The New French Regime for Digital Asset Service Providers

In comparison to the framework envisaged under the Virtual Financial Assets Act

Introduction

A new regime for Digital Asset Service Providers (DASPs) is being introduced in France which will regulate entities offering services related to digital assets which are not financial securities or currencies, thus financial instruments are excluded from this regime. Similarly, the Maltese Virtual Financial Assets Act (VFAA) regulates Virtual Financial Assets (VFAs) which are defined as any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not electronic money, a financial instrument or a virtual token. While the Malta Financial Services Authority (MFSA) is the competent authority which regulates VFA service providers, the French equivalent is the Autorité des Marchés Financiers (AMF).

Categorisation of Service Providers

Services are divided into 5 categories:

  1. Store digital assets or private cryptographic keys on behalf of third parties.
  2. Buy or sell digital assets against legal currencies.
  3. Exchange digital assets against other digital assets.
  4. Manage a trading platform for digital assets.
  5. Various services such as portfolio management of digital assets on behalf of third parties, advice to subscribers on digital assets and underwriting of digital assets.

The first two categories must be registered, while obtaining a licence for the rest of the categories is optional. On the other hand, the VFA Act stipulates that all VFA service providers must obtain a licence from the MFSA.

The categorisation of services under the French regime is similar to the categorisation of VFA services provided in the Second Schedule to the VFA Act. The table below outlines the DASP categories under the French regime, and the comparable VFA service stipulated in the VFA Act.

DASP Categories under the French regime

VFA Services in the VFA Act

Category 1: Store digital assets or private cryptographic keys on behalf of third parties.

Custodian or Nominee Services: Acting as custodian or nominee holder of a VFA or private cryptographic key

Category 2: Buy or sell digital assets against legal currencies.

Execution of orders on behalf of other persons: Concluding agreements to buy, sell or subscribe for VFAs on behalf of other persons.

Category 3: Exchange digital assets against other digital assets.

Execution of orders on behalf of other persons: Concluding agreements to buy, sell or subscribe for VFAs on behalf of other persons.

Category 4: Manage a trading platform for digital assets.

The operation of a VFA exchange.

Category 5: Various services such as advice to subscribers on digital assets.

Investment Advice: Giving a personal recommendation in relation to a VFA to investors or agents of investors.

Category 5: Various services such as reception and transmission of orders on digital assets on behalf of third parties.

Reception and Transmission of Orders:

The reception from a person of an order to buy, sell or subscribe for virtual financial assets and the transmission of that order to a third party for execution.

Category 5: Various services such as portfolio management on digital assets on behalf of third parties.

Portfolio Management: Managing assets belonging to another person if those assets consist of or include VFAs, or the person managing those assets has discretion to invest in VFAs.

The distinction drawn between Category 2 and 3, wherein exchanging digital assets against fiat currencies under Category 2 requires mandatory registration, whilst exchanging digital assets against other digital assets under Category 3 does not require registration, is not reflected in Maltese law. The Maltese legislator adopted a different approach whereby all services require mandatory registration. 

The 4 classes of VFA services licences envisaged under Chapter 3 of the Virtual Financial Assets Rulebook issued by the MFSA, can also be contrasted to the DASP Categories under the French regime.

DASP Categories under the French regime

Licenses stipulated in the VFA Rulebook

Category 1: Store digital assets or private cryptographic keys on behalf of third parties.

Captured by classes 2, 3, and 4 wherein licence holders may hold clients’ assets.

Category 2: Buy or sell digital assets against legal currencies.

Services may be provided under Class 1, 2 and 3.

Category 3: Exchange digital assets against other digital assets.

Category 4: Manage a trading platform for digital assets.

Licensed under Class 4 which provides that licence holders are authorised to provide any VFA service.

Category 5: Various services such as advice to subscribers on digital assets.

Similar to Class 1 which authorizes Licence Holders to provide investment advice.

Category 5: Various services such as reception and transmission of orders on digital assets on behalf of third parties.

Similar to Class 1 wherein Licence Holders are authorised to receive and transmit orders on behalf of third parties.

Category 5: Various services such as portfolio management on digital assets on behalf of third parties.

Similar to Class 2 whereby Licence Holders may receive and transmit orders on behalf of third parties and are authorised to hold or control client’s assets or money in conjunction with such service.

Brokerage

Dealings which do not occur on an exchange take place over-the-counter (OTC), typically through brokers. Classes 1, 2 and 3 as stipulated in the VFA Rulebook may be applicable to OTC trading as they occur off-exchange. Class 3 envisages a broker-dealer service since a Licence Holder is authorised to deal on own account and acts as the counter-party. Similarly, Category 4 of the French framework envisages a broker-dealer service as the manager of the trading platform can engage his own capital.

Furthermore, a brokerage service is also envisaged under Categories 2 and 3 of the French framework which, under the Maltese framework, consists of executing orders on behalf of third parties. Furthermore, reception and transmission of orders and portfolio management provided under Category 5 of the French regime is another brokerage service which is also envisaged under Maltese law.

Licensing Requirements

With regards to services under Categories 1 and 2 which are subject to mandatory registration, the AMF must verify that senior managers and shareholders are of good repute and competence through obtaining documents such as identification, a Curriculum Vitae and a statement that they are not the subject of a criminal conviction or a prohibition to engage in an activity. The AMF must also verify that the DASP has AML/FT procedures in place. DASPs which apply for an optional licence must provide the AMF with documents such as identification, proof of competence and good repute of senior managers and shareholders and financial information. Similarly, applicants seeking to obtain a licence under the VFA Act must undergo the fitness and properness test. The assessment is applicable to qualifying shareholders, beneficial owners, directors, senior managers, the MLRO and compliance officers. The test is based on integrity, solvency, and competence. In contrast to the French regime, Chapter 3 of the VFA rulebook stipulates initial capital requirements for each class of VFA Service Providers.

Obligations

The French regime stipulates various obligations which all licensed DASPs must fulfill, some of which are similar to the obligations which Service Providers licensed under the VFA Act are required to fulfill. The French regime provides that DASPs must have an adequate security and internal control system, and a secure computer system. The VFA Rulebook stipulates that Service Providers must have risk management policies and procedures in place, and a risk management function which implements such policy. Licence Holders must also ensure that IT infrastructures ensure privacy and confidentiality, and security of stored data.

Both frameworks require management of conflicts of interest, with the MFSA Rulebook expressly requiring a conflict of interest policy to be in place. The French regime also requires communication of clear and accurate information to the client, with whom there must be a written agreement. Likewise, the VFA Rulebook requires execution policies to provide the best possible results for clients who must be provided with adequate information on such policy.

The French regime also stipulates specific obligations applicable to each category of services. For example, DASPs providing services under the first category must set out a safekeeping policy and ensure that digital assets kept on behalf of clients are returned without delay. The VFA Rulebook stipulates that where a license holder is authorised to hold or control clients’ assets the Licence Holder must hold such assets in segregated accounts, among other obligations.

Under categories 2 and 3, DASPs must, namely, set out a non-discriminatory commercial policy, publish a firm price of the digital assets or the pricing method applicable to the digital assets, and publish the volumes and prices of the transactions completed. Under category 4, both frameworks set out specific obligations when managing a trading platform for digital assets or VFAs. Under the French regime, DASPs must set out functioning rules, ensure a fair competition, and publish the details of the orders and transactions completed on the platform. The VFA Rulebook sets out similar obligations to ensure pre-trade and post-trade transparency. Pre-trade obligations include publishing current bid and offer prices, while post-trade obligations include publishing the price, volume and time of the transactions. Licence Holders must also issue clear and transparent bye-laws, similar to the functioning rules required under the French framework.

Non-Compliance

In the event of non-compliance, the AMF may hand down sanctions and withdraw licenses. The AMF may also publish a “blacklist” of DASPs that do not comply with the regulations and may block websites offering fraudulent services in digital assets. The MFSA is similarly empowered to sanction Licence Holders, which powers include the right to impose administrative penalties without recourse to a court of law up to €150,000.

Conclusion

The regime being introduced by France is similar to the Maltese framework, indicating a pattern in the regulation of digital assets across different jurisdictions. The main distinction between the two regimes is that under the French regime obtaining a licence for the provision of certain services is optional. This optional nature provides a degree of flexibility on the one hand and security of the financial market on the other, however it could potentially pose certain risks. For example, reception and transmission of orders and portfolio management are equivalent to traditional brokerage services. When these services are unregulated, investors risk financial loss without the option of compensation.

    Alexia Pollacco

    Alexia Pollacco

    Alexia is currently studying for a Bachelor of Laws degree at the University of Malta and will be graduating in 2021. Prior to joining Blockchain Advisory, she undertook a legal internship within the maritime sector of a local authority. Although her career is still at an early stage, the main legal sectors which interest her are transport and financial services.