The Situation: ICOs and digital assets have become a new phenomenon that has impacted many aspects of our modern economies and created an alternative way of financing for start-ups or small and medium-sized enterprises.
The Result: These assets and transactions may lead clients or investors to face new financial risks that cross borders.
Looking Ahead: The French Parliament has adopted a law providing for an optional regime covering the primary and secondary markets relating to digital assets offerings and trading, leaving players with the option to benefit from a label for their activities.
On May 23, 2019, the Pacte Law relating to the growth and transformation of companies was enacted under n°2019-486. The French government, through its Ministry of Finance, along with the French Treasury and the Autorité des marches financiers ("AMF"), was willing to provide a legal framework for new activities relating to tokens and digital assets, which have significantly grown in France. While an ordinance dated December 8, 2017, has provided for a statutory regime for unlisted securities to be registered and transferred using a distributed ledger technology, French authorities were also aiming to regulate both the offering of tokens (excluding security tokens) and certain services on digital assets (including tokens). This new initiative follows Italy, which enacted in early February 2019 a set of rules establishing an overarching legal foundation for the validity and enforceability of distributed ledger technologies and smart contracts.
The Pacte Law sets up two new regimes relating to the issue of tokens and services on digital assets that are essentially optional, therefore leaving to issuers or providers the decision to be registered/licensed or not with the AMF (with one exception). Such registration triggers obligation of compliance with a certain number of rules provided in the French monetary and financial code and implementing regulation. However, only issuers that have obtained approval for their documentation, or service providers of digital assets that have been licensed, may solicit potential clients or investors and could do so in accordance with the solicitation rules applicable to banking or financial services.
The Issue of Tokens
In a new chapter II (articles L. 552-1 and seq.) of the French monetary and financial code, issuers that are incorporated or established in France and are making a public offer of tokens in France may ask the AMF for an approval (visa) of the information document that would be distributed to the public. Tokens are specifically defined for this purpose as nontangible assets granting rights to their owner, who is identified within a distributed ledger technology that also allows for their transfer.
Should an issuer ask for such approval, it will have to prepare an information document (in French or in English with a French summary) that notably must: (i) present in a clear and fair manner the risks relating to the offer; and (ii) describe how subscribers are informed on a yearly basis about the use of their contribution.
Implementing regulations will be used by the AMF within its General Regulation to detail the materials to be provided to the AMF for the application and the precise content of information to be disclosed in the information document. The AMF will also review draft marketing materials (which are not per se subject to an approval process).
If the information so provided is not true or accurate, or becomes untrue or inaccurate afterwards, the AMF may withdraw its approval and issue an injunction not to use any material referring to such prior approval. In case of breach, the issuer may be subject to enforcement action from the Sanction Commission of the AMF and may face criminal sanctions.
Services Relating to Digital Assets
The Pacte Law also provides a set of rules regarding the defined services of digital assets (specifically defined as tokens or crypto currencies) that also take place in the French monetary and financial code (art. L. 54-10-1 and seq.). These services are rather similar to the ones qualifying as investment services relating to financial instruments: custody, trading against fiat currency, trading against other digital assets, operating a trading platform, transmission of orders, portfolio management, advisory, undertaking, or placing (with or without firm commitment). They are to be defined in an implementing decree.
If custody or trading against fiat currency services are offered in France, the providers have to be registered with the AMF, which will: (i) conduct a fit and proper test on their executive officers and main shareholders (holding 25 percent or more of the share capital or voting rights); and (ii) ensure that proper anti-money laundering internal organization and procedures are in place.
In addition to this registration obligation, any provider of any listed service on digital assets may request (optionally) from the AMF a license subject to compliance with: (i) certain general obligations (insurance policy, having control and compliance functions in place, resilient IT systems, conflict of interests policies, public fee policy); and (ii) specific obligations depending on the type of service to be provided. These obligations are to be further detailed in an implementing decree and in the general regulation of the AMF.
The AMF will hold a list of licensed providers and will be entitled to withdraw (temporarily or definitely) such licenses if the conditions upon which a license has been delivered are no longer met. Enforcement action before the sanction commission of the AMF, as well as criminal sanctions, may also be taken.
Persons currently providing custody or trading of digital assets against fiat currency services will have a one-year period from the entering into force of this new regime for getting their registration with the AMF.
Three Key Takeaways
- France now has a legal framework favoring the issue or trading of tokens or other digital assets that is essentially optional (except for custody and trading of digital assets against fiat currency, which are subject to mandatory registration).
- Further rules are to be taken in the coming weeks (through decree or within the general regulation of the AMF), but it is expected that these will be proportionate to enable an effective development of these activities.
- Attention must be paid to marketing and advertising, which may be limited to registered or licensed providers if amounting to public solicitation.