On February 22, 2018, the Autorité des marchés financiers (“AMF”), France’s financial markets regulator, issued guidance regarding the trading of cryptocurrency derivatives and the growth of initial coin offerings (“ICOs”), which raised over US$5 billion in 2017.1 As discussed below, the AMF’s legal analysis of cryptocurrency derivatives concluded that exchanges offering such products are subject to certain European and French regulatory requirements, while its summary of responses to its public consultation on ICOs signals its intention to establish a specific legal framework for this new method of raising capital.
I. Regulatory requirements for trading platforms offering cryptocurrency derivatives
As recounted by the AMF, the recent surge in cryptocurrency trading has prompted several online platforms to offer various new products, such as cryptocurrency derivatives, which have a cryptocurrency (e.g., bitcoin, ether, ripple) serving as the underlying asset. In response, a number of regulatory bodies, including the European Securities and Markets Authority (“ESMA”), US Securities and Exchange Commission, US Commodity Futures Trading Commission, the US Financial Industry Regulatory Authority, and the UK Financial Conduct Authority have begun to examine issues related to cryptocurrency transactions. Moreover, shortly after an agreement was reached between the European Council and the European Parliament to amend the EU’s Fourth Anti-Money Laundering Directive (i.e., what will become the Fifth Anti-Money Laundering Directive) to cover cryptocurrency exchanges platforms, the French Minister of the Economy announced a working group for cryptocurrency regulation earlier this year.
The AMF conducted a two-part legal analysis of cryptocurrency derivatives to: (i) qualify what constitutes a derivative under French law and the EU’s recast Markets in Financial Instruments Directive (commonly referred to as “MiFID II”); and (ii) determine whether a cryptocurrency may legally constitute an eligible underlying asset.
With respect to its first line of inquiry, the AMF noted that MiFID II does not define “derivative” but rather provides an enumerated list of “financial instruments” (Annex I, Section C), which is codified in the French Monetary and Financial Code. Accordingly, the AMF determined that three types of derivatives—binary options, contracts for difference and rolling spot FX—are on that list, and therefore qualify as derivatives under MiFID II.
With respect to its second line of inquiry, the AMF determined that cryptocurrency is an eligible underlying asset because cryptocurrency derivatives can be considered futures or forward contracts concerning “indices and measures” that are cash-settled.
Based on this legal analysis, the AMF concluded that exchanges offering cash-settled cryptocurrency derivatives that are binary options, contracts for difference and rolling spot FX are subject to certain EU regulatory obligations, including reporting and business conduct rules under MiFID II and trade reporting obligations under the European Market Infrastructure Regulation (“EMIR”). Moreover, the AMF determined that such products are also subject to a prohibition on advertisements of certain financial contracts via electronic means under France’s new Law on Transparency, the fight against corruption, and the modernization of economic life (also known as “Loi Sapin II”).
II. Appropriate legal frameworks for initial coin offerings
In addition to its legal analysis of cryptocurrency derivatives, the AMF published a summary of the 82 responses it received to its public consultation on the appropriate legal framework for ICOs. Similar to initial public offerings (“IPOs”), ICOs are new capital raising efforts involving the offer or sale of virtual coins (also known as “tokens”), which are typically issued on the blockchain or using other distributed ledger technology (“DLT”). Until recently, ICOs have been able to raise capital by issuing tokens without the regulatory scrutiny traditionally associated with IPOs and other capital raising methods.
The AMF has emerged as one of the more proactive regulators in the ICO space. In October 2017, the AMF published an ICO discussion paper and launched a digital-asset fundraising and research initiative dubbed UNICORN ("Universal Node to ICO’s Research & Network").2 The AMF discussion paper sought input from a wide range of relevant stakeholders and industry participants, including “digital economy players, individuals, finance professionals, market infrastructures, academics [and] law firms.” It presented three different regulatory options for treating ICOs: (i) promoting best practices without changing existing legislation; (ii) extending the scope of existing texts to treat ICOs as public offerings of securities; and (iii) proposing new legislation adapted to ICOs.
Nearly two-thirds of respondents to the AMF’s consultation paper supported the third option, ICO-specific regulation, while the other third favored promoting a best practices guide. Based on the responses to the consultation, the AMF is actively considering various potential ICO frameworks, which would provide investors with appropriate guarantees. All respondents agreed that investors should receive an information document containing at least the following information related to an ICO: (i) the ICO project and its development and evolution; (ii) the rights conferred by the token; (iii) the jurisdiction governing a potential dispute; and (iv) the economic and accounting treatment of the funds collected during the ICO. According to nearly all respondents, this information document should also identify the legal person responsible for the ICO, as well as its management and their respective roles.
The AMF ultimately envisions a regulatory visa regime in which offerers of ICOs targeting French investors could obtain AMF approval, while other non-approved offerings would not necessarily be illegal, but would be required to disclose their lack of approval and include warnings to investors regarding certain risks. Finally, in addition to the risks posed to investors, the AMF Board cautioned that the ICO framework should include protections related to anti-money laundering and countering the financing of terrorism.
III. Key takeaways
By publishing its legal analysis of cryptocurrency derivatives and summarizing responses to its public consultation on ICOs, the AMF continues to take steps toward addressing the regulatory challenges posed by fintech developments. In particular, France could become the first jurisdiction with a dedicated regime for ICOs if the AMF succeeds in expeditiously establishing a legal framework for ICOs. However, with cryptocurrencies and ICOs remaining two of ESMA’s top priorities for 2018, additional guidance at the EU-level may be forthcoming, especially given mounting investor protection concerns.
1 AMF, Analysis of the legal qualification of cryptocurrency derivatives (Feb. 22, 2018); AMF, Summary of replies to the public consultation on ICOs and update on the UNICORN Programme (Feb. 22, 2018).