An extract from The Virtual Currency Regulation Review, 5th Edition
Introduction to the legal and regulatory framework
As in many countries, the first contact between cryptocurrencies and French law was through the lens of financial crime. In its 2011 annual report, Tracfin (the French financial intelligence unit tasked with fighting financial fraud, money laundering and terrorism financing) was the first French authority to mention Bitcoin.2
Cryptocurrencies then came under scrutiny from other regulators during the Bitcoin bubble of November and December 2013. The French Central Bank published a short report on ‘the dangers linked to the development of virtual currencies’.3 In January 2014, the Prudential Supervision and Resolution Authority (ACPR), the French banking and insurance regulatory authority, stated that entities receiving legal currency on behalf of clients in relation to the purchase or sale of cryptocurrencies were required to obtain a licence to provide payment services.4
In October 2017, the AMF published a discussion paper on ICOs.5 Following an extended consultation of experts and actors of the French cryptocurrency and ICO economy, it was finally decided to create a dedicated framework for ICOs, rather than try to include them in the scope of the existing regulation of securities offerings. This legal framework was included in Act No. 2019-486 of 22 May 2019 on the growth and transformation of enterprises (the PACTE Act), which contains many measures aimed at facilitating the growth of SMEs and giving employees and stakeholders more control over corporations.
Now that the PACTE Act has entered into effect, we do not expect that any significant additional blockchain-related legislation will be adopted. However, on 24 September 2020 the European Commission published a digital finance proposal package, including a digital finance strategy and legislative proposals on cryptoassets (with proposals for a regulation on markets in cryptoassets (MiCA) and for a regulation on a pilot regime for market infrastructures based on blockchain (the pilot regime)) and digital resilience. The MiCA proposal is inspired by the French ICO and digital asset service providers (PSANs) regime, and would include a European passport for issuers and service providers. The French regime will disappear when the MiCA regulation enters into force. It is expected that French PSANs will get facilities to convert their French status to the EU regime status. At the end of March 2022, the European Parliament voted in favour of the MiCA regulation, which aims at regulating cryptocurrencies. The final version is expected at the end of June 2022 and MiCA regime will most likely enter into force within 18 months as of the publication date.
Another regulation, although not as extensively relayed as the MiCA regulation, was also discussed on 28 April 2022, between European decision makers. The regulation is known as the TFR Directive6 (Transfer of Funds Regulation) and focuses on money laundering on fund transfers. In March 2022, in their updated version, MEPs proposed to add the cryptocurrency sector to this directive, which dates from 2015. If this amended version of the directive were to be adopted, it would allow for the monitoring of all cryptocurrency transactions carried out by regulated entities. No updated versions have been circulated since then.
Securities and investment laws
i Tokenisation of securities and issuance of security tokens
The first appearance of the concept of blockchain in French law was in Ordinance No. 2016-520 of 28 April 2016, which created a dedicated framework for the financing of SMEs through crowd-lending platforms. The Ordinance allows for the issuance of promissory notes (known as minibons) through a crowd-lending platform. The registration and transfer of minibons can either be done in the traditional way (i.e., the issuer maintains and updates a register of all minibons holders) or by a shared electronic recording system (i.e., a distributed ledger).7
Ordinance No. 2017-1674 of 8 December 2017 took a much bigger step by extending to unlisted securities8 the possibility to use a distributed ledger for their issuance, registration and transfer. These securities tend to be presented as security tokens, although it would be more accurate to call them ‘tokenised securities’; in any case, the PACTE Act makes it clear that tokens issued pursuant to ICOs cannot be securities.9
Both Ordinances provided that the technical requirements (i.e., 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 government. Instead of rushing this, the government chose to consult the European Commission, which then validated the government’s definition of the distributed ledger.10 The much-awaited decree was published on 24 December 2018 (the Decree).11
The Decree does not specify which of the issuer or its technology provider will be responsible for complying with the four technical requirements regarding distributed ledgers used for the registration of securities and set out in the Decree.12 In addition, it does not address the distinction between private and public blockchains. Although the Decree does not exclude the possibility to issue and register securities through a public blockchain (such as Ethereum), complying with some of these technical conditions could be more complicated if a public blockchain is used.
The Decree also modifies the rules applicable to the pledging of securities to allow securities registered on a distributed ledger to be effectively pledged.13
French start-ups and large corporations have already started using the Decree to tokenise their securities. In April 2019, Société Générale issued €100 million worth of covered bonds registered on the Ethereum blockchain, as part of a pilot project in which it was also the sole subscriber of the bonds.14 Finally, in April 2021, Societé Générale issued the first structured product in a security token format, which was directly registered on the Tezos blockchain and fully subscribed by Société Générale Assurances.
However, registering securities on a blockchain is only useful insofar as various burdensome or costly processes, such as the vote at general meetings or the secondary market of unlisted securities, are made easier. While the registration of unlisted securities was greatly modernised pursuant to the Ordinance of 8 December 2017 and the Decree, the other obligations to which an issuer is subject with respect to its shareholders have remained the same, thus creating many practical problems.
In March 2020, the AMF published an analysis on the application of financial regulations to security tokens,15 in which it identified the legal obstacles to the development of security tokens. The AMF notably suggested to the European Commission that a European ‘Digital Lab’ be created, which would enable national authorities to waive certain regulatory requirements to facilitate the clearing and settlement of transactions involving security tokens. Following the AMF report, the Haut Comité Juridique de la Place de Paris (HCJP), a think tank on financial regulation created by the Banque de France and the AMF, published a first report in 202016 on the situation of French law regarding the digitisation of financial securities, and more precisely on security tokens. A soon-to-be published second report in June 2022 by the HCJP will propose legislative changes to adapt French law to the framework of the DLT Pilot Regime Regulation.17 The DLT Pilot Regime Regulation aims at temporarily exempting DLT market infrastructures from certain specific requirements of the EU financial services legislation.
In this respect, as mentioned above, the European Commission has published a digital finance package that includes a proposal for a blockchain pilot regime for market infrastructures with a view to creating a new regime of exemptions to support the development of financial securities registered on blockchains (see Section XI). The European Securities and Markets Authority (ESMA) has also published an advising paper on the initial coin offerings and cryptoassets18 where it discussed, among other issues, the legal qualification of cryptoassets in the EU financial securities laws.
ii Asset managers and investment funds
In the past two years, alternative fund managers have started to create cryptocurrency investment funds. Tobam Bitcoin Fund, launched in November 2017 by French alternative asset manager Tobam, claimed to be the very first European cryptocurrency fund.19 However, Tobam’s fund was not licensed by the AMF because cryptocurrencies, as an asset class, did not fit in any category of the regulatory framework applicable to asset managers.
In addition, the PACTE Act now allows professional specialised investment funds (FPSs), which are dedicated to professional investors, to purchase assets registered in a shared electronic recording system (i.e., a blockchain), which includes cryptocurrencies.20 The PACTE Act also allows professional private equity funds (FPCIs) to invest up to 20 per cent of their assets in digital assets.21 FPSs and FPCIs are alternative investment funds, and therefore may only be managed by a licensed asset manager; however, they are required to appoint a depositary (which is notably in charge of the custody of the assets owned by the fund). Licensed cryptocurrency asset managers will still need to find depositaries willing to take custody of cryptocurrencies.
Regarding cryptocurrency derivatives, the AMF took actions to increase the protection of retail investors against websites offering to bet on cryptocurrencies through derivatives (such as contracts for difference or binary options). In February 2018, the AMF issued an analysis stating that cash-settled contracts on cryptocurrencies qualified as derivatives under French law.22 Consequently, platforms that offer cryptocurrency derivatives trading must now obtain an administrative authorisation and may not target French residents in their online marketing. Furthermore, the management of individual cryptocurrency portfolios on behalf of clients is now included in the list of digital asset services.23 Obtaining a licence will be optional for entities providing this service and, as a rule, they will not be subject to any regulation.
Napoleon X, which raised around €10 million following an ICO in 2018, became the first French crypto start-up to obtain an asset manager licence from the AMF. In May 2022, the management company Arquant Capital has obtained the approval of the AMF to market a portfolio of funds for professionals as an AIFM (Alternative Investment Fund Managers), invested 100 per cent in cryptocurrencies. Arquant Capital is the first asset manager in France approved by the AMF for active management funds invested directly in cryptocurrencies and is the first to gain exposure to Ethereum.24