Kramer Levin Naftalis & Frankel LLP

After allowing registration and transfer of unlisted securities through distributed ledgers in 2017[1] and drafting legislation for initial coin offerings (ICOs) earlier this year[2], France is contemplating the introduction of a regulatory framework for crypto-asset intermediaries that would solidify its leadership on blockchain and crypto-assets regulation.
The amendment[3] would, if adopted, add a new category of investment services providers to the French Monetary and Financial Code (the 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 purposed 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; and
  • any digitally registered and transferred asset incorporating non-monetary 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 crypto-currencies. This broad definition of crypto-assets is similar, but not identical, to the one introduced by Order No. 2016-1635 of 1st December 2016, whose purpose was to subject crypto-assets intermediaries to AML/CTF requirements.

B) An extensive list of crypto-asset services

Crypto-asset services are broadly defined to encompass traditional investment services[4] when performed in relation with crypto-assets, i.e.:

  1. custody of cryptographic keys for third parties;
  2. trade of crypto-assets with currency having legal tender (i.e. FIAT);
  3. trade of crypto-assets for other crypto-assets;
  4. operation of a crypto-assets trading platform; and
  5. investment services on 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 non-guaranteed 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 (the "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 2 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 its 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 non-mandatory license delivered by the AMF.
To obtain such license, crypto-asset services providers will have to subscribe to professional liability insurance (or to comply with capital requirements to be set forth in the AMF General Regulations), to possess resilient IT system, 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, to inform such clients on the risks associated with crypto-assets, and to publish their fees policy.
Moreover, services provider 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 to implement segregated accounts.
  • Trade of crypto-assets for FIAT currencies or other crypto-assets will require licensed providers to establish a non-discriminatory trade policy, to publish firm bid/offer prices (or prices calculation methods), and to publish the trading volumes and prices for past trades.
  • Operation of crypto-assets trading platforms will require licensed providers to establish operating rules, to ensure fair and orderly negotiation, and to 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 to specify the kind of operations it intends to realize as well as its 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 non-mandatory provisions to foster professionalization and promote sound market practices while avoiding constraining frameworks which might deter innovation and lower 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 for Professional Investment Funds to access hold securities registered on a blockchain

Less talked about is another amendment[5] that would allow Professional Investment Funds (Fonds Professionnels Spécialisés[6]) to hold assets registered on a distributed ledger (dispositif d’enregistrement électronique partagé or DEEP). This would include unlisted securities, which can be registered on a DEEP as of July 1st, 2018 pursuant to the 2017 Order, but also potentially any other asset registered on a blockchain.

 


[1] Order No. 2017-1674 dated 8 December 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 with financial instruments

[5] Amendment No. 1862, as modified by sub-amendment No. 2383

[6] As regulated by articles L. 214-154 et seq. of the MFC

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