François Génaux, Advisory Leader  and  Thomas Campione, Blockchain & Crypto Leader,  both from PwC Luxembourg PwC Luxembourg

François Génaux, Advisory Leader and Thomas Campione, Blockchain & Crypto Leader, both from PwC Luxembourg PwC Luxembourg

In a challenging context recently marked by the failure of many digital assets businesses, either due to corporate governance shortage, security breaches or contagion effects. Luxembourg should leverage its DNA to take a lead in the digital assets industry before the country gets left behind.

To discuss the case for a digital assets industry in Luxembourg, it is imperative to clearly define what we are talking about first, say François Génaux and Thomas Campione from PwC Luxembourg.  Confusion has too often been a reason for immobilism. Digital assets encompass not only the broad crypto-asset representatives—including crypto-currencies, utility tokens, NFTs and stablecoins—but also the tokenised version of traditional assets or financial instruments, the so-called security tokens. The impact of the digital assets universe is manifold. Not only does it create a new asset class and new mediums of exchange, but it also augments existing assets through programmability and revamps traditional value chains.

Next, it is important to point out the continuous rise in adoption, despite turbulent times, by market participants, with examples such as Visa and Mastercard bringing crypto-assets on their networks, EIB issuing tokenised bonds, KKR tokenising a slice of its healthcare fund, and the crypto-user wealth pool increasing by as much as 40 202. Market signals are strong. Maybe more interesting is the opportunity perceived by many traditional players to (re)build trust in the space and increase their footprint in the industry by focusing on customer protection and market integrity, two areas that have demonstrated their lack of maturity lately.

Why Luxembourg should be both tactical and strategic

Looking at the bigger picture, the impact of digitals assets for Luxembourg should not be underestimated. What started as a p2p electronic cash system with bitcoin almost 15 years ago turned into a behemoth with profound ramifications across the entire financial sector, be it in investment management, capital markets or payments industries, three critical pillars for the place.

The country has built its competitive edge and its leading position in financial services by pioneering innovation, adapting quickly to regulatory agenda and building expertise, and securing an appropriate talent pool locally. This has been a tremendous journey for almost 40 years, but the reality has changed, a technological paradigm shift occurred. Other financial centres see an opportunity to create their own competitive edge for the years to come. It is a case of “What brought you here won’t take you there”. There needs to be a new direction or at least a capacity to embed those technology driven innovations into strategic priorities.

At the end of the day, the reality is that 1) a stablecoin based cross-border payment appears quicker, cheaper and more convenient than its fiat equivalent; 2) a native token primary issuance, and secondary trading, are both significantly less expensive and more efficient than their dematerialised equivalent, 3) decentralised finance already offers all traditional banking services at the fraction of the cost and are available around the clock. That is not to say that everything is perfect, but technical feasibility has been demonstrated and digital assets, leveraging DLT technology, already proved their effectiveness and efficiency.

As digital assets are global, borderless by design and leverage digital infrastructures, there is a substantial risk to seeing an established traditional industry move next door if the country fails to adapt to this new environment. Ultimately efficiency gains, servicing costs and the ability to adapt will drive the market. Importantly this will require attracting and retaining the appropriate talents knowledgeable in the latest technological developments and their applications. A structural effort.

Some member states and financial regulators in Europe and beyond quickly perceived the opportunity and made a point to increase their attractiveness for key players and/or facilitate the emergence of national champions by adopting dedicated regulatory framework and fostering innovation-led ecosystems.

As of today, we have seen positive initiatives in Luxembourg already, and the country certainly has what it takes to secure a leading position in the digital assets industry. It is now about going one step further, it is a matter of willingness to create an edge and collaboration, two areas where the country has always been ahead of the pack. Looking beyond, developing a national strategy, performing a thorough impact assessment on the financial sector, creating bridges between traditional and digital assets native players, and further promoting Luxembourg as the EU digital assets safe harbour could be some of the next critical steps to move forward.

 

Article written by and both from PwC Luxembourg. ?