In an interview with Paperjam, Christophe Pilz, compliance manager at 6 Monks, discusses Luxembourg’s compliance-focused crypto framework, which positions the grand duchy as a European leader in fund management. 6 Monks is an alternative investment fund manager (AIFM) that specialises in private equity and crypto assets. The firm provides services for third-party funds investing in crypto and manages daily operations, including valuation, risk management and regulatory compliance. Additionally, 6 Monks offers central administration services such as net asset value calculation, transfer agent activities and financial and regulatory reporting.
Kangkan Halder: How are Luxembourg regulators tackling the challenges presented by crypto funds?
Christophe Pilz: Luxembourg has made significant progress in addressing the challenges of managing crypto funds by ensuring that all key regulated actors involved offer the appropriate compliant framework in terms of governance, compliance and risk management.
Until recently, setting up a regulated crypto fund was nearly impossible due to the absence of critical service providers in the ecosystem. Today, Luxembourg offers a comprehensive range of services, including depositary services for crypto assets, regulated custodian wallet service providers and authorised alternative investment fund managers (AIFMs), facilitating the safe management of crypto assets.
In addition to the existing regulatory frameworks for alternative investment funds, Luxembourg’s regulators have taken a proactive approach by issuing local guidelines specific to crypto assets. These guidelines clarify important issues such as which investment funds are permitted to invest in crypto assets, the types of eligible investors, the arrangements for asset safekeeping, and the division of responsibilities between custodians and depositaries. They also provide guidance on anti-money laundering and countering the financing of terrorism (AML/CTF) obligations. This comprehensive framework enhances security and oversight, ensuring robust investor protection.
These efforts have positioned Luxembourg as a European leader, offering a secured and regulated environment for crypto fund operations.
What sets Luxembourg apart from offshore jurisdictions is its ability to apply stringent regulatory controls to crypto, similar to those used for traditional asset classes
How has Luxembourg’s regulatory framework evolved compared to other financial hubs and what steps are necessary to strengthen its position as Europe’s leading crypto fund hub?
Luxembourg stands out as one of the world’s leading fund centers, with a deep reservoir of expertise and infrastructure for traditional and alternative investments. This extends to crypto assets, where Luxembourg has become a pioneer, offering high-quality services and a compliant framework for managing crypto funds.
Compared to other jurisdictions, Luxembourg’s regulatory environment is robust, providing a higher level of investor protection and governance, which has helped build trust among institutional investors.
What sets Luxembourg apart from offshore jurisdictions is its ability to apply stringent regulatory controls to crypto, similar to those used for traditional asset classes. This rigorous oversight makes Luxembourg an attractive option for fund promoters who seek the credibility that comes with Luxembourg’s fund’s industry, especially when targeting institutional investors.
Additionally, increasing the number of depositary services players would provide more options for fund promoters and expand the scope of services available. This would also offer greater opportunities for opening bank accounts, which remains a significant challenge in Luxembourg, particularly for crypto funds. Resolving these banking issues would remove a key obstacle for market participants.
Education is also important. Institutional players must fully understand that the regulatory framework and necessary infrastructure are already in place in Luxembourg. Ongoing collaboration between regulators, industry participants and professional associations can help in sharing knowledge and build confidence, positioning Luxembourg as the leading hub for crypto funds in Europe.
Unlike registered AIFMs, authorised AIFMs have the ability to market their funds to professional investors
What are the strategies used by asset managers in terms of fundraising?
Asset managers use various strategies to raise capital, starting with their personal networks, often referred to as the “friends and family” approach. This initial funding helps establish a track record and generate liquidity, which is an important step for attracting larger, institutional investors at a later stage. As the fund matures, managers typically shift their focus to institutional investors like pension funds, family offices, and sovereign wealth funds. These investors require rigorous due diligence and a proven track record before committing significant capital.
An important distinction in fundraising strategy comes from whether a fund is managed by a registered or an authorised AIFM. Unlike registered AIFMs, authorised AIFMs have the ability to market their funds to professional investors. This makes authorised AIFMs significantly more attractive for fund promoters who want to expand their investor base.
Furthermore, authorised AIFMs benefit from the EU passport, which allows them to market their funds across all EU member states without needing individual approvals from each country’s regulator. This streamlined cross-border marketing opens up a much larger pool of potential investors and facilitates fundraising efforts across Europe, particularly among sophisticated and institutional investors.
Trust can only be established through regulated actors and a robust regulatory framework
What safeguards should Luxembourg put in place to attract institutional investors to its crypto fund industry?
The increasing institutional interest in crypto is obvious, with 2024 marking the success of products like exchange-traded products and spot exchange-traded funds. This success reflects not only limited availability of such product but also growing institutional demand for crypto investments.
However, for institutional investors, trust is essential, especially after the collapse of FTX, a major cryptocurrency exchange, in 2022. Trust can only be established through regulated actors and a robust regulatory framework, both of which Luxembourg is well positioned to offer. Institutional investors also seek long-term market stability before committing to a new asset class. Luxembourg’s stable regulatory environment is perfectly meet this demand.
From a compliance perspective, what are the benefits of the separation of custody and depositary services for crypto funds?
The separation of custody and depositary services for crypto funds is a possible set-up based on regulatory guidance aimed at ensuring the secure safekeeping of assets. The Luxembourg Financial Sector Supervisory Commission (CSSF) has issued an FAQ clarifying this setup, allowing for the separation between the depositary and the custodian.
Two key points emerge from this guidance: first, the custodian is responsible for the restitution of assets, which directly benefits investors, and second, the custodian must be a virtual asset service provider (Vasp) specialised in crypto custody. Crypto custody is highly technical and requires specific expertise, which is why regulated specialists are essential.
This separation strengthens oversight, offering an additional layer of security for investors. By involving independent actors, this approach reduces potential conflicts of interest that could arise from a single entity handling both depositary and custody functions. This setup is especially crucial for institutional investors, who prioritise the highest levels of asset protection and regulatory compliance.
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Do you think more compliance measures are needed to enhance market maturity and stakeholder confidence?
The necessary compliance measures are largely in place, thanks to the initiatives of Luxembourg’s regulators. However, for the market to become mature and for stakeholder confidence to grow, it is essential to ensure regulatory stability and consistency. Frequent regulatory changes, like those seen in the US and China, could deter institutional investors’ appetite.
Market maturity, however, is not just about regulatory stability. It also requires time, the expansion of regulated actors, and the development of a strong operational processes between actors. Luxembourg should focus on leveraging its existing strengths by applying its well-established compliance framework to crypto assets, alongside controls covering crypto asset risks.
Mica presents an opportunity for Luxembourg, giving it an advantage over offshore jurisdictions that lack equivalent regulatory frameworks
What’s your assessment of the EU’s markets in crypto-assets regulation (Mica) regarding compliance, competition and innovation? Is there anything Luxembourg could do better or faster to stay ahead?
From a compliance perspective, Mica will level the playing field, ensuring that all service providers meet high standards, which will likely accelerate institutional confidence in crypto investments, preventing situations like the FTX collapse, where a lack of asset separation led to investor losses. By introducing robust safeguards, Mica strengthens investor protection, which is crucial for attracting institutional capital.
In terms of competition, Mica presents an opportunity for Luxembourg, giving it an advantage over offshore jurisdictions that lack equivalent regulatory frameworks. To stay ahead, Luxembourg could focus on attracting more regulated actors, particularly in the areas of token custody and portfolio management, to support a wider range of token types and more complex investment strategies.
The upcoming full implementation of Mica in 2025 presents both opportunities and challenges. On one hand, the harmonised framework will enhance investor trust and create a level playing field for crypto asset service providers (Casps) across Europe. On the other hand, Luxembourg will need to balance regulatory adaptation with market growth, ensuring that compliance costs and competitive pressures do not hinder innovation. By staying agile and leveraging its expertise, Luxembourg can maintain its position as a leading crypto hub.