After allowing registration and transfer of unlisted securities through distributed ledgers in 20171 and drafting legislation for initial coin offerings (ICOs) earlier this year2, France is contemplating the introduction of a regulatory framework for crypto-asset intermediaries that would solidify its leadership in blockchain and crypto-asset regulation.
The amendment3 would, if adopted, add a new category of investment services providers to the French Monetary and Financial Code (MFC), referred to as crypto-asset services providers, which would be subject to either mandatory or optional requirements.
I. A draft legislation encompassing a wide range of crypto-assets and services related therewith
A) A broad definition of crypto-assets
Under the proposed amendment, crypto-assets include:
- Tokens, as such term is defined pursuant to the aforementioned ICO regulatory framework, i.e., intangible digital assets incorporating rights that can be issued, registered, held and transferred on a distributed ledger (dispositif d'enregistrement électronique partagé, or DEEP, a notion introduced by the 2017 Order) and do not qualify as financial instruments
- Any digitally registered and transferred asset incorporating nonmonetary units of value that can be transferred for acquiring goods or services
The definition therefore encompasses not only tokens issued through ICOs but all crypto-assets, including cryptocurrencies. This broad definition of crypto-assets is similar, but not identical, to the one introduced by Order No. 2016-1635 of Dec. 1, 2016, the purpose of which was to subject crypto-asset intermediaries to AML/CF requirements.
B) An extensive list of crypto-asset services
Crypto-asset services are broadly defined to encompass traditional investment services4 when performed in relation with crypto-assets, i.e.:
- Custody of cryptographic keys for third parties
- Trade of crypto-assets with currency having legal tender (i.e., FIAT)
- trade of crypto-assets for other crypto-assets
- Operation of a crypto-asset trading platform
- Investment services for crypto-assets, i.e., receipt and transmission of orders on behalf of third parties, portfolio management on behalf of third parties, investment advice to crypto-asset purchasers, underwriting, and guaranteed and nonguaranteed investment
II. Introduction of two regulatory frameworks for the provision of crypto-asset services
The proposed amendment set forth two frameworks for crypto-asset services providers: a mandatory registration for cryptographic keys custodians and FIAT/crypto exchanges (i.e., providers of the services listed in paragraphs 1 and 2 above), and an optional license for all activities defined as crypto-asset services.
A) Mandatory registration for cryptographic keys custodians and FIAT/crypto exchanges
Under the draft regulatory framework, the services of custody of cryptographic keys for third parties or purchase and sale of crypto-assets for FIAT currencies will require a prior registration with the Autorité des Marchés Financiers (AMF). Before proceeding with the registration, the AMF will check the reputation and professional qualifications of the directors and beneficial owners. The AMF will publish the list of registered services provider.
Unregistered providers will be subject to two years' imprisonment and a EUR 30.000 fine. The draft regulation provides that entities that are already providing those services will have 12 months as of the regulation's publication to be registered with the AMF.
B) Optional license for all crypto-asset services providers
Crypto-asset services providers established in France will have the opportunity to request a nonmandatory license delivered by the AMF.
To obtain such license, crypto-asset services providers will have to subscribe to professional liability insurance (or comply with capital requirements to be set forth in the AMF General Regulations), possess resilient IT systems, and to establish adequate security procedures, policies to manage conflicts of interests and internal audits. Once licensed, they will be required to communicate fair, clear and not misleading information to their clients; inform such clients of the risks associated with crypto-assets; and publish their fees policy.
Moreover, services providers wishing to benefit from the optional license will have to comply with specific mandatory requirements depending on the crypto-asset services they intend to provide:
- Custody of cryptographic keys for third parties will require licensed providers to establish a custody policy, ensure they are always in a position to transfer back the crypto-assets and/or keys to their clients, and implement segregated accounts.
- Trade of crypto-assets for FIAT currencies or for other crypto-assets will require licensed providers to establish a nondiscriminatory trade policy, publish firm bid/offer prices (or price calculation methods), and publish the trading volumes and prices for past trades.
- Operation of crypto-asset trading platforms will require licensed providers to establish operating rules, ensure fair and orderly negotiation, and publish the details of past trades.
- Provision of investment services (receipt and transmission of orders, own-account trading, portfolio management, etc.) will require licensed providers to establish activity programs for each investment service provided and specify the kind of operations they intend to realize as well as their organizational structure.
Trade of crypto-assets for other crypto-assets, operation of a crypto-assets trading platform or provision of investment services will all require that the directors and beneficial owners of the services provider prove their good reputation and professional qualifications.
This regulatory strategy, based on optional licenses intended to act as a whitelist of reputable market participants, is similar to the one chosen for the draft ICO regulatory framework. It emphasis on nonmandatory provisions to foster professionalization and promote sound market practices while avoiding constraining frameworks that might deter innovation and diminish the French market's attractiveness.
III. Additional provisions
A) AML/CFT requirements
Under the proposed amendment, AML/CFT requirements will apply to both (i) registered cryptographic keys custodians and FIAT/crypto exchanges and (ii) other crypto-asset services providers that have obtained the optional license.
B) Right of Professional Investment Funds to hold securities registered on a blockchain
Less talked about is another amendment5 that would allow Professional Investment Funds (Fonds Professionnels Spécialisés6) to hold assets registered on a distributed ledger DEEP. This would include unlisted securities, which can be registered on a DEEP as of July 1, 2018 pursuant to the 2017 Order, but also potentially any other asset registered on a blockchain.
1 Order No. 2017-1674 dated Dec. 8, 2017 (the 2017 Order)
2 Article 26 of Draft Law No. 1008 on growth and companies' transformation (loi PACTE)
3 Amendment No. 2492 to the Draft Law No. 1008 on growth and companies' transformation
4 As per article L. 321-1 of the MFC, which defines investment services in relation to financial instruments
6 As regulated by articles L. 214-154 et seq. of the MFC
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