Study: Lux Needs More Active Stance In Crypto-Assets Space

The conclusions were based on a survey with over 120 industry professionals and a market analysis (Photo © Shutterstock)

If Luxembourg is to position itself at the forefront of the crypto-asset space, it will need ongoing dialogue with crypto market players, enhanced coordination between stakeholders and financial education.

These were the recommendations laid out in the country’s first report examining the opportunities and challenges offered by crypto-assets to the financial services sector.

The report concludes that it is unlikely crypto-assets will become a “game changer for the industry”. However, if Luxembourg wants to play a larger role, “survey participants believe it is essential for the country to take a more active stance in the broad crypto-assets space, with 89% believing in the high importance of government action.”

20% of total crypto-asset funds in Europe

Compiled by the Luxembourg House of Financial Technology, the country’s fund promotion platform ALFI and PwC Luxembourg, the conclusions were based on a survey with over 120 industry professionals and a market analysis.

The report found that while crypto-assets have undergone an “incredible transformation” since the emergence of bitcoin in 2008, Europe retains just 20% of global crypto asset funds in terms of office location. European growth depends on “the financial landscape moving forward,” the report stressed. However, to do so, crypto-assets will need to overcome some key sticking points, namely the environmental impact of crypto mining, international agreement on AML and KYC processes and risk.

Optimistic but cautious

Faced with these challenges, the mood among financial players in Luxembourg was relatively optimistic, if cautious. Some 18% of respondents said they considered crypto-assets as a strategic priority now, and a further 43% expected it to become a priority in the next two years. Furthermore, a third of respondents believed Luxembourg was lagging behind the rest of the continent when it came to the asset class. Almost three quarters of respondents said there was a limited or nonexistent demand for crypto-assets services in Luxembourg, a factor which partly explains any lag.

Demand was highest in the “other assets servicing activities” while it was gaining presence in the fund administration sector. Assessed demand was lowest in the asset and wealth management branch, an important segment of the Luxembourg market.

“Overall, we are not likely to see any significant moves in the Luxembourg crypto-assets market as long as demand remains relatively weak,” the report’s author wrote, warning that Switzerland and the UK’s quicker response could further limit demand on Luxembourg players.

Investment diversification

The greatest potential for crypto-assets was from an investment diversification strategy standpoint, according to three quarters of respondents. This will mean greater exposure for private bankers and wealth managers to provide their clients with a balanced, diversified portfolio.

“Indeed, private bankers are coming under pressure by crypto-oriented clients who want to find a way to access the crypto market even when some national authorities have taken a tough line,” the report reads.

It adds that in future there will be a need for “the right custodianship services” which “will be fundamental to meet the needs of the various market stakeholders using crypto services and to capture these business opportunities.” These services could also advise on central bank digital currencies, NFTs and security tokens.

Seven out of 10 respondents believed that AIFs would be the most appropriate vehicle for crypto-asset exposure, compared to 65% who favoured unregulated structures. This preference, the author writes, is a reflection of the “regulatory uncertainty or vaccum that exists in the crypto space.”

Harmonised regulatory environment

To fully exploit the potential of crypto-assets, the report stressed that there needs to be a harmonised regulatory environment within Europe, providing investors with “a degree of protection and certainty comparable to that of more established asset classes”.

This lack of regulation was cited by almost four in 10 respondents as a “significant constraint” to the crypto-assets market in Luxembourg.

Another constraint has been the lack of expertise and skills in the local ecosystem, cited by a quarter of respondents. “Areas such as fund administration and fund custody will need to properly develop new sets of competencies to adequately address these shortcomings,” the author wrote.

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