Regulating the Crypto World - New Developments from France

After the ICO frenzy in 2017 and the turmoil of cryptocurrencies in 2018, will 2019/20 be the year of wisdom where regulators finally accept that it is neither desirable to leave this sphere unregulated nor is it recommended to artificially push it into legal categories that have been conceived for a centralized world and are not necessarily adapted to a distributed environment? Facebook’s release of its white paper on its native currency Libra on 18 June 2019, which has already provoked a lot of reaction from regulators, is likely to be a wake-up call for regulating this evolving environment.But regulating such an evolving and borderless environment is not easy. Fintech and particularly blockchain have a tendency to challenge the scale, scope and the speed of traditional financial system. Through blockchain it is now possible to tokenize almost any asset or right and to transfer and trade it easily. The scope of finance broadens and its borders become blurred. This poses particular challenges for regulators. On the one hand, they need to grasp this evolving environment and its implications for investor protection and financial stability. Regulating this continuously-developing and still quite recent ecosystem too quickly risks hampering its evolution and potential. Regulating it in a disparate way at a national level might favor regulatory arbitrage. On the other hand, regulators cannot let this environment evolve without scrutiny and wake up someday to a private currency like the one considered by Facebook. Furthermore, there are already existing risks favored by the anonymity or at least pseudonimity of crypto-assets, like anti-money laundering (AML) issues, combatting the financing of terrorism (CFT) or general crime, that need to be addressed. However, the ubiquitous nature of blockchain and distributed ledger technology (DLT) poses some challenges for regulators. Thus, the regulatory approach is to target the gatekeepers who allow physical and legal persons to access this environment. Most of the time these service providers are easy to identify.This is precisely what France has tried to do. For better or for worse, France for once did not wait for a wake up call. It enacted a new genre of regulation through a law voted on 22 May 2019 (the ‘PACTE’ law). Putting to one side the preferences of the European regulator, France decided to provide for an optional visa for Initial Coin Offerings (“ICO”) and a mix of mandatory registration for some intermediaries coupled with a voluntary license for all intermediaries. This optional regime (or so it seems) is a new type of regulation: neither totally soft law, nor a default rule, nor totally hard law. Most provisions require an opt-in but once the option is exercised, there are constraining rules that will apply. This carrot and stick method smartly combines a seemingly optional setup with some very persuasive incentives, which in practice makes it anything but voluntary. But the devil is very often in the detail: a smart mix of voluntary and mandatory requirements can only be successful if the advantages outweigh the constraints. The success or failure of the French initiative will also depend on enforcement and in this regard some obstacles still seem to pave the way.