The regulatory chronicle of Eric de Nexon - May 2019
Discover here the video and its transcript regarding the custody of digital assets that will drive our thoughts in 2019.
Following the definitive adoption of the PACTE law in France on 11 April, 2019, I felt it would be interesting to be able to provide you with some information and thoughts regarding digital assets and their issuance, registration and circulation via DLT / Blockchain-type technology
This is not a new issue, insofar as it appeared in January 2009 with the creation of Bitcoin, the first cryptocurrency based on decentralised Blockchain technology.
The issue remained relatively confidential during the first years, and was mostly devoted to the development of the first generation of cryptocurrencies.
Then, from 2014, buoyed by the media that enabled them to be circulated amongst a wider public, but also helped by technological progress, their number and the sophistication of their underlying processes increased, leading an ever-growing number of players to take an interest in the phenomenon.
Since 2015, both new players and traditional players have demonstrated exuberant imagination, testing and developing solutions that aim to reshape traditional processes but also create new ones, and this along the entire financial services value chain from the issuing of assets to their holding by investors: their stated goal is to improve on what already exists, leading to greater efficiency and lower costs, but also encouraging the financing of companies, notably during their initial development phase, by, for example, creating new financial assets, such as ICOs (initial coin offerings), or by over-digitising existing financial assets that will be circulated via the newly-reshaped processes: this is referred to as the tokenisation of the economy, as the financial assets are represented by tokens.
The more these projects are developed, in both number and value, the more there will be a need for a regulatory framework to oversee them.
This is all the more the case given that the cryptocurrency and public Blockchain universe has seen fraudulent practices and technological breaches that are of concern to public authorities around the world.
Putting a suitable legal framework in place is proving to be a real headache for three main reasons:
- firstly, the complexity of this issue resulting from the substantial number of different underlying technologies, operating methods and platform governance, as well as the very nature of the digital assets they support of course;
- secondly, the fact that the this domain is continually evolving, which makes it difficult to grasp and qualify the underlying concepts;
- and thirdly, the abundance of approaches: at the current time, even though this is an area where the circulation of assets is, by its very essence, cross-border, no common vision has been drawn up, each country currently preferring its own approach.
Europe does not yet have an EU-wide regulatory framework in this domain, apart from the specific measures taken in 2017 to fight money laundering and the financing of terrorism, as well as those resulting from the implementation of data protection regulations in May 2018.
The European Commission addressed the issue in March 2018 by launching its action plan for financial technologies, a plan that includes a section dedicated to cryptographic assets, as well as blockchain and distributed ledger technologies.
At the moment, the European Commission is undertaking an analysis phase and is currently basing its work on the EU Blockchain Observatory and Forum, launched in February 2018.
France, like other Member States, has itself launched a number of regulatory initiatives, the aim being to endeavour to pre-empt the ongoing European debate.
Three initiatives can be mentioned:
- the first two aim to adapt existing regulations to allow the transmission of traditional financial assets via Blockchain / DLT: in 2016 for modernised interest-bearing notes, or minibons, then at the end of 2017 for certain financial securities not admitted for central depository operations, along with the introduction of the relatively broad and no doubt insufficiently-defined concept of Shared Electronic Recording Devices;
- the second, which is incorporated within the PACTE law I mentioned in the introduction, looks at new digital assets, principally ICOs or tokens and cryptocurrencies. The law devotes two articles to this topic, one concerning the issuing of tokens, which could benefit from the option of an AMF visa, the other concerning the supervision of activities undertaken by service providers on digital assets, present in the token processing chain, on the primary market and on the secondary market.
These two articles in that law refer to an application decree and to the updating of the AMF’s General Regulations, which is currently being drafted, work we are involved in and which once again highlights how difficult it is to define concepts, understand practices and supervise them in a realistic and proportionate manner.
This is a daunting task for those drafting these enforcement texts, as they must appropriately reflect the law’s intentions in order not to adversely affect its chances of success.
Thank you for your attention.