On 24 September 2020, the European Commission published a draft regulation on “crypto assets” known as the “MiCA Regulation”. Anticipating – and in many respects inspiring – the MiCA Regulation, France published the “PACTE”, one of the first regulations in Europe to provide a comprehensive framework to crypto assets service providers (“CASPs”). A transition period ending on 10 June 2021 grants CASPs the opportunity to register with the French Financial Markets Authority (“AMF”) and provide crypto assets services in France. With this framework becoming fully effective France will likely become a leading jurisdiction establishing future standards for crypto assets on a European scale.
As part of its Digital Finance Package published on 24 September 2020, the European Commission published the draft Regulation for Markets in Crypto Assets (MiCA), to foster innovation and competition in digital finance, while controlling the associated risks. This draft regulation intends to regulate players in the crypto assets market rather than the assets themselves. In many aspects, it is largely inspired by the system introduced by the French “PACTE” law published on 22 May 2019. However, the draft MiCA Regulation, if adopted as it reads today, may entail additional burdens for the issuance of crypto assets and the provision of associated services.
Digital representations of value and digital representations of rights (tokens): a key distinction
French PACTE framework – Both digital representations of rights and values are addressed by article L. 54-10-1 of the CMF under the common classification of digital assets, which introduces rules applicable to CASPs. The representation of rights and values are thus assimilated when defining the rules governing the provision of services in their respect. Yet only the issuance of tokens within the meaning of article L. 552-2 of the French Monetary and Financial Code (“CMF”) has been regulated since the entry into force of the French “PACTE” law. The issuance of digital representations of values, not issued or guaranteed by a central bank or a public authority, a notion which applies to cryptocurrencies, is thus not regulated for the time being.
Draft MiCA Regulation – The draft regulation assimilates the representation of rights and values for both issuance and provision of services. For said quite distinct activities, the draft regulation applies a single definition, namely “crypto assets”, which gather digital representations of value or rights “which may be transferred and stored electronically, distributed ledger technology or similar technology”. As a result, the draft MiCA Regulation builds a framework for the issuance of cryptocurrencies whereas the current French regulation provides for more flexibility.
Issuers of crypto assets: applicable rules
The regulation applicable to issuers and service providers under the draft MiCA are largely inspired by the French PACTE law while creating additional constraints.
Principle – The draft MiCA Regulation sets out a principle of prohibition whereby issuers of crypto assets cannot offer their crypto assets to the public or request their admission to trading on a dedicated trading platform unless they comply with certain conditions. These conditions include the drafting, notification, and publication of an information document (called “white paper”) and compliance with certain rules of conduct and fund protection.
White paper – The regime resulting from the draft Regulation is in fact largely inspired by the regime established by the French CMF and the AMF General Regulation, applicable to persons wishing to obtain a visa from the AMF to proceed with a public offering of tokens. The requirements for the white paper, both in terms of content and applicable procedure and deadlines, are fairly similar to those imposed in France for the information document that must be submitted to the AMF for approval. This also applies to requirements for marketing communications.
Prior approval – The draft MiCA Regulation proposes a framework in which no prior approval of the supervisor is required for the publication of the “white paper”. On the other hand, it grants significant powers to the competent national authorities, allowing them to suspend or even prohibit any public offer in the event of breach. In the French PACTE, since the approval procedure is optional, the AMF can only decide to withdraw its approval in the event of non-compliance.
Exemptions – Aware that such requirements are not adapted to certain providers and certain crypto assets, the European Commission proposes to exempt issuers from any “white paper” requirement when:
- The crypto assets are offered for free,
- The crypto assets are automatically created through mining as a reward for the maintenance of the distributed ledger technology or the validation of the transactions,
- The crypto assets are unique and not fungible with other crypto assets,
- The crypto assets are offered to fewer than 150 natural or legal persons per Member State when such persons are acting on their own account,
- Over a period of 12 months, the total consideration of a public offer of crypto assets in the EU does not exceed 1 million euros,
- The offer is solely addressed to qualified investors and the crypto assets may only be held by such qualified investors.
Stablecoins – Since the French “PACTE” law only regulates the issuance of tokens (vs. the issuance of representation of value), France does not regulate to date the issuance of stablecoins. The Commission, seemingly targeting without saying Facebook’s Diem (ex Libra),
proposes a new and stricter regime for the issuance of stablecoins, referred to as “e-money tokens” and “asset-referenced tokens”.
Unlike e-money, defined by pre-existing French and EU law, e-money tokens are not required to be issued upon reception of funds for the purpose of making payment transactions, nor create a claim on the issuer. Once issued, e-money tokens thus enter a market of potentially infinite transactions and exchanges in the same way as legal tender fiat currencies, whereas electronic money disappears once the payment transaction for which it was issued has been completed.
In the draft MiCA Regulation stablecoins and to asset-referenced tokens face specific constraints. In addition to the notification of a white paper and subject to certain exemptions, an authorisation from the national supervisor is required. This is an ad hoc authorisation for issuers of asset-referenced tokens, whereas issuers of e-money tokens will have to be authorised as a credit or electronic money institution, like issuers of e-money. This authorisation will be required as of the coming into effect of the regulation, even for pre-issued stablecoins.
European passport – “PACTE” law is applicable to CASPs providing services in France but, as local regulation only addressing services, does not provide for a “passport” for issuance. The draft MiCA Regulation will allow issuers of crypto assets that have implemented all the obligations applicable on their territory to benefit from a European passport allowing them to offer crypto assets and apply for admission to dedicated trading platforms within the European Union, without any further requirement.
Crypto Assets Servies Providers: applicable rules
Equivalent definitions – The draft MiCA Regulation preferred the notion of “crypto assets” to that of “digital assets” introduced by the French PACTE law. Yet in effect, by listing and defining crypto assets services, the draft MiCA Regulation adopts the list and definitions of articles L. 54-10-2 and D. 54-10-1 of the CMF, except for portfolio management of digital assets on behalf of third parties and underwriting of digital assets, which have no equivalent in the draft MiCA regulation.
France – The French PACTE law provides for a step-by-step rollout of registration:
- Mandatory registration: CASPs that provide the following services are required to register in advance with the AMF:
- The custody of digital assets on behalf of third parties,
- The purchase or sale of digital assets for fiat currency that is legal tender.
As a reminder, CASPs that began such activity before 24 May 2019 had to register with the AMF no later than 18 December 2020.
Since 11 December 2020, two more services need prior registration to be provided:
- The exchange of digital assets for other digital assets, and
- The operation of a trading platform for digital assets.
CASPs that began such activity before 11 December 2020 have until 10 June 2021 to register with the AMF. Out of the ten services listed by the CMF, the provision of four of them shall now give rise to registration.
- Optional licence: Persons established in France may apply for authorisation with the AMF to provide one or more of the ten services on digital assets. For each service for which the service provider is authorised, the AMF General Regulation sets out several obligations that shall be met.
MiCA licence – The main contribution of the draft MiCA Regulation is to require all CASPs to be authorised for all services on crypto assets. The difference with the current PACTE is striking, since CASPs established in France can provide six categories of services on digital assets without any authorisation or registration. This gap may create a fertile soil for CASPs willing to launch under the protection of a (yet) unregulated framework.
The draft regulation also requires the national competent authorities to make their decision within three months of receiving a complete file, where the AMF General Regulation allows six months. Following the model of the French system, the conditions to be met by these service providers, whether to obtain their authorisation or afterwards, are quite important and may differ according to the nature of the services concerned.
European Passport – Unlike PACTE, the draft MiCA Regulation allows every CASP authorised in one EU Member State to provide services in another Member State, whether on a freedom of establishment or freedom to provide services basis. The draft regulation then makes it very clear that a crypto asset service provider cannot be required to have a physical presence on the territory of a host Member State.
Combination with PSP licences – By providing that CASPs may have their authorisation withdrawn if they lose their licence as payment institution or electronic money institution, the draft MiCA Regulation allows the authorisation of a CASP to be combined with that of payment institutions or electronic money institutions. Platforms that had to apply for such authorisation under PSD2 implementation to handle funds will therefore be able to apply for this authorisation as crypto-asset service provider.
Entry into force, transition and grandfathering – MiCA regulation will become effective upon publication for the e-money tokens and asset-referenced tokens and 18 months after publication for other matters. However, providers offering their services in accordance with the law applicable to them before the entry into force of the regulation will be grated a transitional period of 18 additional months to comply. This period could therefore apply to all CASPs operating in France in accordance with the provisions of the French “PACTE”.
Conclusion – With this draft regulation on markets in crypto assets, the European Commission is proposing a framework that is inspired from, as much as it strengthens, the French “PACTE” regulation. Considering the existing market and the transition regime, the local framework set by PACTE may be seen as an opportunity for foreign actors to anticipate the MiCA Regulation, benefit from the learning curve and start working with a supervisor already used to address such activities.
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