The fund services provider Q Securities said that it expects the “first Luxembourg-domiciled fund investing fully in crypto assets... to launch in less than six months,” and that it plans to provide depository services to crypto investment funds to meet the emerging market need.

Q Securities will announce on Thursday that it has filed paperwork with the Luxembourg Financial Sector Supervisory Commission (CSSF) outlining its “intent to offer depositary services to crypto funds in Luxembourg.”

“As far as we know, we are the first AIF depositary to have such an intention on the Luxembourg market,” Tomasz Matczuk, chairman of the Q Securities supervisory board, will state in the company’s announcement.

The company said that guidelines issued by the CSSF at the beginning of the year had facilitated the development of crypto-oriented investment funds. With the “necessary regulatory and compliance work underway”, the first Luxembourg crypto fund could be on the market by summertime.

Crypto funds allow indirect investment

According to Q Securities: “For the time being, investors seeking exposure to crypto assets can only invest directly via dedicated exchanges, crypto-trading platforms or indirectly through instruments like ETFs, tracking cryptocurrencies’ performance.” A classically regulated investment fund would “allow for indirect investments” overseen by an asset manager.

“Like with any other fund, the added value is that as an investor, you entrust your investment decisions to asset managers,” stated Wojciech Kozlowski, business development director at Q Securities. “As a result, you no longer need to be glued to the screen deciding in real-time to buy or sell your crypto asset positions.”

Service provider market

Crypto asset funds could be a significant segment for fund service providers. The data firm Chainalysis that, across all forms of cryptocurrencies, “total transaction volume grew to $15.8trn in 2021, up 567% from 2020’s totals.” Cryptocurrency assets under custody stood at $223bn in January, the research firm Blockdata.

Global heavyweights are competing the space. Earlier this month, State Street it planned to start providing digital asset custody services after inking a partnership with a London-based outfit called Copper.co. Clearstream has to support cryptocurrency-linked finance products and owns a stake in FundsDLT, a fund distribution platform that uses digital ledger technologies (also known as blockchains) similar to those used to create cryptocurrencies and other virtual assets.

Q Securities will focus on smaller and mid-sized funds that serve institutional and professional investors. “Big industry names often reject funds below a certain threshold” due to profitability pressures, Matczuk stated. “This is when fund managers come to us.”

Job market pressure

Locally-domiciled crypto asset funds could potentially heat up recruitment efforts in the financial sector. “As soon as the first crypto fund launches in Luxembourg, I expect that job offers in this sector will start to mushroom,” Kozlowski reckoned. He said both experienced bankers and fintech professionals would be highly sought-after by crypto outfits.

Last year, Warsaw-headquartered , making it the first investment firm to be granted this type of license in the grand duchy. The company said its assets under custody were €17bn and it served 220 alternative investment funds. It is not authorised to look after Ucits retail funds.

The company got started in 2012 as a brokerage, which is still its larger business segment in Poland. It entered the alternative fund depository business in 2016, expanding to the grand duchy in 2020 and onboarding its first Luxembourg client in 2021.

Coinhouse--a French firm that focusses on individual investors, companies and financial advisors--has already obtained custody services authorisation from the CSSF.

Updated to add information about Coinhouse. Updated to clarify that Clearstream has invested in FundsDLT, but is not its sole shareholder.