Crypto Assets: Towards more legislation and regulations?
The challenges of the regulation: from innovative practices to an evolution of the law.
On the surge in crypto-asset transactions and the diversification of practices
Public interest for crypto assets is currently growing from the buying of bitcoins to the trends of NFTs. Within this context, numerous new projects are being developed by both private and public actors. For example, we could mention, on one side, the development of numerous new NFTs by luxury brands and, on the other side, the development of central bank projects or experimentations with crypto assets.
The use and creation of new crypto assets and new crypto-asset services are currently being driven by innovative tech and crypto companies but also by traditional actors and new entrants from the banking and financial sphere.
From national to regional regulations: the need to standardise market practices and set competition rules
From the creation of national status…
In recent years, at European level, some countries have legislated on crypto-asset activities such as Germany, Luxembourg and Estonia. In France, the legislator took up the issue of the supervision of crypto-asset activities in 2019. A specific status has been created, that of digital asset service providers (DASP). This status includes (1) mandatory registration for certain services, namely custody, buying or selling of crypto assets into fiduciary money, conversion of crypto assets and operating a digital exchange of crypto assets (failure to register is punishable by fines and imprisonment) and (2) optional licensing for the provision of other services on crypto assets. That initiative was successful. To date, there are 30 companies registered as DASP. None are yet DASP-licensed.
…To the project of a European regulation on crypto assets
At European level, the European Commission has published a proposal for a regulation on crypto-asset markets (MiCAR). This text will harmonise the rules applicable to services on crypto assets at European Union (EU) level. Only providers licensed as crypto-asset service providers will be able to provide services linked to crypto assets. EU MiCAR will impose new rules on stablecoins (which may be qualified as asset-referenced tokens or e-money token or e-money) and will limit/prohibit some DeFi market practices and offers (lending, borrowing giving access to rewards for clients) for asset-referenced tokens. To date, the text is still being discussed by the European Parliament. Notably subject to stormy debates are new requirements on Proof of Work protocols (such as bitcoin), while EU policymakers have always argued that European legislation should be technology neutral. The text is awaited by the markets’ players, as it will offer new opportunities but may also restrict some existing practices. At least the text will harmonise practices within the EU and help, at regional level, to fight against unfair competition practices.
On the other EU regulations impacting crypto-asset services
The Pilot regime is part of a European Commission package of measures to unlock and enhance the full potential of digital finance for innovation and competitiveness. The digital finance package provides a new digital finance strategy for the EU financial sector to embrace and lead the digital revolution, with the help of innovative European companies, so that the benefits of digital finance can be delivered to European businesses and consumers. The text on the Pilot regime regarding the marketing of security tokens (i.e., financial instruments issued and/or registered into a DLT/Blockchain) was adopted, allowing regulatory barriers to the issuance and trading of financial instruments on blockchain networks to be removed.
On regulations regarding anti-money laundering and counter terrorism financing (AML-CFT)
To date, at the French level, DASP are subject to the French AML-CFT rules. At European level, the European Commission published, in July 2021, four propositions of regulations regarding AML-CFT, and in particular a draft amendment to EU Regulation 2015/847/EU on money transfers to include specific obligations on crypto-asset service providers, directly related to the recent work of the Financial Action Task Force (FATF). That text will make it possible to harmonise the requirements applicable to crypto assets and avoid forum shopping practices aimed at avoiding AML-CFT rules.
Towards more regulating of the new activities?
On the question of NFT
Non-fungible tokens have been in the media spotlight over the past few months, with significant projects developed in various industries. Theoretically, an NFT is a digital and cryptographic asset recorded on a blockchain, representing digital or physical items, which - unlike other digital assets that are usually interchangeable and fungible - has a non-fungible nature. The purchaser of the NFT is given a digital encrypted certificate that makes it possible to connect in a unique way to a smart contract realised on a blockchain platform and to subsequently access various prerogatives (such as access to a digital product, a physical product or specific services). In France, legislation does not explicitly provide for dedicated rules applicable to NFT, nor does it exclude them specifically from existing regulatory regimes currently in effect. Therefore, the regulatory analysis of NFT projects under French law primarily depends on the legal qualification of the NFT in question. At EU level, the MiCAR project may exclude NFT from its scope unless they are (i) issued for an investment purpose and (ii) listed on trading venues that may impact several ongoing projects.
On the creation of new services on crypto assets
Some actors of the crypto-asset sphere are developing and marketing new products. On the model of traditional banking and financial services, some DASP and fintechs are conceiving new products. We could mention the following, for example:
- the crypto-asset bankbook: a client agrees to implement monthly savings materialised by the purchase of crypto assets;
- the staking of crypto assets: a client makes a deposit of crypto assets in exchange for crypto-asset gains (“rewards”). The product looks like an account but using crypto assets, for which, in practice, there is no guarantee of a return of the initial deposit;
- the lending of crypto assets: a client agrees to lend their crypto assets to decentralised protocols or centralised counterparties in exchange for rewards.
All these new products and services are very similar to those proposed by traditional asset servicers of financial instruments offering clients repo, lending and other hedging strategies to optimise the financial return of a given portfolio. For the time being such DeFi and CeFI1 services are excluded from the scope of EU MiCAR.
The legislation and regulation of crypto assets in the EU, to date:
- is highly divergent within the EU;
- will be harmonised within the EU, avoiding forum shopping practices and enabling all EU crypto-asset providers to be placed on an equal footing;
- is facing new challenges, resulting from new practices, requiring the adaption of the existing applicable rules and legislation, in particular regarding NFT and DeFI/CeFI practices;
- and could, if too restrictive, lead many actors and projects to relocate to more favourable jurisdictions (Dubai, Cayman Islands, Jersey, United Kingdom, Singapore).