The French Act no.2016-1691 dated 9 December 2016 on Transparency, Anti-Corruption and Modernization of Economic Life (Or “Sapin II” – see our compliance coverage here) empowered the Government to amend the regulatory framework to facilitate the transmission of certain financial securities through blockchain technology 1)Article 120 of Sapin II “The Government may by way of executive orders within the 12 months following this Act take the measures necessary to (…) … Continue reading
In order to prepare such executive order, the Ministry of Finance initiated last Spring a public consultation, whose results were made public on 30 August 2017.
The 43 contributions included the points of view of local associations, banks, management companies, fintech pure players, academics, law firms and consultants, and provided operational and technical aspects to be taken into consideration in order for the new regulatory framework not to hinder the adoption of blockchain technology, while balancing security and foreseeability for all the players involved.
A majority of respondents considered that the use distributed ledger technology (“DLT”) for the transmission of securities, while already possible, could nevertheless fall within legal grey areas with respect to laws applicable to ownership of securities and payment terms.
They considered that the transfer of ownership of securities should be feasible through the blockchain, without mandating any change of the current legal framework for the transmission of securities and favored allowing the effective transmission and representation of securities via blockchain. However, intermediate options, requiring little or no legislative change, would be of limited use over the current framework.
While a delivery versus payment system (“DvP”) would be welcomed, its modalities of implementation and of legislative framework are far from being unanimous. Allowing the simultaneous delivery of securities and its settlement in commercial currency, or even in central bank money, constitutes the expected end-game for a majority of the respondents, despite the short-term issues. Some respondents nevertheless highlighted that:
- DvP was not essential to the functioning of the blockchain and could therefore be apprehended at a later stage;
- the use of crypto-currencies, or tokens taking legal currency as an underlying, can make it possible to ensure de facto such DvP under the current regulatory framework.
The issue of DLT “governance” also currently divides the players, which should consequently call for a technology-neutral legal framework, with a supervisor whose interventions would be limited to the certification of blockchain managers for specific activities.
A majority of respondents also called for a balanced framework, in which legislative intervention would be limited to ensuring the technological neutrality of the substantive requirements for the current players. They notably called for the law applicable to data management, security and interoperability requirements, and even “know your customer” regulation (KYC) to not be explicitly defined as far as the blockchain is concerned, and should therefore be left outside the scope of the expected regulation.
On the basis of the observation received, the Ministry of Finance will propose to the Government a draft executive order next Fall.
In collaboration with Sidney Lichtenstein.
First publication in the K&L Gates FinTech Law Watch
|↑1||Article 120 of Sapin II “The Government may by way of executive orders within the 12 months following this Act take the measures necessary to (…) amend the regulatory framework applicable to securities in order to allow the representation and the transmission (via a shared electronic recording device) of securities that are not admitted to the operations of a central depositary or a system of payment and delivery of financial instruments.”|