The notion of distributed ledger (formally denominated "shared electronic recording system, or DEEP in French) was first introduced to French law in 2016 by Ordinance No. 2016-520 of April 28, 20161(the "Minibon Ordinance"), which allows its use for the purpose of recording the issuance and sale of minibons (a class of short-term debt instrument dedicated to the financing of SMEs). 2 Ordinance No. 2017-1674 of Dec. 8, 20173 (the "DLT Ordinance") took a further step by extending to other securities (mainly unlisted equity and debt securities) 4 the possibility of using distributed ledgers for the issuance, registration and transfer of such securities, instead of traditional securities accounts. It should be noted that such securities would not be security tokens (as this term is generally understood in the cryptocurrency and blockchain community), but rather tokenized securities.
Using a shared electronic recording system to issue, register and transfer various kinds of unlisted securities was then theoretically allowed in France. However, both ordinances provided that the technical requirements (that is, the level of security and authentication) of the shared electronic recording system would have to be specified by a decree to be passed by the French government. The DLT Ordinance also provided that the decree should determine how securities registered on a distributed ledger could be effectively pledged.
The much-awaited decree was finally published on Dec. 24, 20185 (the "DLT Decree").
I. Technical requirements of the distributed ledgers used to issue, register and transfer unlisted securities
The DLT Decree requires the distributed ledgers used to register securities to comply with four technical conditions:
- The distributed ledger must be "conceived and implemented" in a manner which preserves the integrity of the information recorded.
- The distributed ledger must allow "directly or indirectly" the identification of the owners of the securities. It must be possible to determine the nature and quantity of the securities held through the distributed ledger.
- A business continuity plan, which includes an external data recording system, must be set out.
- The owners of the securities registered on the distributed ledger must be able to access statements of transactions.
The DLT Decree does not specify which of the issuer or its service provider will be responsible for the compliance of the distributed ledger with these technical requirements. In addition, the decree does not address the distinction between private and public blockchains. Although the decree does not exclude the possibility of issuing and registering securities through a public blockchain, complying with some of these technical conditions could be more complicated if a public blockchain is used. Coders and lawyers will have to work closely together to ensure that the distributed ledgers used to issue securities are compliant with French law.
Further, when an issuer hires a service provider to operate the distributed ledger used to register its securities, the identity and address of such service provider, as well as the nature of the securities, must be disclosed by the issuer in the Bulletin of Mandatory Legal Announcements (Bulletin des annonces légales obligatoires).
II. Provisions related to the pledging of securities registered on a distributed ledger
The DLT Decree also revises the rules applicable to the pledging of securities, to allow securities registered on a distributed ledger to be effectively pledged. The decree extends to these securities most of the existing provisions of the French Monetary and Financial Code related to traditional pledges of securities, and also creates two specific rules applicable only to the pledging of securities registered on a distributed ledger:
- If the person in charge of registering the securities on the distributed ledger (that is, the issuer or its agent) is not authorized to receive repayable funds from the public, a regulated entity (for example, a bank or an investment services provider) shall be responsible for collecting any dividend related to the pledged securities.
- The pledgor and the pledgee must agree on the conditions under which the pledgor is allowed to use the pledged securities and the cash contained in the pledged account.
Thanks to the DLT Decree, the French legal framework applicable to blockchain technology and crypto-assets is now more complete. After the adoption of a specific tax regime for crypto-assets (flat tax and exemption of crypto-to-crypto transactions) in the Budget Act for 2019 and the clarification of the accounting treatment of crypto-assets and initial coin offerings (ICOs) 6 by the French Accounting Rules Authority (ANC), another significant milestone will be reached when the Loi Pacte7 is passed into law. By the end of the first half of 2019, France could become one of the most advanced jurisdictions with respect to the regulation of blockchain and crypto-assets.
1 Ordinance No. 2016-520 of April 28, 2016 related to promissory notes (minibons).
2 Minibon Ordinance, Article 2; Article L. 223-12 of the French Monetary and Financial Code.
3 Ordinance No. 2017-1674 of Dec. 8, 2017 related to the use of a shared electronic recording system for the purpose of representing and transferring securities.
4 More specifically, the securities which may benefit from this new regime are the financial securities (titres financiers) which are not admitted to the operations of a central securities depository (that is, the securities which are not negotiated on a regulated market, a multilateral trading facility or an organized trading facility). In addition to unlisted equity and debt securities and minibons, they include the shares of collective investment undertakings and negotiable debt securities (titres de créance négociables).
5 Decree No. 2018-1226 of Dec. 24, 2018 related to the use of a shared electronic recording system for the purpose of representing and transferring securities and issuing and selling minibons.
6 Regulation No. 2018-07 of Dec.10, 2018.
7 Draft Law No. 1008 on growth and companies' transformation (Loi Pacte) of June 19, 2018 (France Set to Enact the First Regulatory Framework for Crypto-asset Intermediaries and France to Implement a Right to a Bank Account for Crypto-Asset Issuers and Intermediaries).
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