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Luxembourg, European Hub for Securization and Digital Investment Funds

Milo Guastamacchia is the engineer in charge of leading the design and implementation of financial solutions at Abalone Services in Malta, a company that is part of the Abalone Group, a pan-European financial services entity.

At Abalone Services Milo is responsible for interacting with project promoters that typically require the structuring of financial vehicles, be it investment funds or other, in order to thoroughly research their needs and constraints, proposing and coordinating the engineering of solutions that best meet the clients’ expectations, applicable regulations and ultimately ensure a cost-effective profile to meet their specific project or business needs. Milo’s previous work experience includes a stint at JP Morgan in London, where he enriched his professional background by structuring financial solutions in equity derivatives for the bank’s clients. He has brought this valuable experience to Abalone Services and has had the opportunity to amplify it by addressing the extremely varied and sometimes exotic needs of the Group’s clients, always with a view to product innovation and keeping abreast of the regulatory developments crowding the financial industry.

Among the financial solutions typically offered, Abalone Services works, in strong symbiosis with the Group’s legal team, to design and structure special purpose entities and collective investment undertakings, also known as investment funds, which depending on the needs of the promoter and the type of target investors can be implemented both within and outside the EU.

The team led by Milo has been structuring investment funds for more than five years and is deeply versed in the EU regulatory framework that dominates such a sector, which allows from the very first interaction with new clients or projects to quickly identify and propose the most suitable potential scenarios for the specific needs discussed, leading to an efficient and timely definition of the best project solution for the client.

Currently, as far as the most advanced domiciles for financial vehicle types are concerned, within the EU, both the legislation and the Luxembourg ecosystem are among the most conducive to the agile structuring and management of special purpose vehicles and investment funds. Perhaps more importantly, Luxembourg has created a renowned international brand of expertise and professionalism when it comes to the financial sector, so that within the EU and in East Asia most consider it a ‘privileged domicile’ if one wants to launch a fund targeted at EU investors.

Ireland has also historically been a favoured destination in the EU, especially for UK and US promoter-sponsored investment funds and securitisation vehicles. 

It is believed that Luxembourg’s ability to continue to innovate and stay ahead of the ever-changing economic environment and regulatory changes – while providing peace of mind to investors thanks to robust regulatory oversight by the local financial supervisory body, the CSSF – makes it the ideal domicile for many solutions offered by Abalone Services, including particularly innovative or complex ones.

One of the most recent developments implemented by the Luxembourg authorities is indeed the introduction in February this year of the new securitisation law, which replaces and modernises the previous 2004 law, making Luxembourg an even more attractive securitisation jurisdiction.

“Securitisation” is defined as the process of designing a tradable financial instrument that merges or aggregates various financial assets, typically illiquid assets, by issuing a security, e.g. a bond or a note, which allows investors to gain exposure to that “pool” of assets.

The two key innovations of this new Luxembourg securitisation law concern the fact that refinancing of a transaction is no longer limited to the issuance of securities but is open to any financial instrument, e.g. promissory notes or loans; and the fact that active management of Luxembourg securitisation vehicles is now allowed for risks related to bonds, loans or other debt instruments, except if the financing instruments are issued to the public.

As Luxembourg is not alone in the “securitisation race” on the European scene and in fact competes head-to-head with Ireland in terms of market share, the introduction of these changes in the securitisation sector aims at making Luxembourg the country of choice for this type of financial vehicle.

As far as investment funds are concerned, one of the most recent developments in Luxembourg is the fact that over the past year, the local authority has gradually opened up the possibility of including digital asset classes, be they cryptocurrencies or other forms of virtual financial assets, as permitted assets within Luxembourg alternative investment funds, which are regulated by the pan-European Alternative Investment Fund Managers Directive (“AIFMD”).

Indeed, in the summer of last year a well-known Luxembourg-based product platform – linked to a large Italian financial group – was authorised to extend its Alternative Investment Fund Manager (“AIFMD”) licence to manage alternative investment funds that allow exposure in virtual assets such as Bitcoin, Ethereum and other secondary digital asset classes such as DeFi tokens. Other major fund managers in Luxembourg are following suit, as are custodian banks which are putting in place legal sub-custody arrangements with digital institutions to ensure the safekeeping of such virtual assets.

With the introduction of this licence extension for local fund managers and the management of virtual financial assets, Luxembourg is leveraging its reputation and infrastructure to strengthen its position as a leading global financial centre for cross-border funds and to promote innovation in the financial sector.

Following the introduction of this new regulatory framework in Luxembourg, very few new crypto funds have yet been launched. The inclusion of this asset class in regulated collective investment schemes offered to professional investors has been slow, as the number of authorised fund managers is still low and most custodians still need to find the right set-up with the right “cryptocurrency wallet providers”, not only to ensure that operational processes run smoothly and that custody is properly executed, but also to ensure full compliance with the relevant anti-money laundering regulations.

Therefore, promoters, like successful cryptocurrency managers, will not necessarily have to wait much longer to launch their crypto funds in the EU. Luxembourg is already moving in the right direction, at least with larger managers who can afford to invest in an extended AIFMD licence, and certainly other relevant jurisdictions will soon follow suit. Thus, we should expect the number of crypto funds to increase substantially in the next couple of years.

However, already now it is possible to design some interesting solutions for investing in virtual assets. For instance, Abalone Group companies recently structured for a European promoter its first unregulated fund based on a “club deal” approach, a Luxembourg-based Special Limited Partnership that operates entirely with Tether, a cryptocurrency that is hosted on the blockchains of Ethereum and Bitcoin, among others, while accepting subscriptions from investors in that cryptocurrency, which is invested through “staking” on the main cryptocurrency markets.

The Abalone Group, through its Swiss company Abalone Solitaire, has also been active in the area of digital Active Management Certificates, launching its first two certificates dedicated to professional investors in Switzerland, investing respectively in the Bitcoin/Ethereum pair, via a trading algorithm, and in DeFI/staking of various cryptocurrencies.