Virtual Assets

On 3 July 2023, the CSSF reported on the Financial Action Task Force (“FATF”) publication on virtual assets and the implementation of the FATF standards on virtual assets (“VA”) and virtual asset service providers (“VASPs”). Since 2019, FATF standards on anti-money laundering and counter-terrorist financing have been applicable to VA and VASPs. Now the FATF released an updated report on the compliance of VA and VASPs with its current standards, the recommendation 15 and its interpretative note (“R.15 / INR.15”).

The report highlights that many jurisdictions are struggling to meet essential requirements such as conducting a risk assessment, enacting legislation to regulate VASPs, and conducting supervisory inspections. Based on mutual evaluation and follow-up reports, 75% of jurisdictions are only partially or not compliant with FATF's requirements. Additionally, more than half of the 151 jurisdictions surveyed have not taken steps to implement the travel rule (“Travel Rule”), a crucial anti-money laundering and counter-terrorism financing measure. The Travel Rule for crypto states that all crypto companies must screen, record and communicate the information of both sender and recipient for crypto transactions that exceed $1,000 or such amount as FATF member states have specified.

AIFMs should ensure that they appreciate risk identification and mitigation measures in line with R.15 / INR.15. In addition, AIFMs should monitor and asses the risk across the VA ecosystem as well as mitigate these risks and consult with regulators.

The lack of regulation and compliance with FATF standards identified by the report, pose significant risks, allowing for exploitation of loopholes in the virtual asset sector. Therefore, the report emphasises the urgent need to take steps to mitigate the misuse of virtual assets.

Thus, the FATF calls for rapid implementation of its standards on VA and VASPs and will continue to monitor the progress of this process. The FATF will also continue to engage with FATF member countries and the private sector on progress and challenges and conduct a further review of implementation progress and remaining challenges by June 2024.

On 6 July 2023, the CSSF published a Communication on the Markets in Crypto-Assets Regulation (“MiCAR”) on information accompanying transfers of funds and certain crypto-assets, which entered into force on 29 June 2023.

As it has been reported earlier, MiCAR establishes a standardised regulatory framework for the crypto-asset market. This regulation applies to institutions that engage in the issuance, public offering, and trading of crypto-assets or provide related services within the EU. MiCAR defines crypto-assets as a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology, including utility tokens which provide access to a good or a service supplied by its issuer. MiCAR does not apply to asset-referenced tokens and e-money tokens, which are crypto-assets whose value references the value of one or more official currencies.

AIFMs can apply for a “MiCAR top-up” under Article 59 MiCAR, enabling them to provide defined “crypto-asset services”, as defined in Article 3(1)(16), in the EU that correspond to the management of investment portfolios and non-core services for which they are specifically authorised under the AIFM Law.

Alongside MiCAR, the recast Transfer of Funds Regulation (“TFR”) aligns its definition of "crypto-asset" with that of MiCAR and covers the same categories of crypto-assets. Furthermore, TFR complements the implementation of the FATF recommendation, focusing on AML/CFT risks related to virtual assets. The TFR extends the existing rules on information accompanying fund transfers to include transfers of crypto-assets throughout the EU.

TFR requires fund transfers including crypto-assets involving a crypto-asset service provider (“CASP”) registered in the EU to be accompanied by information about the originators and beneficiaries of the transfers. CASPs must securely obtain, hold, and share this information with the counterpart on the receiving end of the crypto-asset transfer. Additionally, competent authorities can request access to this information to facilitate the prevention, detection, and investigation of money laundering and terrorist financing.

The main goal of MiCAR and TFR is to bring legal clarity to the crypto-asset ecosystem, support innovation, and protect investors, maintain market integrity, and ensure financial stability.

On 09 July 2023, ESMA published an overview of the developments of the Markets in Crypto-Assets Regulation (“MiCAR”). MiCAR covers various aspects related to issuing and trading crypto-assets, including transparency, disclosure, authorisation, and supervision of transactions. Its main objectives are to enhance market integrity, ensure financial stability, and provide better investor protection by regulating public offers of crypto-assets and informing investors about associated risks such as reverse solicitation, suitability of advice and portfolio management services to the client, policies and procedures for crypto-asset transfer services, including client’s rights.

MiCAR entered into force on 29 June 2023 and includes several Level 2 and 3 measures that need to be developed before the new regime can be fully implemented. The entry into force and impending applicability of MiCAR will bring further CSSF supervision for Luxembourg investment funds and AIFMs in relation to investments or acquisitions in crypto-assets.

During the implementation phase, ESMA, in collaboration with the EU financial authorities, will consult the public on various technical standards in three packages, containing draft Level 2 and Level 3 measures which will be published sequentially.

Hence, on 12 July 2023, ESMA announced the publication of its first consultation package. The consultation package seeks input from stakeholders until 20 September 2023.

The first consultation focuses on proposed rules for crypto-asset service providers (“CASPs”) concerning their (i) authorisation, (ii) conflict of interest management, prevention and identification, and (iii) complaint handling procedures. In addition, financial entities should sufficiently detail their intention to provide crypto-asset services to their respective NCA.

The second consultation package will be released in October 2023 including sustainability indicators, business continuity requirements, trade transparency data and order book record-keeping, record keeping requirements for CASPs, classification and templates and format of crypto-asset white papers and public disclosure of inside information. The third and final consultation package is scheduled for publication in Q1 2024.