More recently, Luxembourg has growing experience in managing alternative asset funds and has given the green light to investment fund activities with crypto exposure. This move is a great opportunity for funds waiting to expand their portfolio with a new type of asset. For investors, this means a reduction in legal investment risk. DLT, blockchain and security tokens are hot topics among legal authors and many publications have been published so far. Distributed ledger technology (DLT) is increasingly being used by companies in a variety of sectors, with many fintech start-ups flourishing in Luxembourg and Europe. In Luxembourg, the Commission de Surveillance du Secteur Financier (the “CSSF”) has been contacted in recent years by many DLT project leaders and relevant expertise has been gathered[2], but without publishing any in-depth indications or analyses, unlike the AMF[3] or BaFin[4]. The Luxembourg legislator has been active during the same period and has made some changes to its legislation to take account of DLT. However, we are currently seeing a gap between this new technology, which is attracting more and more players willing to use it, and the lack of a clear legal framework regulating the issuance of tokens, especially those that are considered financial instruments (so-called security tokens). Nevertheless, Luxembourg law does not preclude the tokenisation of traditional securities (and in particular securities in the form of names), which will be the subject of this article. The purpose of this document is to draw attention to various legal considerations to be taken into account when issuing tokenized securities. Prior to CSSF`s position, Azimuth received permission to invest indirectly in virtual assets such as Bitcoin, Ethereum, and other asset subclasses such as DeFi tokens. The fund is intended for professional investors only.
Azimut representatives said: “Digital assets will enable exposure to cryptocurrencies in a dynamic and diversified manner and within an active risk management framework. The portfolio is managed to generate returns from an active allocation to asset subclasses, allowing investors to participate in the full range of opportunities offered by digital assets without having to deal with the technical and financial complexities typically associated with a new investment vehicle. The fund is managed by the Group`s investment centre in Singapore, an Asian country recognised as the world`s leading provider of digital assets. In addition, Giorgio Medda, Co-CEO and Global Head of Asset Management of the Group, commented: “The license is a source of great satisfaction and recognition for the commitment and work we do to meet the needs of our clients today and in the future and to create new revenue streams. We have been approaching the world of virtual assets for some time, exploring their underlying technologies and potentials and following a holistic approach to risk and opportunity management, which also underpins the AZ RAIF II – Digital Asset Fund. The product initiative targets long-term investment objectives over longer diversification horizons for our clients` portfolios in a very dynamic market environment for this asset class. [8]. [1] Cryptocurrency World Survey, Luxembourg, www.loc.gov/law/help/cryptocurrency/world-survey.php#_ftn450.
As regards the definition of virtual assets, the CSSF has not issued any interpretative guidelines. Thus, in the absence of specific rules, any person carrying out activities related to them or those involved in the creation of tokens or the collection and collection of funds must assess, on the basis of their characteristics, whether they are subject to certain legal provisions in Luxembourg and therefore to certain prudential requirements. This evaluation is highly recommended and is intended to be facilitated through the Innovation Centre, a newly created department within the CSSF, as described in the Promotion and testing section below. In another warning of the same day regarding initial coin offerings (“ICOs”) and tokens11, the CSSF acknowledged that the collection of funds from the public in the form of ICOs is not subject to any specific regulation and does not benefit from any guarantee or other form of regulatory protection. The CSSF considered that, despite the absence of specific rules for ICOs, activities related to the creation of tokens and the collection and raising of funds may be subject to certain legislation and, consequently, to a number of prudential requirements, depending on their characteristics. It is therefore important that the public and private keys are kept and stored securely by each user, especially the private keys, because from a technical point of view it is not possible to recreate the private key with the public key. For this reason, wallet service providers offer a range of services related to public and private keys, and in particular for their safe custody. As explained by the European Securities and Markets Authority (“ESMA”) in its Recommendation on Initial Coin Offerings and Crypto-Assets of 9 January 2019, “crypto-asset digital wallets are used to store public and private keys and interact with DLTs to enable users to send and receive cryptoassets and monitor their balances. Crypto asset portfolios come in different forms.
Some support multiple crypto/DLT assets, while others are specific to crypto/DLT assets.”[18] As stated in section II)(A)(2.b) below, it is therefore crucial to ensure that the wallets are compatible with the underlying blockchain and the smart contract generating the tokens. It is also important to clarify that a wallet used as part of a blockchain does not contain the tokens of a particular user, but only their public and private keys. Income from cryptocurrencies constitutes “commercial income” as long as it meets the conditions of Article 14 of the Luxembourg law of 4 December 1967 on income tax: “Any self-employed activity for profit, which is carried out permanently and participates in the general economy, if this activity is neither a forestry activity nor an independent professional activity. In this regard, there are three categories of taxpayers: Although blockchain technology is often referred to as cryptocurrencies, it has a wide range of areas of work. Centralized or decentralized is used in many industries. In Luxembourg, the most important applications of blockchain include: One of the main legal risks is whether the platform can be considered a trading platform and, in particular, an MTF or OTF. MiFID defines an MTF as “a multilateral system operated by an investment firm or market operator that brings together several third-party buying and selling interests in financial instruments […] in a manner that results in a contract … [107] and an OTF as “a multilateral system, other than a regulated market or an MTF, in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives can interact in the system in a manner that results in a contract […] [108]. Provided that the AIFM (as defined in Section I)(B)(2)(b) above) that manages the platform is not an investment firm or a market operator, we can easily exclude the qualification of MTFs.
