DDADUE law project: what outcome for the crypto markets?
On February 28, 2023, the French National Assembly voted definitively the DDADUE law to establish a new step for the crypto and web 3 economy in France, between the implementation of the pilot regime and the reinforcement of the registration of PSAN.
Pilot regime: an opportunity for financial markets that remains to be confirmed
It had been talked about since 2020, the pilot regime for DLT market infrastructures is now enshrined in French law and will be accessible to companies as of March 23, 2023.
The objective? To conduct an experiment for 3 renewable years on what market infrastructures could be thanks to blockchain technologies. Companies participating in these experiments will benefit from exemptions to existing regulations for services provided on digital securities. In this way, Europe hopes to bring the financial sector up to speed with innovation and find new and more efficient solutions for financing the economy, especially in support of SMEs. This is a world first, which should help to give the European Union the means to be at the forefront of financial innovation.
Large companies and start-ups alike have expressed their interest in participating in building the future of European finance through the pilot regime.
However, it seems necessary to warn of two pitfalls that will limit the ambition of the adopted regime, and that could even go against the objectives of this initiative:
- Payment settlements will be allowed through traditional intermediaries or through central bank, commercial or electronic currencies that rely on existing systems and whose digital equivalents are not expected to emerge within 3 years. Similarly, e-money tokens will not have legal validity until MiCA comes into force in mid-2024. Therefore, none of the solutions proposed in the text would allow to take full advantage of the pilot scheme and to exploit the potential offered by end-to-end on-chain solutions. As it stands, the ambition of France and Europe to explore all the avenues opened up by blockchain technologies in the financial world should therefore be revised downwards.
- Companies operating as simplified joint stock companies (SAS) are not eligible to participate in the experiment. As it stands, the pilot regime therefore excludes the majority of SMEs whose development it is supposed to promote.
The coming months will be an opportunity to remove these obstacles. In particular by allowing stablecoins to be used as settlement assets and simplified joint stock companies to be eligible for the pilot regime. The essence of Adan’s work will be to advance these reflections so that these three experimental years can be fully beneficial for all stakeholders.
Reinforced registration: a mountain to climb for the new PSANs?
The Parliament’s vote also marked a major step forward for digital asset service providers (DASPs or PSANs) that need to register in France.
After three months of intense debate, the option of a mandatory license for new entrants has been officially rejected. The sector is delighted with this alternative decision as it would have been too difficult for young start-ups to obtain approval, particularly due to practical obstacles such as the lack of professional liability insurance, which still prevents service providers from obtaining such approval.
While we share the desire to take the PSANs on the road to MiCA regulation, particularly in order to protect investors, Adan has always advocated for the most effective approach to this end: balanced and appropriate regulation, which allows innovation to develop in our country and to spread throughout the world for the benefit of all.
We must salute the work of deputies Eric Bothorel and Daniel Labaronne, who put forward alternative proposals to mandatory approval, as well as the commitment of the Government, and in particular of the Minister for Digital Transition and Telecommunications, Jean-Noël Barrot, who supported this option during the debates.
As soon as the DDADUE law is examined by the National Assembly, it will have been noted that :
- Already registered PSANs are not affected by the reinforced regime.
- All new companies wishing to establish themselves in France must, in order to be authorised by the Autorité des marchés financiers to launch their activity, have an adequate security and internal control system and a system for managing conflicts of interest.
- In addition, digital asset custody service providers will also have to:
- Explain their responsibilities in an agreement that their clients agree to
- Establish a custody policy
- Return their clients’ crypto-assets without delay in case of problems attributable to the custodian
- Segregate their funds and those of their clients
- To not use their clients’ assets without prior approval from them
However, further negotiations will have resulted in further strengthening of the registration of new PSANs wishing to establish themselves in France by two steps.
The tightening of regulations will take effect on July 1, 2023. Given the current delays in registration procedures, companies planning to set up in the next few months – whether their application has not yet been submitted or is still under review – must be able to anticipate the possibility of being affected by the new regime.
PSANs will have to comply with cybersecurity requirements. It is entirely desirable that providers be able to assure their users of the security of their transactions and funds. However, it has become clear that several obstacles remain to be overcome before start-ups can meet the cyber requirements – in particular the vagueness of certain obligations and the high cost of implementing them – even though, due to their size, they present more limited risks.
Given the fact that French players will be subject to these various obligations ahead of their European competitors, Adan will be careful in the coming months to make this advance an asset in the preparation of European regulations. The anticipated strengthening of the French framework must not constitute an obstacle to the development of companies in France.
For this to happen, it will be necessary for the regulators and the sector to engage in a reinforced dialogue in order to :
- Clarify the conditions for processing PSAN registration files submitted to the authorities between now and the entry into force of the reinforced regime.
Allocate the means to achieve France’s ambitions, in particular by strengthening the authorities’ resources so as not to penalize players for excessive delays in authorization.
- Support service providers in complying with cybersecurity requirements by clarifying expectations, increasing the skills of the stakeholders involved on the authorities’ side, and adopting a pragmatic approach in analyzing their risks.
- Work on the finalization of the MiCA texts in order to facilitate the transition of the French regime to the European regulation.