On-shore VASP 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.

Explicit Requirement: MiCA explicitly mandates crypto-asset service providers offering custody services to:

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.

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

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.

However, CSSF Circular 22/811 and the general principles of sound risk management dictate that VASPs must implement robust IT security measures and internal controls to protect virtual assets. This implicitly requires firms to adopt industry best practices for secure storage, which often involves a combination of hot, warm, and cold storage solutions, multi-signature wallets, Hardware Security Modules (HSMs), and comprehensive key management policies. The CSSF assesses the adequacy of these measures as part of the VASP registration and ongoing supervision.

Have sound governance arrangements, including clear organisational structure with well-defined, transparent and consistent lines of responsibility.

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.

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.

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.

Consult relevant registers (e.g., the Luxembourg Register of Beneficial Owners - RBE).

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:

Regulator: Commission de Surveillance du Secteur Financier (CSSF)

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