France has taken steps to set up a dedicated frame for cryptocurrency transactions aiming at conciliating legal certainty, market integrity and innovation.

Capitalizing on best market practices, a recent bill defines an optional visa regime for ICOs, while a report commissioned by the French government sets forth principles of minimum regulations. Taxwise, the French Administrative Supreme Court has just ruled in favour of investors in Bitcoins.

The French market has recently witnessed a fast-growing interest from entrepreneurs and investors for fund raising and trading in cryptocurrencies. Fund raising transactions based on crypto-assets in France rose to a value of EUR 130 million by December 2017 and the digital economy ecosystem of blockchain applications is flourishing.

In crypto-fund raising transactions, known as initial coin offerings (ICOs) or initial token offerings (ITOs), the entities seeking to receive funds to finance their development or specific projects generally technology-oriented, issue tokens to investors who settle the subscription price in cryptocurrencies[1]. Tokens represent a variety of entitlement rights held in the issuer, that generally fall into three categories: rights to use services developed by the issuer (utility tokens), political rights in the issuer or the project (governance tokens); or rights to revenues generated by a specific project or to the company’s results (income-sharing tokens).

Crypto-exchanges relate to trading activities of fiat money into cryptocurrency or vice versa and payments in cryptocurrencies.

At no point has French law been stripped out by cryptocurrencies development. Since 2014, the positions issued by the regulators, the tax authorities and courts have substantially designed what has become soft law or guidance.

As a next step, the French government has issued a draft bill on business growth and transformation known as the Loi Pacte proposal (Pact Bill), published on 19 June 2018, that sets forth a dedicated regulatory frame for initial coin offerings. It is believed that the Pact Bill will be passed later in 2018.

The Pact Bill coincides with the release on 5 July 2018 of a market place report on cryptocurrencies commissioned by the government to the former vice governor of Bank of France, Jean-Pierre Landau, to enlighten the stakes of cryptocurrencies transactions and their development, scrutinize options for legal, tax and accounting approach to cryptocurrencies and make recommendations for their regulation.

The recommendations made by the report for a legal framework for crypto-assets and currencies are the following:

• No early rigid legal frame in relation to cryptocurrencies should be established. Such an approach would avoid inadequate restrictions on technological development and would prevent regulatory arbitrage.
• Exchanges and payments should be regulated to fight money laundering and terrorism financing and promote market integrity and transparency. Furthermore, unsophisticated investors should be protected.
• Spillover effects of risks related to crypto-assets towards regulated financial institutions should be avoided: trading in cryptocurrencies on own account, investment management vehicles’ investments in crypto-assets, taking crypto-assets as a collateral and exchanges activities should therefore be prohibited for financial institutions.

[1] Or as the case may be in fiat currency.

ICO regulation

The Pact Bill implements the conclusions of a market place consultation on ICOs, conducted by the French Financial Markets Authority (AMF) in the fall of 2017. Among the three regulatory approaches considered by the regulator - promoting good practices without changes in regulation, extending the financial instruments regimes to ICOs or adopting new legislation better suited to ICOs - a large majority of answers expressed a preference for a customized regime.

Definition and categorization of tokens

The Pact Bill introduces a broad definition of the term “token” as any intangible asset representing, in digital form, one or several rights, and which may be issued, registered, kept in custody or transferred through a shared electronic registration mechanism (i.e. blockchain) allowing to identify, directly or indirectly, the holder of the said asset.

It acknowledges that tokens may take the form of financial securities as defined by the French Monetary and Financial Code, in which case they will be subject to the mandatory rules relating to financial securities offerings to the public.

Under French company law, the share capital of companies must be denominated in Euros, as the fiat currency having legal tender, and may not be denominated in cryptocurrencies. Therefore, tokens cannot qualify as equity securities but only as debt securities.

Optional visa regime

The Pact Bill provides that issuers will have the option of seeking a visa from the AMF on an information document. Such document – known in the ICOs international market practice as a white paper - would be required to provide all useful information in relation to the offering and the issuer. Certain issuers in France had already submitted white papers to the AMF for review and for unofficial clearance.

The rationale behind the optional visa is to induce participants in ICOs to respect best market place practices and benefit from the regulator’s clearance to build investors’ confidence on primary and secondary markets for cryptocurrency instruments.

It is expected that the AMF will require disclosure of the following to provide its optional visa: terms and conditions of the token sale; description of the project to be financed; information on shareholders of the issuing company; subscription terms and conditions; risks associated with the ICO; technical details relating to the associated smart contract; type of tokens; amount of tokens that the issuer shall hold; goals of the project to be financed; ICO roadmap; type of assets or payment accepted (fiat currency having legal tender and/or cryptocurrency); duration of ICO fundraising campaign; and a description of the functioning of the tokens secondary market.

In addition, the issuer will need to be a legal person established in France and have put in place all means enabling monitoring and safeguard of collected assets.

The investors would be informed about the outcome of the offering.

The AMF would have the power to stop new subscriptions and offers of tokens or promotional materials and rescind its visa. It would publish and update a list of issuers and tokens for which it grants its visa.

A default regime

The AMF visa regime will apply only if the issuer so elects. However, where tokens are financial securities, their offer and sale shall be governed by the provisions of the Prospectus Directive[2], unless they qualify for private placement or reverse solicitation exemptions.

The optional visa regime would be available for utility and governance tokens as well as for income sharing tokens that are not financial securities offered to 150 or more investors.

Mandatory AML-CFT base

It is expected that AML-CFT checks will be required on the source of the crypto funds received by the issuer, pending the adoption and implementation of the Fifth Anti-Money Laundering Directive extending the scope of the European Union’s regulatory authority to virtual currency transactions. 

Definition / categorization of cryptocurrencies

It may be asserted that cryptocurrencies have the three features generally attributed to a currency: medium of exchange, store of value and unit of account.

The French Financial and Monetary Code does not define or refer to cryptocurrencies, whether with reference to lending, payments or investments. The French Monetary and Financial Code recognizes the Euro as the currency having legal tender in France - a creditor is compelled to accept Euro in repayment of a debt – along with local currencies issued under certain conditions by entities of the social and solidary economy. It also refers to foreign currencies in relation to enforcement of judgments for payment of a sum of money in a foreign currency.

In a position relating to derivative products using cryptocurrency as the underlying asset dated 22 February 2018, the AMF expresses the view that under French law cryptocurrencies are unlikely to qualify as fiat currency having legal tender or as either a foreign currency or e-money or financial instrument. Cryptocurrencies qualify as movable intangible assets.

The AMF assesses cryptocurrency as a “miscellaneous asset” for purposes of marketing and investment management rules[3].

Lending/ Cash management

Cryptocurrencies should stay outside the scope of credit monopoly, as they would not qualify as funds referred to in the definition of credit transactions[4].

Accordingly, a financial corporate entity may lend cryptocurrencies or carry out centralized cash management of cryptocurrencies both within a group of companies to which it belongs, subject to complying with corporate benefit principles and prevention of conflicts of interest rules, and outside of its group. It can also pledge or assign as security crypto-assets.

Participating entities in a cash management arrangement will have to monitor risks allocations issues. 

Intermediaries, exchanges and payments

According to the French Prudential Control Authority (ACPR)‘s position relating to the activities of intermediaries in the framework of acquisition / sale of Bitcoins against fiat currency, the regular exercise of intermediation activity consisting in the receipt from a buyer of Bitcoins in order to transfer them to a Bitcoin seller is a payment services activity requiring a payment service institution license unless such activity is ancillary to a commercial activity within a limited network or to limited goods or services[5].

Furthermore, intermediaries in cryptocurrencies offerings fall under the scope of obligation put in place by the law of 9 December 2016 relating to transparency, fight against corruption and modernization of the economic activity (known as theSapin II Act) for companies acting as intermediaries in the offering of rights over assets entailing an opportunity of return on investment or the economic equivalent thereof a registration obligation of its offer with the AMF.

In respect of trading platforms of cash-settled derivative instruments using cryptocurrency as underlying assets, the AMF has expressed the position that, since those instruments qualify as financial instruments, trading platforms may only be operated by investment services providers, that shall respect rules of good conduct and comply with obligations arising out EMIR (European Market Infrastructure Regulation n° 648/2012 dated 4 July 2012). Promotional activities shall be prohibited in most cases. Regulated platforms will be subject to the implementation of AML regulations.

Taxation

The French Administrative Supreme Court (Conseil d’Etat), in a decision dated April 26, 2018^[6], ruling on the tax classification and tax regime of cryptocurrencies in France, has rejected the position of the French tax authorities issued in 2014:

As a general rule, gains deriving from occasional sale of Bitcoins are to be considered as “capital gains of movable property” (and subject to personal income tax as such at the proportional rate of 19%) whereas gains from cryptocurrency mining shall be taxed as “non-commercial activities”. Other revenues resulting from habitual transactions as “industrial and commercial profits” (taxable at the progressive rate of personal income tax up to 45%). Although it refers to Bitcoins, the decision may be extended to ICOs in any cryptocurrency.

Going further, the Landau report dated July 4, 2018 defines orientations to adapt the applicable French accounting and tax rules to ICOs’ specificities. In particular, it recommends removing adverse immediate taxation of issuers at the time of issuance of the tokens (i.e. through a tax deferral) and adjusting the taxation of capital gains realized on tokens held by the subscribers depending on whether (i) detention of such crypto-assets is sustainable [i.e. non-speculative] and whether (ii) those crypto-assets represent the ability to acquire goods or services provided by the issuing entity.

The above positions have indisputably shed a light on key tax issues regarding the ICOs, for which dedicated solutions would be relevant, in particular in respect of the accounting treatment of crypto-assets on issuers and subscribers’ balance sheets, the characterization of tokens for taxation of revenue purposes (which mainly depends on the rights associated with the token - i.e. security income sharing tokens vs. utility or governance tokens), the reporting and withholding requirements for token issuers and the taxation to VAT.

For the time being, most of tax practitioners in France agree that the tax rules in force appear to be sufficient: 

• The issuance of tokens, especially utility tokens, should trigger corporate income taxation at the level of the issuers since the cryptocurrencies received in consideration for those tokens could be viewed as a prepayment of a supply of goods or services (even though questions may arise regarding the timing of such taxation);
• The exchange of cryptocurrencies for tokens triggers taxation at the level of the investor without deferral;
• Capital gains deriving from a sale of tokens by the investor are taxable;
• From a VAT perspective, the ICO should be taxable since the tokens would be deemed issued in consideration of services or goods.