Virtual Assets

On 25 February 2025, European securities and markets authority (“ESMA”) published an analysis on the adoption of artificial intelligence (“AI”) in the EU investment management sector, assessing both the operational use of AI by asset managers and the growing portfolio exposure to AI-related companies.

While AI-driven funds remain a minor segment of the industry, fund managers increasingly integrate generative AI and large language models to enhance human-driven decision-making, improve risk management, and support compliance. However, the uptake of fully AI-driven investment strategies remains limited, and funds explicitly advertising AI use have not consistently outperformed traditional funds and the market. The report finds that, despite AI’s potential cost-saving advantages, these funds do not charge significantly lower fees compared to others which can also be explained by the fact that the innovative and technological equipment constitutes an investment by the concerned funds.

ESMA also examined investment fund exposure to AI-related companies, identifying a sharp increase in actively managed equity funds' allocations to AI stocks. Since 2023, the average AI portfolio share has risen to 12% for passive funds and to 14% for active funds, with the total market value of these holdings doubling, primarily driven by large-cap technology firms (“the magnificent seven”) such as Microsoft, Nvidia, and Alphabet. This sectoral concentration poses potential risks, as market downturns or regulatory challenges could amplify systemic vulnerabilities for funds highly exposed to AI-related equities.

Despite the enthusiasm surrounding AI, ESMA highlights data governance risks, regulatory uncertainties, and third-party dependencies that could aggravate operational risks in the sector. The report underscores the need for continued risk monitoring and enhanced regulatory scrutiny as AI continues to reshape investment strategies and market structures.

On 10 February 2025, the law of 6 February 2025 (the “Law”) was published, aligning Luxembourg's financial regulatory framework with key EU regulations on crypto assets.

The Law incorporated the Markets in Crypto-Assets Regulation (“MiCAR”), establishing a unified framework for the issuance, trading, and provision of crypto-asset services. The CSSF is the competent authority responsible for monitoring activities, ensuring compliance, and enforcing sanctions. Enhanced CSSF powers include supervisory and investigative capabilities, such as access to documents, on-site inspections, and the ability to impose fines and public reprimands. Violations related to crypto-asset markets can lead to financial penalties of up to EUR 15 million, while offences involving fund transfers under Regulation (EU) 2023/1113 can result in fines up to EUR 5 million for credit institutions. Insider trading or market manipulation may carry criminal penalties, including imprisonment.

The Law further amended Luxembourg's AML/CFT framework to address risks associated with crypto-assets and self-hosted wallets. Crypto-Asset Service Providers (“CASPs”) are now classified as obliged entities, requiring enhanced due diligence for transactions exceeding EUR 1,000. CASPs engaging in cross-border relationships with non-EU entities must verify compliance with AML/CFT regulations and obtain high-level approval. Virtual asset service providers (“VASPs”) registered before 30 December 2024 will be recognised as CASPs until 1 July 2026 or until they obtain full authorisation under MiCAR, leading to the eventual repeal of the VASP regime.

Finally, the Law updated the annex of the amended law of 5 April 1993 to encompass activities such as issuance of electronic money tokens, asset-referenced tokens and various crypto-asset services such as trading, custody and transfers. Moreover, the Law revised the amended law of 10 November 2009 on payment services to reflect updates in EU regulations, extending traceability rules to crypto-assets and enhancing CSSF supervision for entities offering currency conversion services. These changes aim to modernise cross-border payment frameworks and strengthen regulatory oversight.

On 17 February 2025, ESMA issued a public consultation (the “Consultation”) on its proposed guidelines (the “Guidelines”) for assessing the knowledge and competence of individuals providing advice and information on crypto-assets and related services under MiCAR. The consultation, which is open until 22 April 2025, aims to enhance investor protection and standardise competency criteria across the EU.

The Guidelines are aimed to introduce a structured framework for assessing the proficiency of personnel engaged in advising on and providing information about crypto-assets and crypto-asset services. They establish minimum qualifications, experience thresholds, and continuous professional development requirements. The approach is inspired by similar provisions under the Directive 2014/65 on markets in financial instruments (“MiFID II”).

For individuals providing information on crypto-assets and crypto-asset services, the Guidelines propose a minimum of 80 hours of professional qualification training and at least six months of supervised experience or one year of supervised experience, with competency assessed through an examination. Continuous professional development of no less than ten hours per year is also required.

For those providing advice on crypto-assets and crypto-asset services, the Guidelines require a higher level of expertise, with options including a three-year tertiary education degree plus one year of experience, a secondary education diploma with three years of professional training and one year of experience, or a professional formation of at least 160 hours and one year of supervised experience. Continuous professional development of at least 20 hours per year is mandated.

Under the Guidelines, CASPs are required to establish and update at least annually their internal policies and procedures to ensure that their staff possess the necessary knowledge and competence and address any identified deficiencies. In this respect, the management body must conduct annual assessments of their staff’s qualifications and training.

Additionally, the Guidelines mandates firms to keep records of staff training and qualifications, which may be requested by national competent authorities. When information or advice is provided through automated or semi-automated services, the Guidelines clarify that staff responsible for designing and maintaining such systems must also meet competence requirements.

The Consultation invites stakeholders, including CASPs, financial entities and investors, to provide feedback before final guidelines are issued in the third quarter of 2025. Following the consultation period, ESMA will review the feedback and publish the final guidelines later in 2025. Once adopted, these guidelines will apply 60 days after publication.

On 19 March 2025, ESMA published guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments. In the rapidly evolving technological landscape, AIFs intending to invest in crypto-assets need to be aware of the distinction between crypto-assets and financial instruments, as the applicable regulatory rules vary. These AIFs are advised to be aware when their crypto-asset provider should comply with either MiCAR or a different regulation. Additionally, AIFMs that intend to provide crypto-asset services, such as crypto-asset portfolio management, need to know whether the underlying instruments qualify as crypto-assets. Likewise, it is beneficial to those AIFs and AIFMs that intend to refrain from MiCAR obligations to know when a crypto-asset still qualifies as financial instrument. The guidelines published by the ESMA emphasise that the process of tokenisation of financial instruments should not affect the classification of such assets. These tokenised financial instruments should continue to be considered as financial instruments for all regulatory purposes. AIFs and AIFMs can use the guidelines to their advantage, aligning the technological possibilities with their investment preferences. For those who would like to read up on MiCAR obligations, we recommend starting with Part I of our MiCAR blog trilogy.

On 24 January 2025, ESMA published its opinion addressing amendments to the RTS on conflicts of interest for CASPs under MiCAR. The opinion outlines ESMA's response to the European Commission's proposed amendments to the RTS, which aim to further specify the requirements for policies and procedures to identify, prevent, manage and disclose conflicts of interest. ESMA highlights the importance of balancing investor protection and financial stability with promoting safe and sustainable innovation. The opinion suggests a limited number of changes to the Commission's amendments, focusing on personal transactions, remuneration policies and adequate resources. ESMA emphasises the need for robust internal controls and effective risk management frameworks to mitigate conflicts of interest that could be detrimental to CASPs. The opinion also addresses the role of multifunction crypto-asset intermediaries and the necessity for clear disclosure of the general nature and sources of conflicts of interest.