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Silvestre Tandeau de Marsac
FTMS Avocats and Lawyer at the Paris Bar, Paris
smarsac@ftms-a.com

Introduction

The new regulation on crypto assets was long awaited and was welcomed several months ago in France. Ultimately, it was Law No 2019-486 of 22 May 2019 (commonly referred to as the PACTE Law – Plan d’Action pour la Croissance et la Transformation des Entreprises, or the Action Plan for Business Growth and Transformation) that introduced into French law an ad hoc legal framework for initial coin offering (ICOs) issuers and digital assets service providers (DASPs).

On 21 November 2019, Decree 2019-1219 was issued to complete this new legal framework.

A twofold optional system has been established for token issuers on the one hand and digital asset service providers on the other, reflecting the joint desire of the French legislator and the Financial Market Authority (AMF) to encourage issuers and market participants to comply voluntarily with new requirements rather than being forced to do so.

From digital assets to tokens

The PACTE Law introduced the new categories of ‘tokens’ and ‘digital assets’^[1] in the Monetary and Financial Code (CMF), thus departing from the European terminology of ‘virtual money’ and ‘crypto assets’ used, in particular, in the Fifth Anti-Money Laundering Directive (5AMLD) and reports by the American Bar Association (ABA) and European Securities and Markets Authority (ESMA).

Digital assets

The new Article L54-10-1 of the CMF does not define digital assets but rather enumerates assets that fall within this definition.The following are considered to be digital assets: (1) the tokens defined at Article L552-2 of the same Code, apart from those that can be assimilated to financial instruments; and (2) any digital representation of a value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a currency being legal tender and does not have the legal status of a currency, but which is accepted by natural or legal persons as a means of exchange and can be transferred, stored or exchanged electronically.

Thus, the category of digital assets includes tokens and virtual currencies within the meaning of European law, but excludes financial instrument-like assets.

Digital tokens

The new Article L552-2 of the CMF defines the token as any intangible property representing, in digital form, one or more rights that may be issued, registered, retained or transferred through a shared electronic recording device that makes it possible to directly or indirectly identify the owner of that property.

In addition to the digital form, the core feature of the token derives from the use of a ‘shared electronic recording device’ enabling the direct or indirect identification of the owner of that asset (the notorious blockchain). It is interesting to note that the definition of tokens includes prima facie financial securities registered in a blockchain.

Nevertheless, as Professor France Drummond points out,^[2] this classification of financial securities as tokens is neutral: it bears no legal consequences for these securities insofar as the PACTE only concerns raising funds through the issue of tokens that cannot be assimilated to financial instruments.

Finally, this new definition does not solve all the problems of digital assets qualification. Recent discussions on the Libra have highlighted the difficulties of determining its legal nature. Is it a payment token or financial service? A product or crypto asset?

ICO issuers

The ICO is a new type of project funding, using an encryption method based on blockchain technology. The operation consists of a primary market issue of tokens to investors,  who will then be able to exchange these tokens on the secondary market through, for example, exchange platforms or digital asset service providers.

ICO issuers now have the option of submitting their offer of tokens to the public to an optional visa from the AMF. The visa is issued for the offer and not to the issuer. To be eligible for AMF approval, the duration of the token offer may not exceed six months and must be open to more than 150 subscribers.

To obtain the AMF’s optional visa, ICO issuers must submit an information document (known as a white paper) to the AMF, containing various information on the offer of tokens and on the issuer, enabling subscribers to base their investment decision and understand the risks associated with the offer.^[3]

During its inspection, the AMF also verifies that the ICO issuer meets certain guarantees.

First, and in line with the objective of building ‘an attractive ecosystem to attract fine ICO projects to France’,^[4]the PACTE Law requires the ICO issuer to be incorporated or registered in France.

Next, the issuer must implement a process for monitoring and safeguarding the assets collected as part of the offer of tokens to ensure their reliability, operability and effectiveness. In this respect, AMF Instruction DOC-2019-06 gives concrete examples of arrangements that meet the guarantees, such as the setting up of a conventional escrow with a professional, the setting up of a multiple signature system or an automated computer program.

Finally, the issuer must justify the existence of a mechanism enabling it to comply with its obligations in terms of the fight against money laundering and terrorist financing.

Once approval has been obtained, the AMF reserves its right to examine the draft promotional communications intended for the public to ensure that it complies with the provisions of Article 713-5 of the AMF General Regulation.^[5]

Digital assets service providers

The PACTE Law establishes digital assets service providers as a new category of regulated service providers.

The activities covered by the DASP status are set out in Article L54-10-2 of the CMF and include the services of:

• custody of digital assets;

• purchase or sale of digital assets against currency being legal tender;

• purchase or sale of digital assets against other digital assets;

• operation of a digital assets trading platform; and

• various other services relating to digital assets, such as receipt and transmission of orders on behalf of third parties, asset management, investment advice, underwriting and with or without a firm commitment.

The law, which had remained rather evasive as it only listed the activities covered by the DASP statute, has been completed by the decree through Article D54-10-1 of the CMF. This article now clearly defines the scope of the activity.

The PACTE Law establishes a status that differs according to the activities carried out by the DASP. All DASPs are entitled to apply to the AMF for approval.

However, service providers offering digital assets custody services and the purchase or sale of digital assets in currency being legal tender are subject to mandatory registration with the AMF before starting their activities, in accordance with the 5AMLD Directive.

As part of its pre-registration audit of DASPs, the AMF verifies the ‘good repute and competence’ of the legal entity’s management and shareholders, as well as the effective implementation of internal control procedures and mechanisms to ensure compliance with obligations relating to the fight against money laundering and terrorist financing.

However, there is a void in the legislation as this mandatory registration regime does not apply to providers carrying out purchase/sale activities against other digital assets.

It appears from the parliamentary debates that the legislator deliberately omitted this category of DASPs to avoid ‘over-transposition’ of the 5AMLD Directive. The argument is surprising, as this omission creates a clear loophole in the anti-money laundering and anti-terrorist financing system.

Legal status of ICO issuers having obtained a visa and approved DASPs

Obtaining a visa or approval places ICO issuers or DASPs under a special regime that requires them, in particular, to comply with anti-money laundering and anti-terrorist financing provisions.^[6]

As a counterpart, issuers that obtained a visa and approved DASPs have the opportunity to benefit from the ‘AMF label’ and prospect customers, which would be otherwise forbidden.

The possibility of carrying out acts of banking or financial prospecting

This possibility remains the most important advantage offered by the AMF’s visa/approval. In this respect, Article L341-1 of the CMF has been amended to add issuers and DASPs to the list of entities or persons authorised to engage in prospecting.

Although DASPs and ICO issuers remain subject to the ban on advertising by electronic means under Article L222-16-1 of the French Consumer Code, the latter may nevertheless use advertising ‘whose purpose is to invite a person, by means of a response or contact form, to request or provide additional information, or to establish a relationship with the advertiser, to obtain the advertiser's consent to carry out a transaction’.

Facilitated access to a bank account

The PACTE Law also introduces provisions to ensure that approved and registered DASPs, as well as ICO issuers who have obtained a visa, would not be arbitrarily refused the opening of a bank account. Indeed, it appeared that the holders of blockchain projects wishing to open a bank account in France were opposed to a high number of refusals, the banking establishments fearing the strong constraint of the compliance regulation.

In this regard, Article L312-23 of the CMF provides that credit institutions must put in place objective, non-discriminatory and proportional rules to allow ICO issuers and authorised and registered DASPs access to a bank account. In the event of refusal, they have a right of appeal against the credit institution’s decision, which must also communicate the reasons for its refusal to open a bank account to the AMF and the French Prudential Supervision and Resolution Authority (ACPR). Article D312-23 of the same code specified in particular that silence kept by the bank for more than two months from receipt of the complete file is tantamount to refusal.

The sanctions provided for in the PACTE Law

The PACTE legislation also introduces a section in Articles L572-23 to L572-27 of the CMF to penalise DASPs and ICO issuers failing to comply with their obligations.

Thus, Article L572-23 punishes DASPs subject to a registration requirement pursuant to Article L54-10-3 with one year of imprisonment and a fine of €15,000, if they have not subscribed to the mandatory reporting requirement or if they have provided inaccurate information to the AMF.

They could also face a one-year prison sentence and a fine of €15,000 if they refuse to cooperate with the AMF after receiving a formal notice to do so.

Lastly, DASPs, whether or not subject to the registration requirement, and token issuers are liable to six months’ imprisonment and a fine of €7,500 in the event of dissemination of inaccurate or misleading information.^[7]

The new arrangements created by the PACTE legislation and the AMF are part of the government’s determination to make Paris more attractive as a financial centre for issuers of digital assets and DASPs, and to foster the development of primary and secondary markets for this asset category. While the concern for attractiveness may seem legitimate, it will be up to the regulatory authorities to ensure the necessary protection of investors.

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