France is the first European country to regulate cryptocurrency derivatives in a move that could signal a whole raft of inter-jurisdictional regulation for this sector. But attempts to limit retail investors from entering the highly volatile market could fail as the new rules provide legal certainty and investor protection.
With more cryptocurrency regulation inevitable in the coming months, this could prove to be an important test case and a strong indicator as to which way the rest of Europe will turn.
France’s Autorité des marchés financiers (AMF) announced February 22 that cryptocurrency derivatives should be regulated just like any other financial instrument and therefore online platforms offering these are included under the new Markets in Financial Instruments Directive (Mifid II). As well as offering greater transparency and reporting requirements, this also means the products cannot be advertised via electronic means under France’s Sapin 2 law – which aims to provide transparency, reduce corruption and modernise the economy – and exchanges must comply with the European Market Infrastructure Regulation (Emir) reporting standards which requires counterparties to report details of a trade to a trade repository.
This is intended to restrict offerings to high net institutional investors, aligning the framework with the US, which regulates cryptocurrencies as securities and forces firms to comply with additional rules, including registering with the Securities and Exchange Commission. Contracts for differences and binary contracts are included under the derivatives umbrella.
AMF secretary general Benoît de Juvigny told IFLR: "We have more and more platforms that offer cryptocurrency derivatives to French retail investors. According to European and French law, it was clear that these should be regulated like any other financial instrument".
"Legally we don't think we could classify ICOs as financial instruments".
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"It is becoming more normal to regulate these types of businesses at EU level" |
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Clarity and uncertainty
Marc Perrone, partner at Linklaters in Paris, believes that a clear legal framework will boost cryptocurrency derivative investments, providing certainty and protection to retail investors which may go against the AMF’s original aims. Rules such as obliging counterparties to publish a prospectus if they are selling to retail investors could provide encouragement though forbidding electronic marketing of these products is likely to do the opposite.
The AMF has taken matters into its own hands, but some kind of pan-European framework is expected soon. The G20 are meeting this month in Argentina and it’s expected that talks will take place on cryptocurrency regulation, including on initial coin offerings (ICOs). France and Germany will also make a joint proposal to regulate the bitcoin cryptocurrency and boost investor protection.
As reported in IFLR last month, the EU will look to regulate cryptocurrencies in a similar way to securities, but if they don’t move quickly enough then member states are likely to go their own way. Nevertheless as France becomes the first member state to regulate cryptocurrency derivatives as a conventional financial instrument, any inter-jurisdictional or EU-wide regulation going forward may be influenced by the results from this test case.
The European Central Bank (ECB) has been reluctant to regulate cryptocurrencies for fear that any regulation could legitimise a marketplace they disapprove of. Last month ECB chief supervisor Danielle Nouy said crypto regulation was not a priority, adding to ECB president Mario Draghi’s comments that the bank does not have a mandate to regulate them. The risk for France is that any regulation could both legitimise and boost a market they are very wary of.
KEY TAKEAWAYS
The AMF will regulate crypto derivatives in the same way as conventional products, meaning they are included under MIFID II;
This approach could boost retail investment by providing certainty and greater protection, counter-productive to its original aims;
With wider cryptocurrency regulation on the horizon, this will be closely monitored by other member states and the EU in view to adopting a similar approach.
Perrone said he expects the AMF has already discussed ICO regulation with EU regulators to close the gap in the regulation that exists. Forcing exchanges to provide background checks on investors, obliging any ICO to be reported to the securities authorities, and even restricting ICOs to high net worth investors have all been suggested as potential solutions. While it is unclear precisely what measures will be implemented, it’s becoming increasingly likely that some measures will be adopted imminently.
The European Securities and Markets Authority (Esma) raised concerns about ICOs, including the lack of investor knowledge about the risks involved and the magnitude of firms not complying with relevant EU legislation. This suggests that existing financial regulation will be extended to cryptocurrencies soon.
“It is becoming more normal to regulate these types of businesses at EU level,” Perrone said. “I would expect the framework to be European, but the length of the EU legislative process may force member states to take measures.”
The problem is that some member states have widely differing priorities and objectives and any Europe-wide regulation is unlikely to satisfy every country. Switzerland, for example, is trying to cultivate a crypto-nation and has already established a comprehensive regulatory framework that aims to encourage retail investment rather than deterring it. Other member states such as the UK, Germany and France have been far more vocal about their concerns and would be expected to press for much more stringent regulation designed to limit retail participation.
Michael Wainwright, Dentons partner, said the AMF’s intention is to exclude all but high net value investors, moving in the US’s direction rather than Switzerland.
“This provides a more conventional way in for investors,” he said.
For retail investors that are accustomed to investing in financial instruments this would be a much more comfortable way to trade.
In the UK if cryptocurrency derivatives are not regulated as securities then they would be caught by gambling regulation. This means that they must comply with the codes of practice that ensure the activity is conducted in a fair and open way and protects children and other vulnerable persons from being harmed or exploited, but moving towards the French approach would significantly bolster the obligations placed on issuers.
Wainwright expects Esma to lead regulation efforts. “But if Esma is slow then national regulators would be prepared to take action,” he said.
What kind of actions this may well depend on the success of the AMF’s move.
See also
EU can look to US, Swiss approaches for crypto regulation