Crypto-funded debit card in Luxembourg

Registration as a VASP: Entities providing "custodian wallet services" (which includes custody of virtual assets on behalf of clients) are considered Virtual Asset Service Providers (VASPs) under Luxembourg law. These VASPs are subject to registration with the CSSF for AML/CFT purposes.

The registration is governed by the Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (the "AML Law"), which incorporated the EU's 5th AML Directive.

Registration requires the entity to comply with AML/CFT obligations, including customer due diligence (CDD), ongoing monitoring, suspicious transaction reporting, and internal control frameworks.

CSSF Circular 22/811 (and previous versions like 20/747 and 21/769 which it consolidates/replaces): This circular provides detailed guidance on AML/CFT obligations for VASPs.

Authorization, not just Registration: MiCA will require firms providing "custody and administration of crypto-assets on behalf of third parties" to obtain a full authorization from a national competent authority (the CSSF in Luxembourg) to operate across the EU. This is a more stringent licensing regime than the current AML registration.

Keep separate the crypto-assets of their clients from their own crypto-assets and ensure that this is achieved by using different blockchain addresses or distributed ledgers.

Keep separate the funds of their clients from their own funds, in accordance with national law.

MiCA Regulation (EU) 2023/1114, Article 67 ("Custody and administration of crypto-assets on behalf of third parties"): Specifically, Article 67(1)(b) addresses segregation.

Hold own funds (capital requirements) or a professional indemnity insurance to cover liability risks from their operations. The amount will depend on the type of service and associated risks.

Prudential Requirements and Professional Indemnity Insurance: MiCA introduces specific prudential requirements for crypto-asset service providers. For custodians, it requires them to:

Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (the "AML Law"): This is the cornerstone legislation. It was significantly amended by the Law of 25 March 2020 to transpose the 5th AML Directive, explicitly including virtual asset service providers as "professionals" subject to AML/CFT obligations.

Directive (EU) 2018/843 (5th AML Directive): Critically, this directive extended the scope of AML/CFT rules to include virtual asset service providers, bringing them under the regulatory purview.

CSSF Circular 20/747 (as amended by Circular 22/815): This circular is crucial for VASPs as it consolidates and specifies the AML/CFT professional obligations under the amended AML Law for all entities subject to CSSF supervision, including VASPs. It provides detailed guidance on risk assessment, customer due diligence, internal organisation, and reporting requirements.

Exchange services: Exchanging virtual assets for fiat currencies or other virtual assets.

Custodial wallet providers: Entities that provide services to safeguard private cryptographic keys on behalf of their customers, to hold, store and transfer virtual assets.

Identification and Verification:

Obtain and verify the customer's name, residential address, date and place of birth, nationality, and a unique identification number (e.g., from a passport or national ID card).

Beneficial Ownership (UBO): Identify and take reasonable measures to verify the identity of the beneficial owner(s) (any natural person who directly or indirectly owns or controls 25% or more of the shares or voting rights, or otherwise exercises control over the entity). For trusts or similar legal arrangements, identify the settlors, trustees, beneficiaries, and any other person exercising ultimate control.

Scrutinize transactions undertaken throughout the course of the relationship to ensure they are consistent with the VASP's knowledge of the customer, their business, and risk profile.

Enhanced Due Diligence (EDD): Required for situations posing a higher ML/TF risk, including:

CSSF VASP Register (Information Page): This page explains the registration requirements and provides access to the list of registered VASPs.

CSSF Circular 23/843: Updated guidance for VASPs on AML/CFT, reflecting new recommendations from the Financial Action Task Force (FATF).

Focus on Registration and AML/CFT Compliance:

Ordering non-compliant entities to cease operations.

Speculative Gains (Occasional Trading):

If the cryptocurrency is held for more than six months, the gain is generally considered tax-exempt. This is a significant advantage in Luxembourg for long-term individual investors.