Clifford Chance

As part of the EU Digital Finance Package, the European Commission published a proposal for the Markets in Cryptoassets (MiCA) on 24 September 2020. The European Parliament adopted an amended version of the proposal on 14 March 2022. MiCA aims at establishing a dedicated and harmonised regulatory framework for the offering of cryptoassets and related provision of services upon them. The existing digital assets regulatory framework in force in France will be replaced by MiCA.

The existing French regulatory framework: quick reminder and update

The French "loi Pacte", enacted in May 2019, introduced a comprehensive new regulatory framework for digital assets in France, reflecting the strong support from the French regulators and government for innovation through the creation of dedicated legal regimes for initial coin offerings (ICOs) and certain services in relation to digital assets (digital asset service providers – "PSAN").

The "loi Pacte" introduced the concept of digital assets, defined as follows:

• tokens, which are defined as an intangible asset representing, under a digital form, one or more rights that can be issued, written, stored or transferred through a shared digital registration mechanism enabling the identification, directly or indirectly, of the owner of said tokens¹ ; or
• cryptocurrencies, which are defined as any digital representation of a value which is not issued or guaranteed by a central bank or a public authority, but which is not necessarily related to a money of legal tender and which does not have the legal status of money, but which is, however, accepted by natural or legal persons as a means of exchange and which can be digitally transferred, stored or exchanged.²

Under such new framework, a PSAN shall register with the AMF where it intends to provide one of the following digital asset services in France: · custody on behalf of third parties of digital assets or access to digital assets (as the case may be, in the form of private cryptographic keys) in view of holding, storing or transferring digital assets; · buying or selling of digital assets against currency having legal tender (i.e. fiat); · exchanging digital assets against digital assets; and · the operation of a digital asset trading platform.

The question of when a digital asset service is provided in France has been subject to clarifications from the AMF (as to which, please see below).

It is also worth noting that the service providers who seek to register are required to put in place and implement anti-money laundering and counterterrorist financing ("AML-CTF") procedures only with respect to the custody and the buying or selling against fiat services mentioned above.

Please see our previous briefing - France leads the way with a dedicated legal regime for digital assets and icos - published in 2019 to learn more about the French regulatory framework created by the "loi Pacte".

Since the publication of our previous briefing, additional regulatory measures have been adopted to implement the provisions of the "loi Pacte", in particular decree n°2019-1213 of 21 November 2019 in relation to PSANs, decree n°2021-387 of 2 April 2021 on the fight against the anonymity of virtual assets and strengthening the national system for combating money laundering and terrorist financing, and Title II of Book VII of AMF General Regulation (Digital Asset Services Providers).

Guidance regarding the location of digital asset services

The AMF clarified that a digital asset service is considered as being provided in France, thus triggering, as applicable, PSAN registration requirements:

• when it is provided by a digital asset service provider having facilities in France; or
• when it is provided at the initiative of the digital asset service provider to customers residing or established in France.

It further specified that the digital asset service provider shall be deemed as providing a service in France when at least one of the following criteria is met:

• the service provider has commercial premises or a place dedicated to the marketing of digital asset services in France;
• the service provider has installed one or more automatic machines offering digital asset services in France;
• the service provider addresses a promotional communication, regardless of the medium, to customers residing or established in France;
• the service provider organises the distribution of its products and services through one or several distribution system(s) to customers residing or established in France;
• the service provider has a postal address or a telephone number in France;
• the service provider has a ".fr" extension to the name domain for its website.

The AMF has also published a Q&A on the PSAN regime (AMF Position DOC2020-07 – English Version). Among other things, the Q&A clarifies certain key terms such as the concept of "service provider established" in France for the purpose of the optional licence, which should be understood as a legal entity having legal personality (a subsidiary) or a branch in France.

Digital asset services and other regulated services

One of the key issues that Fintechs face in France relates to the delineation between digital asset services and other regulated services that are subject to standalone sectoral regulations (in other words investment, banking, payment and e-money services). The borders might appear blurred in some cases which require a legal and regulatory characterisation work exercise. On this front, it is worth noting that MiCA (as we discuss in further detail below) requires from cryptoasset issuers to justify why the cryptoasset is not to be considered a financial instrument, e-money, a deposit or a structured deposit.

From a French law perspective, the ACPR published a position on Bitcoin transactions in France as early as 2014 in which it indicated that, in the context of a transaction to buy/sell Bitcoins for fiat currency that is legal tender, the intermediation activity of receiving funds from the Bitcoin buyer and transferring them to the Bitcoin seller may characterise the provision of payment services. The ACPR therefore concluded in its position that entities willing to carry out this activity on a regular basis in France must be authorised as a payment service provider (i.e. credit institution, e-money institution, payment institution) or enter into partnership with a PSP as its payment agent.

Regarding investment services, the AMF also concluded in its "Analysis of the legal qualification of cryptocurrency derivatives" published in March 2018 that a cash-settled derivative whose underlying is a cryptocurrency can be considered as a financial contract and that, consequently, the regulations applicable to the marketing of financial instruments in France apply to cryptocurrency derivatives. Both positions still stand today.

White lists published by the AMF

The AMF publishes "white lists" of approved ICOs and registered PSANs. However, as of today, no digital asset service provider has been licensed by the AMF under the optional regime.

The European future: an overview of MiCA

MiCA is the European Commission's attempt to create a Europe-wide taxonomy of cryptoassets and establish a regulatory framework for the issuance and provision of services related to cryptoassets that are not currently regulated as financial instruments.

As part of the EU Digital Finance Package, MiCA has been published along with a proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT – please see the paragraph below in relation to the EU pilot regime) and a proposal for an EU regulatory framework on digital operational resilience (DORA).

The MiCA proposal published by the Commission has been voted by the EU Parliament's Economic and Monetary Affairs ("ECON") Committee of the European Parliament on 14 March 2022. The ban on cryptoassets relying on the Proof of Work (PoW) validation method was narrowly avoided during the vote by the Committee following an amendment tabled by the Green Group to ban cryptos based on such validation method which is very energy intensive. The issue was crucial as otherwise the future of Bitcoin and the most widely used cryptoassets would have been conducted outside of the European Union.

The ECON Committee has published a report containing its negotiating position on the EU Commission's proposal. The report, dated 17 March 2022, sets out various amendments to the proposal. The developments below are based on the Proposal as amended by the Parliament. This article will be updated as the legislative process currently pending comes to an end.

In view of the trilogue negotiations which are due to commence shortly, the EU Council has helpfully published a note settling out the text of MiCA in a three column table, comparing the negotiating positions taken by the European Commission, the Council and the European Parliament (please click here to access the table).

It is expected that MiCA should enter into force by the end of 2022. As it is an EU regulation, it will directly be effective in EU Member States without further formalities (in particular, without the need for any local "transposition" contrary to EU directives).

Major amendments of the Parliament to the initial proposal of the European Commission

The Parliament has included an article requiring the EU Commission to develop, by 1 January 2025,

• a legislative proposal to include any cryptoasset mining activities that contribute substantially to climate change under the EU taxonomy; and
• the European Parliament has granted ESMA with the supervisory responsibility over the issuance of asset-referenced tokens and EBA the responsibility over e-money tokens.

Please note that the developments below are based on the MiCA proposal as amended by the European Parliament.

Scope of MiCA

MiCA applies both to (i) persons that are engaged in the issuance or offering of cryptoassets for the purpose of trading and (ii) to persons that provide services related to the trading of cryptoassets in the European Union. MiCA defines the "cryptoasset" concept very broadly as "a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology".

However, MiCA excludes cryptoassets that are already regulated as financial instruments, e-money (except where they qualify as e-money tokens under MiCA), deposits, structured deposits and securitisations. MiCA sets out three different types of cryptoasset and three consequential regimes depending on the type of cryptoasset:

• asset-referenced tokens;
• e-money tokens; and
• cryptoassets other than asset-referenced tokens and e-money tokens (referred to below as ""regular" cryptoassets"), which are briefly compared in the attached table.

Regulating cryptoasset service providers

• MiCA also sets out a new regime that will be applicable to anyone seeking to provide cryptoasset services in the EU.
• The candidate must be a legal entity having a registered office in the EU. It must apply for authorisation with ESMA and shall be authorised by the relevant competent authority.
• An authorisation as a cryptoasset service provider shall be valid for the entire Union and shall allow cryptoassets service providers to provide services throughout the Union through the passporting regime.
• The European Parliament has added an article into MiCA initial proposal regarding the provision of cryptoasset services at the own exclusive initiative of the client (article 56a) (i.e. reverse solicitation). · MiCA does not provide for a separate third country regime. This means that persons located in a non-EU jurisdiction and wishing to actively promote and/or advertise their services to clients in the EU will have to obtain full authorisation. Otherwise they could rely on reverse solicitation as indicated above.
• A register of all cryptoasset service providers will be held by ESMA.
• Cryptoasset service providers are subject to general requirements that include conduct of business rules, prudential requirements, organisational requirements, rules relating to safekeeping of clients' cryptoassets and funds, complaint-handling requirements, as well as the management of conflicts of interest and outsourcing.
• Following amendments made by the European Parliament, cryptoasset service providers shall also have systems in place to prevent and detect money laundering and terrorism financing. They shall also implement know-your-customer policies. ESMA shall set up a public register of non-compliant cryptoasset service providers and update it on a regular basis.
• MiCA sets out requirements that are specific to each cryptoasset service.
• Rules are also provided in relation to the acquisition or disposal of a qualifying holding in an entity that is a cryptoasset service provider.

Market abuse regime

As a new type of asset class, cryptoassets that do not qualify as financial instruments under MiFID II fall outside the scope of the market abuse regulation (MAR). However, MiCA sets out new market abuse rules for cryptoasset markets to guarantee market integrity. These rules apply to cryptoassets that are admitted to trading on a trading platform for cryptoassets operated by an authorised cryptoasset service provider. They notably include requirements relating to the disclosure of inside information, the prohibition of insider dealing, the prohibition of unlawful disclosure of inside information and the prohibition of market manipulation.

MiCA future regime vs French existing regime

MiCA will replace existing national frameworks applicable to cryptoassets. In the meantime, however, it is interesting to put into perspective the differences between the two regimes. These are set out in the attached table (MiCA future regime vs French existing regime). MiCA includes a grandfathering clause for cryptoassets issued before its entry into force, with the exception of asset-referenced tokens and e-money tokens. There will also be a transitional period allowing cryptoasset service providers to continue providing their services for 18 months or until they obtain the new MiCA licence. This is relevant for French PSANs who could benefit from this transitional period and a simplified procedure to transition from the current French regime to the new rules under MiCA.

Exclusions from MiCA:

CBDCs and NFTs

CBDCs MiCA does not apply to central bank digital currencies (CBDCs) issued by the ECB and national central banks of the Member States when acting in their capacity as monetary authority. Recital 7 of MiCA specifies that cryptoassets issued by central banks acting in their monetary authority capacity should not be subject to MiCA, and nor should services related to cryptoassets that are provided by such central banks.

The Banque de France recently completed the last experiment of its programme for interbank settlements in CBDC, launched in March 2020. The Banque de France will now proceed with its CBDC experimentation programme, which second tranche will be mainly dedicated to cross-border transactions . Considering the fact that the European monetary system is based on the complementarity of private money with public money, the ECB has launched an investigation into the possible issuance of a digital euro alongside cash, to ensure that public money can maintain its fundamental role in the digital age.

NFTs

A non-fungible token ("NFT") is a unique cryptoasset that represents rights to an underlying "tokenised", often digital asset, which is created and transferred using DLT. This contrasts with many existing cryptoassets, including cryptocurrencies like Bitcoin, which are fungible or interchangeable.

The scope of the purchaser's usage rights with respect to an NFT is determined by the conditions or licence terms attached to the applicable NFT.

In light of the very broad definition of a "cryptoasset" that is set out by MiCA (please see above), it could be considered that NFTs are in the scope of application of MiCA, even though NFTs have emerged after the drafting of such definition. However, 3 Article 4(2)(c) of MiCA. explicitly states that the obligation of drafting, notifying to the competent authority and publishing the cryptoasset white paper shall not apply where the cryptoassets are unique and not fungible with other cryptoassets. Such exemption would probably apply to NFTs. It is worth noting that this is the sole reference to cryptoassets that are unique and not fungible in MiCA.

Some clarification could be brought by clearly excluding NFTs from MiCA's scope of application, not only with respect to the obligations in relation to the cryptoasset white paper, but also from the entire scope of application of MiCA.

EU pilot regime

On 24 September 2020, as part of the Digital Finance package, the European Commission published a proposal for a pilot regime (the "Pilot Regime") for market infrastructures based on DLT. The Pilot Regime regulation has been published on 2 June 2022 and shall generally apply from 23 March 2023. The Pilot Regime aims to help the development of the European infrastructure for the trading, clearing and settlement of tokenised securities using DLT by providing a regulatory sandbox in which it will be possible to disapply European legislation such as MiFID II and the CSDR. The European Commission hopes that the Pilot Regime experiments will allow a market consensus to emerge as to what a permanent EU regulatory regime for the use of DLT in capital markets should look like, and help market infrastructures (i.e. the central securities depositories and multilateral trading facilities) develop DLT platforms that can handle both trade and post-trade activities.

For Paris Europlace, the Pilot Regime is a part of a general move towards the emergence of fully digital end-to-end solutions which will gain market acceptance without any technological or legal "big bang" that could threaten financial stability and cause systemic risk. The Legal High Committee for Financial Markets of Paris (HCJP) has also been supportive of the Pilot Regime, proposing various changes to French law in order to ensure that there is no conflict between French law and the Pilot Regime which might prevent French actors from participating or French law being used as the governing law of experiments.

Legal challenges raised by the Metaverse

There is no universally accepted definition for the term "Metaverse" and, for many, it is simply a generic term used to refer to a future of the internet (the so-called "Web 3.0") which is emerging. Generally, such term designates the use of virtual reality (VR), augmented reality (AR), and avatars, connected by a network. Companies can distribute digital goods in the Metaverse, either by selling identical goods to many users, or by selling rights of ownership on unique goods. Sales of virtual goods are being made using cryptocurrencies and other digital assets.

While the real scope of the Metaverse and its implication in the lives of users have still to be determined, new situations and new challenges will appear tomorrow, as already experienced by Nike, Hermès and Meta.

Nike recently issued a claim against online reseller StockX LLC for launching NFTs that used its trademark and portrayed the similarities with official Nike products. Nike alleges that the NFT collection constitutes trademark infringement and trademark dilution. In May 2022, Nike filed an amended complaint to include counterfeiting on the ground that it had recently bought counterfeit shoes through StockX despite the platform's claims that its NFTs are part of a process to guarantee its shoes' authenticity. Similarly, Hermès is suing the NFT creator Mason Rothschild, who designed the MetaBirkins NFTs for trademark infringement. Meta has faced complaints from users who claimed to be sexually harassed on Horizon World (Meta's Metaverse). To react to such behaviour, Meta has rolled out "Personal Boundary", a function that prevents avatars from invading other avatar's personal space.

This raises new legal issues. For instance, can the avatar, which is the virtual incarnation of each user in the Metaverse, be seen as an extension of the legal personality of the user who created it, or will it be recognised as having its own virtual responsibility? Should positive law be applied to the Metaverse, or should the legislator be proactive and enact laws regulating the Metaverse? Such questions, and others, such as the regulation of financial services offered by regulated entities in the Metaverse are still to be explored.

Some law firms have already entered the Metaverse. For instance, a French law firm is acting on the Lemverse platform, while other American law firms have chosen Decentraland. A Canadian law firm has even bought premises in the Upland Metaverse. Such firms propose to their clients to access their virtual premises: could this be the future of legal services?

We can also note that HSBC is launching a new fund, called the Metaverse Discretionary Strategy Portfolio, aimed at high net worth private banking clients in Asia. The portfolio will invest in virtual-world/metaverse products.

And what about DeFi?

The OECD recently published a report entitled "Why Decentralised Finance (DeFi) Matters and the Policy Implications".

Decentralised Finance (or DeFi) seeks to provide traditional financial services involving cryptoassets (i.e. mimicking the centralised finance market (CeFi) in an open, decentralised, permissionless way). DeFi applications allow for the provisions of financial products and services built as decentralised applications on the blockchain, such applications being mostly based on the Ethereum protocol.

Collateralised lending is currently the fastest growing DeFi product. DeFi lending activities try to mirror market-based lending (securities lending, repos) rather than traditional consumer/retail bank lending.

On the one hand, DeFi applications would allow some benefits to financial market participants: increase in speed of execution, decrease of transaction costs, more equitable participation of users in markets, promote innovation in financial services as well as financial inclusion.

On the other hand, DeFi gives rise to important risks and challenges, notably in relation to the lack of regulatory safeguards, and in particular AML-CTF, market integrity and prudential and investor protection rules. Further, the possibility to engage in almost unlimited leveraged trading of cryptoassets is another important risk induced by DeFi. According to the OECD Report published in January 2022, such challenges can be overcome at the cross-border level and avoid regulatory arbitrage by greater international policy collaboration and discussion.

References

1. Article 54-10-1, 1° of the French Code monétaire et financier https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038509570/
2. Article 54-10-1, 2° of the French Code monétaire et financier. https://www.legifrance.gouv.fr/codes/article_lc/LEGIARTI000038509572/