France Imposes New Regulatory Regime on Digital Asset Service Providers Seeking to Access the French Market

On Feb. 28, 2023, the French Parliament passed new legislation that modifies the regulatory framework applicable to digital asset service providers based in France, or that provide services in France.

Services covered by the new French law would include financial services rendered with respect to digital assets on behalf of third parties, including the (i) custody of digital assets; (ii) buying or selling of digital assets in legal tender; (iii) trading of digital assets for other digital assets; and (iv) the operation of a trading platform for digital assets.

These services currently can be provided pursuant to one of two regulatory regimes established under French law: (i) mandatory registration or (ii) an optional license, which optional license provides more assurances to investors.

The new legislation establishes a third regulatory regime applicable to digital asset service providers, which substantially overlaps with that of a licensed digital asset service provider and is referred to as “reinforced registration.”

The adoption of this law demonstrates the legislature’s intent to step in to protect French crypto investors after the collapse of prominent crypto companies in the past few months, and to allow regulators to exert stricter oversight of the sector pending MiCA’s entry into force.

MiCA stands for Markets in Crypto Assets, a comprehensive European regulation that provides for a harmonized framework for the regulation of digital assets-based services in Europe. The regulation, whose approval is scheduled for April 2023, will be directly applicable to member states 18 months after its publication in the Official Journal of the European Union (which constitutes MiCA’s effective date).

Overview of the existing French regulatory framework

The PACTE Act, enacted in May 2019, established a comprehensive regulatory framework for digital assets in France through the creation of dedicated legal regimes for initial coin offerings and certain services in relation to digital assets (digital asset service providers — “DASPs,” or “PSAN” in French).

The law provides for two levels of regulation:

A mandatory registration for the provision of part or all of the four services described in the second paragraph above.

To register an entity as a DASP, the French regulators conduct due diligence on the following:

• The good repute and competence of the applicant’s directors and beneficial owners, which includes an assessment of the suitability of their academic and professional experience with respect to the services to be provided by the entity as well as a review of any criminal history they may have; and
• The applicant’s anti-money laundering and anti-terrorism policies and procedures

An optional license, which may be used in lieu of the mandatory registration for the provision of the four services set forth in the second paragraph above, as well as for the provision of the following services on behalf of third parties: (i) the reception and transmission of orders for digital assets; (ii) the management of digital asset portfolios; (iii) advice to investors with respect to digital assets; (iv) digital asset underwritings; and (v) the placement of digital assets.

In order to secure a DASP license, the applicant must not only satisfy the requirements needed to obtain the mandatory registration, but also must have (a) professional liability insurance or a minimum of equity capital in specified amounts; (b) at least one effective director; (c) sufficient human and technical resources; (d) resilient IT systems; (e) an internal control system; (f) procedures for handling complaints; and (g) procedures and policies to prevent conflicts of interest. The optional license enables its holders to engage in marketing and canvassing practices in France, which is otherwise prohibited to registered DASPs.

The requirements to operate under the DASP optional license are substantially similar to those that will be required once the MiCA Regulation becomes effective.

Being licensed as a DASP should accelerate the process for obtaining the MiCA license and the resulting European passport, which will enable companies to provide their services in all member states with a single license.

The introduction of a third regulatory regime, reinforced registration, as of January 2024

The new reinforced registration statute will become mandatory as of Jan. 1, 2024. However, applications for the mandatory DASP registration will no longer be processed starting July 1, 2023.

Therefore, three regimes will coexist in France:

1. DASPs with a mandatory registration granted before Jan. 1, 2024
2. DASPs with a reinforced registration whose application either (i) has been filed after July 1, 2023, or (ii) that results from the conversion of a mandatory DASP registration application filed prior to July 1, 2023, but which the French regulators have deemed incomplete and therefore converted to a reinforced registration; and
3. Licensed DASPs (i.e., DASPs that secured the “optional license”)

The July 2023 deadline implies that it is essential for companies wishing to obtain a simple registration to submit a complete file for this purpose before July 1, 2023.

The requirements for obtaining the reinforced registration are in substance analogous to those required under the optional licensed DASP status with the exception of the prudential requirements applicable to licensed DASPs, according to which licensed DASPs should alternatively have a certain amount of capital set aside or a professional liability insurance policy that provides €400,000 of coverage per claim and €800,000 of coverage per insurance year.

The similarities between the optional license and the reinforced registration raise questions about the benefit of applying for the latter status, especially since DASPs granted reinforced registration will not be authorized to canvass the French market or to carry out a number of marketing or sponsorship strategies that would enable the companies to build their visibility in France, which only licensed DASPs can do.

Increased powers granted to the regulator

In addition, it should be noted that the French Financial Markets Authority (AMF) will be granted new powers pursuant to which the regulator will be able to take specific protective measures with regard to a DASP providing the services subject to mandatory registration (and listed above) when the latter “represents a serious and imminent threat to the stability of the digital assets market.”

Accordingly, the AMF may decide, after consultation with the French Banking Supervisor (Prudential Control Authority, or ACPR), to suspend the DASP’s registration, and therefore the registered company’s ability to provide its services in France.

Conclusion

Companies considering providing digital assets-based services in France are encouraged to define their strategy in view of both the recent legislative developments and MiCA’s upcoming entry into application.

After July 1, 2023, while the advantages of applying for a reinforced registration can be debated, it may be preferable for companies having the requisite capital or professional liability insurance to directly apply for a DASP license, which they will then convert into a MiCA license.

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For more information on these matters in the U.S., please contact Corporate partners Christopher S. Auguste, Fabien Carruzzo or Kevin P. Scanlan.