10.02.2022 IT Fintech Luxembourg Tech

Crypto-assets: paradigm shift or hype?

The LHoFT commissioned a comprehensive crypto-assets study to assess how Luxembourg’s Asset Management industry considers the potential opportunities and challenges of this new asset class. The study and report were developed with PWC and the active support of ALFI, the Association of the Luxembourg Fund Industry. 123 industry practitioners responded to the survey, conducted in Q4 2021.

Customer demand and a desire to remain at the forefront of financial innovation are key incentives driving the development of crypto-asset products and services:

–43% of respondents expect crypto-assets to become a strategic priority within the next two years and ? of respondents expect to see broad adoption within the traditional asset management chain within 5 years.

–A majority of respondents already have crypto-asset related offerings, are in the process of developing such offerings or are assessing the opportunities associated with them.

–From a portfolio management perspective, ¾ of respondents’ view diversification as the most attractive feature of crypto-assets while 38% highlight the asset class’ potential as an inflation hedge.

–A majority of respondents expect custodianship and private banking & wealth management to see increasing exposure to crypto-assets over the coming 5 years.

–89% of respondents believe that the Grand Duchy should take a more active stance in the crypto-assets space.

–An open dialogue with market participants, enhanced coordination and cohesion between stakeholders as well educational efforts could give Luxembourg an edge in this space.

2021 was an outstanding year for crypto-assets: Bitcoin reached a historic market capitalisation threshold, the NFT market skyrocketed, and for the first time Bitcoin was adopted as legal tender by a sovereign nation. On the other hand: China has banned crypto-assets, there are concerns on the systemic risks they pose, and many have voiced concerns regarding the sustainability and transparency of this new asset class, not to mention its high volatility.

The report highlights the drivers of growth, the opportunities arising and the challenges and issues that prevail with the aim of helping Luxembourg market participants in their decisions on how to approach the asset class.

In light of the report’s findings, the LHoFT Foundation has formulated recommendations that may ultimately serve to enhance and clarify the Luxembourg financial sector’s positioning towards crypto-assets in the context of rapidly growing interest from investors and international competition to capture early and sustained market share.

Crypto-assets today: an exponential adoption

Despite representing a relatively nascent asset class, crypto-assets have undergone an incredible transformation since the emergence of bitcoin in 2008 – evolving from a niche market primarily consisting of IT-savvy early adopters, to a global phenomenon to the tune of 3 trillion dollars for crypto-currencies, as of November 2021.

Luxembourg’s financial services landscape and Crypto-assets: a cautious optimism

Luxembourg is a perfect microcosm of the global financial services landscape, domiciling the entire spectrum of the fund industry. In light of this, setting up a survey of Luxembourg financial sector participants represents the perfect opportunity to paint an accurate picture of the key challenges and opportunities faced by the sector in regard to crypto-assets, which will in turn help readers gauge the current and future direction of his innovative and disruptive asset class.

Overall, the survey results indicate a mix of enthusiasm and pragmatism around crypto-assets within Luxembourg’s financial services landscape: 61% of our respondents are already assessing, developing or providing crypto-asset products/services.

Nasir Zubairi,  CEO of the LHoFT Foundation, says: “It is critical for the Asset Management Industry to get to grips with—and stay on top of— the world of crypto-assets. We hope the survey and study will help in providing a sense of the opportunities and challenges as well as the latest trends within this fast-evolving sector.”

Thomas Campione, CFA Director | Blockchain & Crypto-assets Leader, PwC Luxembourg, says: “While markets have been turbulent over the last two months, looking at the global picture and the industry structural developments, I expect 2022 to be a pivotal year for the crypto-assets management industry. It is critical that Luxembourg and the broad financial industry embrace the topic and do not stay away from the conversation because of contradictory signals.”

Steven Libby, EMEA Asset & Wealth Management Leader, PwC Luxembourg, says: “Given Luxembourg’s position at the forefront of financial innovation and the ongoing need to evaluate and adapt the financial centre’s value proposition in an evolving macro context, it is crucial that local industry players maintain an updated view of emerging developments – and position themselves accordingly.”

You can discover the full report HERE