An extract from The Virtual Currency Regulation Review, 3rd 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 December 2016, cryptocurrency trading platforms and brokers were included in the list of entities subject to the anti-money laundering legislation.5
In 2016, a distinction arose between the concept of blockchain and the universe of cryptocurrencies. Experimentations using blockchain technology to simplify various technological processes were initiated. Several French banks joined the R3 consortium (which developed a private blockchain platform named Corda). The Deposits and Consignments Fund (a state-owned financial institution) launched LaBChain, a blockchain innovation lab that started working in July 2016 on a business case dedicated to the use of blockchain to manage digital identity and know-your-customer procedures.6
Simultaneously, the French government started working on a legal framework allowing the use of blockchain for the registration of securities. Registration on a blockchain was first limited to short-term bonds dedicated to small and medium-sized enterprises (SMEs),7 but was soon extended to all unlisted securities pursuant to Ordinance No. 2017-1674 of 8 December 2017.
In 2017, the renewed cryptocurrencies and initial coin offerings (ICOs) bubble led the French regulators and the government to start working on the creation of a dedicated legal framework. The French government tasked Jean-Pierre Landau, a former top executive of the Central Bank, with preparing a report on cryptocurrencies, which was published in July 2018. Three working groups were created among the French Parliament to prepare reports on ICOs, blockchains and cryptocurrencies. In addition, both the French Financial Markets Authority (AMF) and the ACPR created internal fintech teams acting as 'innovation hubs' in 2016.
In October 2017, the AMF published a discussion paper on ICOs.8 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. Before its adoption, the PACTE Act was amended by the National Assembly and the Senate, and an ad hoc legal framework for intermediaries dealing with cryptocurrencies was added.
In the meantime, widespread lobbying was conducted by the French cryptocurrency community (with the notable help of several legislators interested in cryptocurrencies) to adapt the French tax regime. The capital gains related to cryptocurrencies were taxed at very high rates, and this became a significant problem during the 2017 bull market, as many individual investors threatened to leave France and cash out in tax-friendly jurisdictions. Consequently, Act No. 2018-1317 of 28 December 2018 (the 2019 Budget Act) created a specific tax regime that taxes capital gains of individuals at a flat rate of 30 per cent.
With the PACTE Act and the new tax regime now fully in force, the legal environment for companies dealing with cryptocurrencies, ICO issuers and individual investors has been clarified.
Securities and investment lawsi Tokenisation of securities and issuance of security tokens
More than a year before the bubble of late 2017, the French government started studying the emerging concept of blockchain technology (or distributed ledger technology).
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).9
Ordinance No. 2017-1674 of 8 December 2017 took a much bigger step by extending to unlisted securities10 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.11
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.12 The much-awaited decree was published on 24 December 2018 (the Decree).13
The Decree provides that the distributed ledgers used for the registration of securities should comply with four technical conditions:14
- they must be 'conceived and implemented' in a manner that preserves the integrity of the information recorded;
- they must 'directly or indirectly' allow the identification of the owners of securities, and the nature and number of securities held;
- they must include a business continuity plan, which includes an external data recording system; and
- the owners of the securities registered on them must be able to access their statements of transactions.
The Decree does not specify which of the issuer or its technology provider will be responsible for complying with these technical requirements. 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.15
French start-ups and large corporations have already started using the Decree to tokenise their securities. Carthagea16 and DomRaider17 announced that they planned to raise funds through the issuance of shares registered on a distributed ledger. In April 2019, Societe Generale 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.18 In June 2019, the share capital of a company owning a €6.5 million building located near Paris was tokenised by start-up Equisafe.19
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,20 in which it identified the legal obstacles to the development of security tokens. The AMF notably suggests 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.
In any case, various regulations (both French and European) will need to be amended to make the registration of securities on a blockchain an attractive option (see Section XI).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.21 However, Tobam's fund was not licensed by the AMF, as cryptocurrencies, as an asset class, did not fit in any category of the regulatory framework applicable to asset managers.
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.22
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.23 The PACTE Act also allows professional private equity funds (FPCIs) to invest up to 20 per cent of their assets in digital assets.24 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.
Napoleon AM (the licensed asset manager of the Napoleon Group mentioned above) launched a FPS invested in digital assets in November 2019.25 To deal with the issue of the depositary, Napoleon AM decided to purchase cash-settled derivatives on Bitcoin listed on the Chicago Mercantile Exchange, which qualify as financial instruments, instead of purchasing bitcoins directly.
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.26 Consequently, platforms that offer cryptocurrency derivatives trading must now obtain an administrative authorisation and may not target French residents in their online marketing.
Finally, the management of individual cryptocurrency portfolios on behalf of clients is now included in the list of the digital assets services.27 Obtaining a licence will be optional for entities providing this service and, as a general rule, they will not be subject to any regulation.
Banking and money transmission
Over the past few years, French banking regulators have frequently reminded the general public that cryptocurrencies are not real money. The Central Bank and the ACPR, for example, consider that the term 'cryptocurrency' is misleading, and prefer to use the term 'cryptoassets'.28
Their position clearly matters because the French regulation of payment services revolves around the use of legal currency (i.e., a legal tender issued by a sovereign country). All the payment services defined by Article L. 314-1 of the MFC involve the use of funds. Pursuant to Directive (EU) 2015/2366 of 25 November 2015 on payment services in the internal market (PSD 2), funds mean 'banknotes and coins, scriptural money or electronic money as defined in point (2) of Article 2 of Directive 2009/110/EC'.29 Therefore, as a general rule, receiving and sending cryptocurrencies on behalf of third parties does not qualify as a regulated service under the payment services regulation.
However, the recent development of stablecoins (and in particular fiat-backed stablecoins) blurs the line between legal currencies and cryptocurrencies. As the European Banking Authority (EBA) stated in its advice on cryptoassets of 9 January 2019, redeemable fiat-backed stablecoins may qualify as electronic money when the token (1) is electronically stored, (2) has monetary value, (3) represents a claim on the issuer, (4) is issued on receipt of funds, (5) is issued for the purpose of making payment transactions and (6) is accepted by persons other than the issuer.30 Consequently, some fiat-backed stablecoin issuers may be required to obtain electronic money licences to be allowed to operate in France.
Finally, the announcement of Facebook's plan to launch a cryptocurrency called Libra has been met with scepticism by the French government and the Central Bank. Bruno Le Maire, the Minister of Economy and Finance, stated that Facebook may create its own payment system, but under no circumstance should it be allowed to create a sovereign currency.31 François Villeroy de Galhau, the governor of the Central Bank, stated that Libra would in any case need the relevant licences if payment or banking services are to be provided.32 France also announced that a taskforce dedicated to stablecoins would be created within the G7.33 In addition, the Central Bank started working with external consultants to develop a central bank digital currency (CBDC).34 The CBDC projects of the Central Bank focus on wholesale transactions (i.e., large interbank transactions) and the clearing and settlement of transactions involving tokenised financials assets.