As part of the European Union, France's regulatory framework complies with the Prospectus Regulation as well as the Markets in Financial Instruments, Alternative Investment Fund Managers and Anti-Money Laundering Directives. As a civil law country with a strong culture of state intervention, France's complex regulatory framework and significant taxation on capital gains has, thus far, failed to attract a substantial number of foreign projects. However, its vibrant research and startup ecosystem has brought some leading blockchain projects to emerge in France, including a few major ICOs.
In France, there are several regulatory authorities in charge of establishing rules and regulations that might to some extent affect the way people are entitled to engage in a token sale. These include:
Ministry of the Finances and the Economy The current Minister of Finances, Bruno Lemaire, is eager to create new opportunities for the establishment of a blockchain startup ecosystem in France (see ordinance below). However, the public opinion is generally geared towards limiting excessively speculative endeavors. The Ministry of Finances comprises different services working on cryptocurrencies:
- The general direction of public finances (DGFiP) in charge of taxation, that clarified taxation on bitcoin and other cryptocurrencies for individuals.
- TRACFIN in charge of Anti-Money Laundering regulations.
Authority of Financial Markets (AMF) The AMF is an independent administrative body in charge of the regulation of markets and financial instruments. The AMF is concerned with the protecting investors, while allowing for the French ICO ecosystem to grow and develop (See statement below).
Prudential Supervision and Resolution Authority (ACPR) The ACPR is the department of the Bank of France in charge of the supervision of banks and insurances. While the Bank of France has experimented with blockchain through the implementation of some Proof of Concepts (e.g. using Ethereum for its register of participants in SEPA payments schemes), the ACPR maintains a more prudent position.
The general attitude of these regulatory authorities is to try and clarify the potential application of existing laws and regulations on token sales, to warn investors on the risks inherent in investing in cryptocurrencies, and to build a dialogue with startups to elaborate a proper regulatory framework that will promote innovation.
A. Securities Law
Financial titles are defined in France through an explicit enumeration:197 shares, bonds and units in collective investments. Unless tokens provide voting and financial rights to their holders (similar to a share or a bond on the issuer) their are unlikely to qualify as a financial title. Similarly, units in collective investments are precisely enumerated and only refer to investments in a fund, rather than in a particular project (Article L214-1 CMF).
However, token issuers might fall under the classification of "intermediaries in miscellaneous property", which are defined as:198
- Whoever, directly or indirectly, by means of advertising or direct marketing, regularly invites third parties to subscribe to life annuities or to acquire title to movable or immovable property where the acquirers do not perform the management thereof themselves or where the contract offers a buy-back or exchange option with revaluation of the capital invested;
- Whoever collects funds to that end;
- Any individual or legal entity responsible for the management of such property.
These intermediaries must register to the AMF and provide a document disclosing their operations.
A secondary status of intermediaries in miscellaneous property also applies to any party that proposes to one or several clients to acquire rights on one or several properties with the expectation of financial returns. In this broader sense, the AMF can control a posteriori the transparency and accuracy of relevant documents. Those two classifications are likely to concern token issuers to the extent that a token sale consists in advertising the sale of digital rights that can be exchanged on a secondary market, with an expectation of return.
B. Money Regulation
In France, "electronic money" is defined as (1) a value stored in a digital form, (2) that represents a debt of the issuer, (3) and that is issued in exchange of money to be used for payment199--- transcribing the European directive on electronic money.200 Terms and conditions such as reimbursement should be defined by a contract. While this law is designed for electronic payment systems, some tokens could be qualified as electronic money if they meet these criteria. The processing of electronic money generally requires a party to register as an Electronic Money Establishment at the ACPR, as prescribed by the payment services directive201 and transcribed in French law.202
The term "electronic money" should not be confused with the broader notion of "virtual currency"203 that refers to an unit of value with no legal status. Virtual currencies can be closed (such as currencies within online games), unidirectional (i.e. that can be bought with fiat currency but not redeemed for it), or bidirectional such as most tokens and cryptocurrencies.
In a position paper of January 2014,204 ACPR estimated that receiving funds from the sale of Bitcoin was regulated as providing payment services---which requires the party to register at the ACPR as a payment institution. Alternatively, if a third party provider handles the payments for the issuer, the party should consider registering as a banking and payment services intermediary, also at the ACPR.
Anti Money Laundering regulations
Anti-money Laundering (AML) and counter-terrorism financing (CTF) regulations concern most financial businesses as listed at L561-2 CMF. Trading platforms and tokens issuers should comply with those rules.
The main obligations are: vigilance, through a risk evaluation policy; identification of clients; and disclosure of suspicious movements of funds to the service of the Ministry of Finances responsible for money laundering (TRACFIN). Moreover, any individual and or legal entity who in the normal course of their business, execute, supervise or recommend transactions giving rise to capital movements, must declare any transactions they have knowledge of that involve sums which may come from a substantial crime.
In 2016, TRACFIN received 178 reports of suspicious activity, mostly because a cryptocurrency was involved without further characterization.205 TRACFIN has already put in place various cooperation and technical measures to detect suspicious patterns on public blockchains.
C. Consumer protection
Even if toke sales do not qualify as a security offerings, and if token issuers do not fall within the category of a payment processor, they might still be subject to the more general consumer protection laws.
Specifically, under French law, the professional selling a product to a non-professional has the obligation of giving specific informations such as essential characteristics of the product or service, the price, the date of delivery, his identity, functionalities for a digital product and legal information.206 As the ICO could be considered as the presale of a service, those rules are likely applicable.
Similarly a platform operator, ranking products or services or offering a connection for the sell of a product, the delivery of a service, the exchange or the share of a content, service or good is under the obligation to provide information on:
- General conditions of the service, including the referencing and ranking methods;
- The existence of a remuneration to promote a particular content, good or service if it influences its ranking;
- Rights and obligations of all parties.
Many project financed by ICOs are decentralized platforms. Those obligations would therefore apply, while some questions might be raised on the particular responsibility of the various stakeholders.
Finally, contractual clauses between a professional and non-professional can be declared abusive when the contract is substantially unbalanced (e.g. specific advertisements, such as the designation of "digital vault" are regulated). As the act of buying a token in an ICO consist generally of an adhesion contract between a professional, the issuer, and non professionals, the buyers, consumer protection law is therefore applicable to their terms and conditions.
Taxation on cryptoassets realised gains by individuals has been recently clarifiedby the Admnistrative Supreme Court. There remain however remain several open questions regarded what constitute a taxable event, valuation, and accounting in the context of a token sale.
The fact of buying and selling bitcoin and other cryptocurrencies as a professional activity is interpreted as an industrial and commercial activity207 and is taxed as such with regard to the income tax. If the activity is occasional it is regarded either as -Capital gains resulting from the disposal of movable assets_ or as non commercial benefits, if it is a reward for “contributing to the creation or the operations of the system”. The fact of buying and selling cryptocurrencies is exempted from VAT according to a decision of the European Court of Justice208.
Critical thoughts and comparative analysis
Due to its high capital taxes and complex regulatory framework, France is currently not the most favorable country for the launch of an ICO as shows the relatively low number of ICOs. Other places in Europe are more attractive due to their simpler regulatory framework, lower taxation rates and larger startup ecosystem.
However, with twelve Fields medallists, substantial taxation credits for research, and a strong engineering tradition in mathematics and computer science, France is a flourishing place for R&D in the blockchain space. For instance, Tezos, a blockchain and smart contract platform with static analysis capability, was partially developed by a French Company building on top of technology developed for public research.
Moreover, there is a political interest in France to be at the forefront of European finance as shown by the recent bid to relocate in Paris of the European Banking Authority.211 This ambition is shared by some administrations and regulatory authorities and might lead to significant clarification concerning the legal status of ICOs in the coming months. The AMF, for instance, launched---in addition to its public consultation on ICOs---a digital-asset fundraising accompaniment and research program called "Unicorn" (for "Universal Node to ICO's Research & Network").