The French SEC-equivalent AMF (Autorité des marchés financiers), detailed the existing issue on approaches taken regarding digital currencies. In their report, the AMF called on the European Commission to develop a strategy for digital financial services.
The Fintech dossier called for the EU to “regulate the issuance and exchange of financial instruments in a blockchain (tokenization)“. This would only be feasible by removing current legal barriers.
Legal barriers to the development of block-chain based securities
According to the report, currently, attention is drawn to problems that have already been addressed by other market participants. Following a detailed legal analysis, the AMF has identified several legal obstacles that stand in the way of the development of blockchain securities. The AMF criticized and highlighted specific points that are incompatible with the decentralized structure of blockchain technology:
- The need to designate a blockchain manager to act as a settlement system, which de facto excludes decentralized securities trading platforms on blockchains.
- The obligation to use a credit institution or an investment firm as an intermediary in order to give individuals access to the settlement system.
- The obligation to settle securities transactions in cash, central bank money or commercial currency.
Three fundamental aspects should be noted
(1) The amendment of European regulations in which legal obstacles for the development of applications on the blockchain have been identified.
(2) The creation of tailor-made rules for blockchain based securities that take into account the specificities of their decentralized nature.
(3) The creation of experimental areas at a European level, allowing competent national authorities to dismiss certain obligations imposed by European regulations.
The system would include the establishment of a governance mechanism at a European level. The authorities overseeing national competition would be able to exchange practices, thus benefit from them. According to the AMF, such a system would have the advantage of removing regulatory barriers for the creation of infrastructure projects for blockchain assets. This would be achieved without the need to change European regulations immediately.
Removing regulatory barriers for the development of blockchain financial instruments is a strategic priority, as projects cannot develop at the current level of regulation. Many laws regulating the investment and money-raising market are outdated, as they were designed for a time when everything revolved around physical paper.
In addition, capital procurement, such as initial public offerings (IPOs), usually has to be handled through a bank and other intermediaries. There are numerous laws and regulations that govern such procedures.
Europe one step ahead of the U.S.
If the proposal made by the AMF is adopted, it would be possible throughout Europe to carry out regulated, digitally-based fundraising and blockchain based securities transactions. At present, this is not possible under current US legislation. Currently, SEC Commissioner Hester Peirce has proposed to grant a three-year grace period to cryptographic projects, thus giving them the chance to avoid conflict with U.S. securities laws. Nevertheless, the U.S. finds it difficult to enact generally applicable laws for digital assets. Conversely, this would make EU jurisdictions very attractive, as the local regulatory authorities clearly see an opportunity to be accommodating force.
In contrast, the German legislators have granted financial institutions the right to offer crypto services if they have the appropriate authorization. France has passed a law at the end of 2018 that forces banks to provide accounts for companies in the crypto sector. Whether the outdated regulations regarding blockchain and traditional financial instruments and capital procurement methods will change and whether the European Commission will also develop a strategy for digital financial services will become clear in the future.
