Cryptic Europe: Deciphering Crypto-assets Regulation Through the French and German Lenses

Regulating emerging technologies always creates challenges for policymakers who need to strike a balance between a framework that is solid enough to prevent risky developments, but not too tight as to stifle innovation. While crypto-assets have been around for over a decade now, their growing popularity and the swift development of far-reaching projects such as the digital-yuan or the Libra payment system, have pushed governments to double down on their regulatory efforts. This is particularly true in Europe where France and Germany have recently adopted laws setting the scene for crypto-assets regulation, while the European Commission is finalizing a draft legislation, named Markets in Crypto-Assets Regulation (MiCAR), that would implement a bespoke regime overwriting national ones. Through this piece of legislation, the EU would become the first regional entity to offer a comprehensive framework to crypto-assets. Yet, two major challenges remain for the European regulators; first, to provide a coherent classification and definition of crypto-assets, and second, to offer proportionate requirements which are complementing, and ideally improving, existing financial regulations.

Financial or non-financial instruments? The conundrum of crypto-assets taxonomy

As the frontier between crypto-assets and financial instruments is considered to be blurry, a major challenge that policymakers are facing lies in the definition and classification of crypto-assets. This difficulty is evidenced by the diverging regimes currently applied by French and German authorities. Back in 2018, the EU provided the first milestone in crypto regulation through a piece of legislation on anti-money laundering (AMLD5) that included a definition of crypto-assets as “digital representations of value that are not issued or guaranteed by a central bank or a public authority and that do not possess the legal status of currency or money.” When France and Germany adopted their laws on crypto-assets, respectively in May 2019 and January 2020, both countries built on this definition. However, its rather broad scope resulted in diverging interpretations, with the French financial authority (AMF) clearly stating that financial instruments are excluded from the digital assets regime, while the German financial authority (BaFin) asserted that crypto-assets can also be financial instruments.

The distinction between financial and non-financial instruments is only the first layer of complexity and the conundrum gets more complicated when considering the variety of crypto-assets (security tokens, utility tokens, payment tokens, e-money tokens, stablecoins or—as lately renamed at EU level—asset-referenced tokens…). Although there is no statutory classification in Germany, BaFin guidance distinguishes between such categories, while the French authorities advocate for the future EU regulation to stick to the simpler financial/non-financial distinction, plus a separate category for stablecoins. Additionally, French and German authorities are also discussing whether some crypto-assets could qualify as e-money or not, a specific asset category under EU law. In view of these layers of complexities, one of the biggest challenges for the upcoming MiCAR will be to provide a clear distinction between these categories of assets. On the one hand, if the categories are too broad it will favor regulatory arbitrage and undermine its consistent application across the EU, but if too specific the classification could impede innovation by adding an unnecessary level of complexity which creates uncertainty.

When size does matter; towards a proportionate framework made of mandatory requirements?

The taxonomy of crypto-assets matters a lot because the legislation and related requirements applicable to Crypto-Asset Services Providers (CASPs) and token issuers stem from it. It looks like everybody in France and Germany agrees that a bespoke regime for crypto-assets not covered by existing financial regulation is necessary, while crypto-assets qualifying as financial instruments or e-money will fall under the scope of existing EU regulations—MiFID II and EMD II, respectively. However, the debate remains open whether this bespoke regime should be composed of mandatory and optional requirements—an approach championed by France—or introduce only full harmonization, as it is the case in Germany.

In France, policymakers created a rather flexible regime based on mandatory requirements for services including crypto-asset trades against fiat and custody, while offering CASPs and token issuers the opportunity to apply for an optional license for other services. This flexible regime was designed to attract the best crypto projects to France by offering them a framework balancing investor protection and flexibility. Following this approach, the AMF supports the introduction of a similar mechanism for the upcoming EU regulation. On the other hand, German policy makers decided to follow a more stringent approach by incorporating crypto custodianship into the German Banking Act, making it a fully-fledged financial service with mandatory requirements overseen by BaFin, without an optional regime for other services. Germany will also regulate security tokens in the same spirit under its digital securities draft law, whereas the AMF advocates for flexible experimentation with such tokens under the aegis of an EU “digital lab” that would be supervised by the European Securities and Market Authorities (ESMA).

Finally, a major point of consensus in France and Germany relates to the identified necessity to put additional requirements for global players. This cautious approach is best exemplified by the concerns expressed by policymakers about the Libra payment system. What is at stake here is not the Libra project per se, but rather the implication that any global network could have on the EU financial system. Therefore, the approach taken by European regulators should be proportionate, benefiting low-risk players, while achieving tech-neutrality. This would allow the smaller players to innovate without bearing the full cost of regulatory compliance. In parallel, such an approach would balance the actual risks of global tokens with the indisputable value this sector would bring to consumers, and equally enable innovation at EU-level.

Authors: Martin Signoux & Viktor Reier