In Short
The Situation: France has had a registration and licensing process for digital assets service providers for over three years. The recent crisis with Terra Luna and FTX trading platform has made it clear to French regulators that applicable rules needed to be enhanced.
The Result: Registration applicants will now have to provide more information on their organization and the conditions of their custody activities.
Looking Ahead: These new rules are intended to help digital assets service providers prepare for obtaining a new license that will be required in early 2025 with the provisions of the European Regulation (EU) 2023/114 on Markets in Crypto-Assets (the "MiCA Regulation")—which will include more stringent registration requirements.
France's Current Digital Asset Service Provider Framework
There are currently two ways for a digital asset service provider ("DASP") to operate in France:
- Applicants who wish to provide, on behalf of a third party, a digital asset custody service or access to digital assets, a service for the purchase or sale of digital assets in legal tender, the trading of digital assets for other digital assets, or a service of operation of a trading platform for digital assets, must register with the Autorité des Marches Financiers ("AMF") in accordance with Article L. 54-10-3 of the Monetary and Financial Code.
- In addition to registering, applicants may also ask the AMF for a license pursuant to Article L. 54-10-5 of the Monetary and Financial Code for the same services and for other digital asset services (as listed in Article L.54-10-2 of the Monetary and Financial Code), if applicable.
Obtaining a license is far more difficult than being registered. In practical terms, registration essentially requires executive managers to pass a "fit and proper person" test, and to provide evidence that there are proper systems in place to comply with anti-money laundering obligations.
On the other hand, licensed DASPs must also comply with organizational rules (minimum capital, internal control functions, etc) quite similar to those applicable to investment firms. The main benefit in getting a license lies in the possibility of soliciting investors (which is not allowed for registered-only DASPs). As a result, only a single applicant in 2023 applied for a license (compared to more than 60 registered DASPs).
The Law of March 9, 2023, and its Implementing Decree of August 19, 2023
In response to the bankruptcy of the FTX trading platform and Terra Luna scandal—which caused a crisis in the crypto market—and in order to take into account the provisions of the MiCA Regulation, which proposes a harmonization of the regulation applicable to the provision of services on crypto-assets in the Member States of the European Union ("EU"), on March 9, 2023, French Parliament adopted an act containing various provisions adapting to EU law in the fields of the economy, health, labour, transport, and agriculture (the "DDADUE Law"), including provisions relating to DASPs.
The DDADUE Law, which comes into force on January 1, 2024, reinforces the requirements for registration. DASPs will have to implement adequate security and internal control systems, including specifically for managing conflicts of interest, and a resilient and secure IT system. New obligations are also imposed on DASPs providing third-party custody services for digital assets (with the obligation to establish a retention policy and segregate holdings on behalf of their customers from their own holdings). DASPs will therefore no longer be subject to a "simple" registration, but to an "enhanced" registration.
The DDADUE Law also grants the AMF the authority to take necessary precautionary measures when the solvency or liquidity of a registered or authorized DASP, or the interests of its customers, are compromised or likely to be compromised.
A decree on the implementation of enhanced registration for DASPs, dated August 19, 2023, sets out the new requirements imposed by the DDADUE Law. It notably empowers the AMF with the duty to monitor the security of the information systems of registered DASPs. If the solvency or liquidity of a DASP is compromised, the AMF may also temporarily limit or prohibit certain transactions or activities.
AMF Updates Its Policy on DASPs
Against this backdrop, and in order to take into account these various regulatory developments, the AMF has amended the provisions of its General Regulation and its policy relating to the DASPs regime.
The changes adopted by the AMF have two main objectives:
- To incorporate into the General Regulation and its policy the provisions applicable to DASPs subject to "enhanced" registration. This regime will become mandatory from January 1, 2024, for new entrants wishing to provide the four services subject to mandatory registration; and
- Align the requirements for DASPs license with those for European authorization for crypto-asset service providers ("CASPs") under the MiCA Regulation, and allow a fast track procedure to be implemented towards CASPs authorization.
Transitional Provisions
These new rules have been subject to specific transitioning rules:
When to Move from Simple to Enhanced Registration? Applicants that did not submit a complete simple registration application by July 1, 2023, must submit an enhanced one. The completeness of the dossier will be assessed not only on the completeness of the documents provided, but also on the quality and accuracy of the information supplied.
On the other hand, already-registered DASPs, or those that submitted a registration application considered complete before July 1, 2023, are not impacted by this new enhanced registration regulation, as the simple registration continues to apply to them (therefore coexisting with the new enhanced regime).
What Happens if a Simple Registration Is Extended? Should a DASP benefiting from a simple registration seek a registration extension to a new digital asset service, it will be subject to the provisions of enhanced registration for all services provided, including those for which it was previously registered under the provisions applicable before January 1, 2024.
What Impact Will the MiCA Regulation Have? From December 30, 2024, DASPs will have to comply with the European MiCA Regulation, which will replace the French regime (as presented above) and requires mandatory licensing for CASPs, with requirements similar to those of the optional licensing regime for DASPs under France's current framework.
More specifically, DASPs not registered or licensed by December 30, 2024, will be subject to the MiCA mandatory license, enabling them to provide their services throughout the EU.
DASPs registered (under the simple or enhanced registration regime) and/or licensed by the AMF before the MiCA Regulation comes into force (i.e., before December 30, 2024) will be permitted to keep offering their services to the French public for a transitional period of 18 months (i.e., until June 30, 2026). From July 1, 2026, they will need to obtain MiCA mandatory license to continue offering their services, including to the French public.
Three Key Takeaways
- French regulators are particularly sensitive to the internal organization of DASPs, in particular as to their conflict of interest policy and the conditions of custody of digital assets and the transparency owed to clients in this respect.
- The enhanced registration process will make it easier for new applicants to switch to the MiCA Regulation license, although additional information must still comply with all licensing requirements.
- Current registered DASPs are not required to review their application to conform to the new enhanced process before 2025 and the entering into force of the MiCA Regulation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
