Act No. 2019-486 of May 22, 2019 (the Loi PACTE), which creates a regulatory framework for both initial coin offerings (ICOs) and cryptocurrency-related businesses, has finally been enacted by the French government and became effective on May 24, 2019.
The enactment of the Loi PACTE is the last step of a legislative process which saw France give a clear set of rules to the crypto-assets and blockchain industries. In addition to the Loi PACTE, France also passed in 2018 a law allowing the registration of unlisted securities on a blockchain, and clarified the tax and accounting regime applicable to cryptocurrencies investors and ICO issuers. The Loi PACTE also allows certain professional investment funds to purchase crypto-assets. France is arguably the first large country to establish such a comprehensive framework.
Our firm was involved from the very beginning of this legislative process and had extended discussions with the regulatory authorities at various steps of the elaboration of the Loi PACTE. The Paris office of Kramer Levin notably chairs the Fintech/ICO working group of Paris Europlace, the professional organization in charge of promoting Paris as an international financial center. As part of the Haut Comité Juridique de la Place Financière de Paris (a semi-public think tank tasked with proposing changes to French financial law), our firm also pushed for further studies on the use of blockchain by central securities depositories (in particular for the settlement of securities).
Since 2017, the French government and regulatory authorities have adopted a welcoming position toward the blockchain industry as a whole. Various official reports have been published on blockchain and crypto-assets, both by government bodies (Landau report of July 20181) and by the Parliament (report on the technological challenges of blockchains of July 2018;2 report on blockchains of December 2018;3 report on crypto-assets of January 20194). More recently, during the Paris Blockchain Conference of April 15, 2019, the Minister of Economy and Finance reaffirmed his goal to make France a world leader of the blockchain industry. French politicians seem to establish a clear distinction between blockchain (which they see as a revolutionary technology affecting all industries) and crypto-assets (which are still seen as risky speculative assets). However, even though blockchain is the trending topic among politicians, the Loi PACTE applies only to crypto-assets.
The most interesting feature of the legal regime established by the Loi PACTE is that it is not mandatory. ICO issuers will not need to obtain approval from the Financial Markets Authority (AMF) before offering their tokens, and crypto-assets intermediaries will not have to be licensed to offer crypto-related services. The underlying idea is to encourage these actors to apply for these approvals, by giving approved ICOs and licensed intermediaries certain legal rights (e.g., easier access to a bank account). It is also expected that the AMF's approval or license will serve as a quality label which will help these companies market their tokens and products to consumers in France and abroad.5
I) An optional approval for ICOs
Obtaining the AMF's approval (or visa) will be optional for all ICO issuers. No ICO will be forbidden in France for lack of a visa, although unapproved ICOs will be subject to marketing restrictions.
The Loi PACTE explicitly separates ICOs from securities offerings. Securities offerings cannot be carried out under the form of an ICO. Therefore, under existing French law, there is no such thing as a security token offering. Issuing a token whose characteristics would make it similar to a security would merely trigger the application of corporate law.
In order to obtain the AMF's approval, ICO issuers will have to file an information document containing various details on the offer and the issuer itself. This document will contain financial and legal information, but also certain technical information about the tokens and the method used to secure the crypto-assets raised during the offering (e.g., multisignature wallets, smart contracts). In a way, the information document will be similar to a white paper. In addition, the issuer will be required to be located in France – if necessary through a subsidiary or a branch.
The Loi PACTE adds that the "communication material" used by the issuer will also be reviewed by the AMF. This provision was criticized by the French community as it would in theory prevent the issuer from communicating on its contemplated offering before the end of the approval process (which may take a few months). Further regulations issued by the AMF may clarify the possibility for the issuer to communicate before the approval is obtained.
II) An optional license for crypto-assets intermediaries
The Loi PACTE creates a new category of regulated service providers: digital assets service providers. Under the Loi PACTE, digital assets will encompass both tokens (as defined by the ICO regulation) and traditional crypto-assets or cryptocurrencies. The services related to digital assets include various kinds of traditional investment services, as soon as they are performed in relation to digital assets:
- Custody of digital assets
- Purchase or sale of digital assets against legal currency (i.e., fiat)
- Purchase or sale of digital assets against other digital assets
- Operation of a digital assets trading platform
- Various other services, as soon as they are related to digital assets: receipt and transmission of orders on behalf of third parties, asset management, investment advice, underwriting, and placing with or without a firm commitment
The scope of certain of these services (notably the custody and the purchase or sale of digital assets services) is still quite unclear and should be clarified by an upcoming decree.
Obtaining a license shall also be optional for digital assets service providers. The rationale is the same as for ICO issuers: "Good" actors will be encouraged to obtain the license as it will give them certain legal rights, help them market their services in France and reassure their customers.
However, due to anti-money laundering concerns (arising notably from the 5th Anti-Money Laundering Directive6 and the last recommendations of the Financial Action Task Force (FATF), a registration with the AMF shall be mandatory for both custodians of crypto-assets and providers of the service of purchase or sale of digital assets against legal currency. The requirements to obtain such registration will not be overly burdensome: The AMF will check that the managers and majority shareholders are "honorable" and sufficiently experienced, and the entity will have to adopt adequate anti-money laundering procedures. The licensing procedure, on the other hand, will impose more stringent requirements, as it is broadly similar to the licensing procedure of regulated investment services providers.
III) The main legal effects of the ICO approval and the crypto-assets intermediary license
Although ICOs and the crypto-related businesses regulated by the Loi PACTE are rather different, the legal effects of obtaining a visa (for ICO issuers) or a license (for digital assets service providers) are quite similar.
The main legal effect is the possibility to contact individual customers or investors on a massive scale (through emails or cold calls) to market the offering or the digital assets services, pursuant to the regime of démarchage bancaire ou financier (financial or banking solicitation). Approved issuers and licensed service providers will also be able to broadly advertise their offers to the general public. On the other hand, the use of these marketing methods will be forbidden for unapproved ICO issuers and unlicensed intermediaries.
In addition, the Loi PACTE introduces a provision which guarantees that approved ICO issuers and licensed intermediaries will not be arbitrarily forbidden from opening a bank account. Banks will have to set up objective, nondiscriminatory and proportionate rules to determine whether these actors should be able to open an account in their books. If a bank denies such entity a bank account, it shall communicate to the AMF and the Prudential Supervision and Resolution Authority (ACPR – the regulator for the banking and insurance sectors) the reason of its decision. Entities denied a bank account may then appeal the bank's decision. This provision is expected to reinforce the attractiveness of the optional visa or license, as crypto-related companies often struggle to open bank accounts or access basic banking services, due to the implementation by banks of overly strict compliance procedures.
Finally, approved ICO issuers and licensed intermediaries (as well as registered digital assets custodians and providers of the service of purchase or sale of digital assets against legal currency) will be subject to the anti-money laundering legislation. Approved ICO issuers will be subject to these rules only with respect to the assets raised during the offering. It is worthwhile to note that these provisions will likely be modified once the FATF recommendations are updated, as the FATF is expected to require that all crypto-related companies be subject to the anti-money laundering legislation.
Last but not least, the visa or license granted by the AMF has no extraterritorial effect. As this regulatory framework is specifically French, there is no "passporting" regime with respect to ICOs and crypto-assets intermediaries. At the EU level, the regulation of ICOs and crypto-assets is still nonexistent, although the European institutions and regulatory authorities have started working on potential legislation. In particular, in its Advice on Initial Coin Offerings and Crypto-Assets of Jan. 9, 2019, the European Securities and Markets Authority noted that the multiplication of national regimes in the EU may create an uneven playing field and encourage regulatory arbitrage. Unsurprisingly, the Minister of Economy and Finance announced during the Paris Blockchain Conference that France would support the adoption by the EU of a legislative framework similar to the one created by the Loi PACTE.
IV) Upcoming implementing regulations
As mentioned above, several decrees and specific regulations implementing the Loi PACTE will be adopted between June and August 2019 by both the French government and the AMF. Once these texts become effective, ICO issuers and crypto-related companies will be able to apply for the AMF's visa or license. It is expected that many companies – including multiple clients of our firm – will file an application as soon as the implementing regulations are published. Most of these companies have already met with the AMF and started to work on these applications on the basis of the draft regulations communicated by the AMF to the actors of the crypto-economy.
Once the application is filed, the review by the AMF (and, if applicable, by the ACPR) will last anywhere from a few weeks to three or four months. Reviews related to the approval of ICOs will logically be shorter than those related to the crypto-assets intermediary license.
1 "Les crypto-monnaies," Rapport au Ministre de l'Economie et des Finances, July 4, 2018: https://www.mindfintech.fr/files/documents/Etudes/Landau_rapport_cryptomonnaies_2018.pdf
2 Office parlementaire d'évaluation des choix scientifiques et technologiques, "Rapport sur les enjeux technologiques des blockchains (chaînes de blocs)," June 20, 2018: https://www.senat.fr/rap/r17-584/r17-5841.pdf
3 Assemblée nationale, Rapport d'information par la mission d'information commune sur les chaînes de blocs (blockchains), Dec. 12, 2018: http://www.assemblee-nationale.fr/15/pdf/rap-info/i1501.pdf
4 Assemblée nationale, Rapport d'information par la Commission des finances relatif aux monnaies virtuelles, Jan. 30 2019: http://www.assemblee-nationale.fr/15/pdf/rap-info/i1624.pdf
5 According to Anne Maréchal, director of legal affairs of the AMF, the AMF's visa will give a "competitive advantage" to the issuer and guarantee to a certain extent its "seriousness." Wolters Kluwer France – Actualités du droit, Interview of Anne Maréchal, May 22, 2019: https://www.actualitesdudroit.fr/browse/tech-droit/blockchain/21868/anne-marechal-directrice-des-affaires-juridiques-de-l-amf-avec-ce-visa-optionnel-nous-esperons-creer-un-ecosysteme-attractif-qui-permette-d-attirer-en-france-les-beaux-projets-d-ico
6 Directive (EU) 2018/843 of May 30, 2018, amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU
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