Platforms for exchange of crypto-assets: Which regulation?


At the beginning, there is Bitcoin. Since, other crypto-assets have been created like Ether or Ripple: the Banque de France counts 1300 kind of crypto-assets in March 2018.


Crypto-assets may also take the form of tokens, often issued within the context of an initial coin offering ("ICO"), with various features (frequently rights of use and more rarely voting rights and/or financial rights).


In order to enable the exchange of those crypto-assets, a secondary market emerged and is developing exponentially. We found in this market different categories of players:


  • OTC operators who ease OTC transactions between buyers and sellers mindful of discretion, and for consequent amounts. To the extent that crypto-assets are not (with some exceptions) financial instruments, those operations take place nowadays outside of any regulation;

  • decentralized exchange platforms, using blockchain technology to allow peer-to-peer exchanges;

  • "Centralized" exchange platforms, which operate "offchain", outside of blockchain, through "classical" web sites. Some of those, like Coinbase, accessed the envied status of "unicorns".



Regulation from the point of view of anti-money laundering


The 4th Directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (now called Fifth Anti-Money Laundering Directive) is in a process of revision.


Will then be submitted to anti-money laundering obligations the professionals engaged in the exchange services between virtual currencies and fiat money, and also the custodian wallet providers defined as the "entities which provide backup services of private keys on behalf of their customers, and also virtual currencies storage and transfer.


The proposed Directive adds a provision that will be a topic of discussion in the "crypto" community because it provides that, within the first two years of the transposition period of the future Directive, the European Commission should offer legislative measures aiming at create a central data basis registering the identity of users and the "wallet" addresses.


This register should be accessible to anti-money laundering national bodies (Tracfin in France).


Regulation from the point of view of "MIFID" and "Market Abuses"


It is obvious that platforms for exchange of crypto-assets are related, in their essence, to those offered by stock exchange markets.


Many regulators are engaged in the way of an exchange platforms regulation from a point of view that we may name in Europe "MIFID/Market Abuses" in order to protect investors.


In terms of regulation, the situation will be different depending on whether the concerned crypto-asset is a financial instrument or not.


The crypto-asset qualified as financial instrument


If the relevant crypto-assets are related to financial instruments, the provisions of MIFID II Directive and "Market Abuses" Directive will apply. They will be able to be negotiated only through compliant MIFID platforms. It should be a platform regulated and supervised as a multilateral negotiation system (MTF). In European law, in order to retain the qualification of financial instrument, it is necessary to take interest in the nature of the right offered by the crypto-asset: if it includes same rights than those attached to a capital security or a debt security, therefore it should be a financial instrument (which is rarely seen in practice).


The crypto-asset not qualified as financial instrument


In Europe at least, most of crypto-assets are not, nowadays, financial instruments, even if the market should develop quickly toward a massive tokenization of assets, like real property funds shares, which should be a considerable game-changing.


Malta has already a complete legislation (in force in July 2018) on the exchange platforms regulation (which negotiate tokens not qualified as financial instrument), by submitting them to an authorization regime by the financier regulator (MFSA) and by forcing them to respect "anti-market abuses" rules derived from the eponym Directive.


France should adopt by the end of the year a similar approach, by imposing a compulsory approval for the exchange platforms (and not only an optional approval as envisaged in the future loi Pacte for the "French" ICOs issuers). Such a regulation at European scale will be crucial considering that some inacceptable practices (for instance the "pump & pump") became current in the crypto-currencies secondary market.

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3èmes Assises des Technologies Financières - Jeudi 17 octobre 2019


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