1. General overview of the French fintech ecosystem
In January 2018, at the peak of the cryptocurrency fever, Paris-based cryptocurrency security company Ledger raised $75 million in a Series B round and seems well-placed to become one of France’s first fintech unicorns.
According to various studies, there would be now between 350 and 500 active fintech and insurtech companies in France. Most of them were founded less than two years ago. France appears to be a fertile ground for innovative projects in the finance, banking and insurance industries, helped by the quality of its home-bred engineers, the wide network of startup incubators and accelerators, and the constant interest shown by both regulatory agencies and public authorities.
The French fintech scene covers a wide range of businesses, among which are:
- Mobile payments apps such as Lydia and Pumpkin;
- Group gifting/personal fundraising apps such as Leetchi and LePotCommun;
- Bank accounts aggregators & personal finance apps such as Bankin, Linxo, and Fiduceo;
- Crowdfunding and crowdlending platforms such as Lendix, Younited, Unilend, and KissKissBankBank;
- Cryptocurrency-related companies such as Ledger and Paymium;
- ICO issuers such as Legolas, Domraider, and Talao;
- Robo-advisors such as Advize and Yomoni;
- Insurtech startups such as Alan;
- Factoring and short-term financing providers such as Finexkap;
- Payroll processors such as Payfit.
On the financing side, the French fintech startups have been supported by a strong network of business angels and venture capital funds, some of them dedicated to funding fintech or insurtech startups. During the first half of 2018, according to KPMG, 34 French fintech startups raised an aggregate amount of €218 million, compared to €348 million for the full year 2017, and €172 million in 2016. Recent high-profile deals include Ledger, crowdlending platform Lendix (€32 million), insurtech Alan (€23 million), international payments platform IBanFirst (€15 million), mobile payments app Lydia (€13 million), and digital cash register provider Tiller (€12 million).
Most fintech startups are created to bypass and “disrupt” traditional financial institutions by offering consumers innovative services or new ways to invest their savings. Yet there seems to be plenty of room for cooperation between incumbents and challengers. On the one hand, traditional banks and insurance companies need to modernise and dematerialise their business models to adapt to consumers who increasingly use mobile banking services and other payment innovations; on the other hand, fintech startups lack the scale and financial strength of the large financial groups.
Cooperation between fintech startups and established players materialises in two ways. First, most French financial institutions created in-house fintech or insurtech incubators, such as L’Atelier by BNP Paribas, Kamet by AXA, Truffle Fintech Incubator by Truffle Capital, and Swave by a consortium of financial institutions including Société Générale, New Alpha Asset Management, and AG2R La Mondiale. Then, if you can’t beat them, buy them: the last few years saw a flurry of acquisitions of some of the most successful French fintech companies by traditional financial institutions. In April 2017, BNP Paribas purchased Compte Nickel, a neobank, for approximately €200 million. In June 2017, Tikehau Capital, a listed asset manager, purchased Crédit.fr, a crowdlending platform, and the Banque Postale purchased KissKissBankBank, a prominent crowdfunding platform. In July 2017, Crédit Mutuel Arkea purchased Pumpkin, a mobile payments app.
The French fintech economy is also supported by a various organisations and associations. Major fintech-related organisations include France Fintech, an association of fintech startups, Financement Participatif France, an association of crowdfunding platforms, and the Paris Fintech Forum, which has become a major international fintech conference.
French public authorities have taken steps to establish France as a major player in the fintech industry. In 2013, the French government launched “La French Tech”, a brand aimed at promoting French startups worldwide, as well as a task force reuniting various public administrations. The regulatory agencies supervising financial institutions and the financial markets, i.e. the Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de résolution or “ACPR”) and the Financial Markets Authority (Autorité des marchés financiers or “AMF”) both created “hubs” to help fintech entrepreneurs navigate complex regulatory issues. The AMF and the ACPR also created the FinTech Forum, a consultation and dialogue body between regulatory agencies and the fintech industry. In addition, the election of Emmanuel Macron as President of France, an ex-investment banker who coined the term “startup nation”, clearly boosted France’s position in the global startup ecosystem, while Brexit is a once-in-a-lifetime opportunity to make Paris the major European financial hub. Overall, the current French government loudly champions innovation and startups, hoping to catch up with the most successful innovation hubs worldwide.
A major ongoing development in the French fintech landscape is the Loi Pacte (which stands for “Action Plan for the Growth and Transformation of Companies”). Among many measures aimed at facilitating the growth of small and medium-sized enterprises (“SMEs”) and giving employees and stakeholders more control over corporations, the Loi Pacte will introduce the first comprehensive regulatory framework for initial coin offerings (“ICOs”) and intermediaries dealing with cryptocurrencies, and create a sovereign fund dedicated to the financing of “disruptive innovation” with an endowment of €10 billion. It is worth noting that the French government surprisingly inverted its stance towards cryptocurrencies and took major steps to establish France as a hub for ICOs and cryptocurrency-related projects.
2. Hot regulatory topics in fintech
2.1. ICOs, cryptocurrencies and blockchain technology: a proposed comprehensive legal framework
2.1.1. An optional AMF approval for ICOs
France has not been a major hub for ICOs in the last two years. According to the AMF, French ICOs only raised €89 million, while the global amount raised by ICOs reached $22 billion. The most successful French ICOs include Domraider ($45 million), NeuroChain ($25 million), Legolas Exchange ($19 million), and Napoleon X ($12 million), according to estimates made by ICO Bench. While these amounts are meaningful, they remain negligible in comparison to the amounts raised by some behemoth ICOs such as EOS ($4 billion). In any case, French entrepreneurs have been very active in this field (such as Arthur Breitman, Tezos’ cofounder), and lots of them chose to launch their ICOs from foreign jurisdictions.
As stated above, the French government and the AMF have taken multiple steps to place France at the forefront of the upcoming regulated and institutional investor-friendly ICO economy. The Loi Pacte, yet to be officially adopted, plans to create a comprehensive legal framework for ICO issuers. In line with the AMF position, the French government chose to develop an ad hoc framework for ICOs rather than promoting a best practices guide or including ICOs in the scope of the existing regulation of public offerings of securities, which were the other options discussed during the consultation led by the AMF. However, this new framework would not apply to tokens which share the same characteristics as financial instruments: hence, the offerings of “security tokens” would have to comply with existing regulations.
Under the proposed legislation, the AMF will grant its approval (“visa”) to public offerings of tokens that comply with the requirements set out by the Loi Pacte. This approval will be optional and not mandatory: potential token issuers will be free to require the AMF’s visa or proceed with their ICO without AMF approval. The AMF expects that the most serious projects will require its approval as the global reputation of the AMF would help token issuers market their ICO in other jurisdictions, as well as allow them to freely sell their token to French investors. The AMF’s approval would act as a certification that the project is promising and the team is trustworthy. Under the proposed legislation, the approval may be granted by the AMF if the token issuer complies with the following requirements:
- the issuer is a legal entity incorporated in France, or at least registered in France through a branch – as the goal is to convince French entrepreneurs to stay in France to launch their ICO, and to induce foreign token issuers to open an office in France, or even relocate their entire operation;
- the disclosure document (i.e. the white paper) and the marketing materials are accurate, written in plain language, and non-misleading; they describe the risks associated with the offer; and
- the issuer plans to implement adequate procedures to track and safeguard the funds raised in the ICO – the idea is to limit the risk of theft of the cryptocurrencies raised during the ICO, as well as the risk of scam.
The AMF’s visa may also be withdrawn if the token issuer stops complying with the approval’s requirements. The AMF may also prevent such issuer from mentioning its approval in its marketing materials.
The General Regulation (Règlement général) of the AMF will detail the approval procedure and the required supporting documents, as well as the expected content of the white paper. To our knowledge, this set of provisions is currently being drafted by the AMF – the goal being to allow the AMF to start processing ICO projects as soon as the Loi Pacte is passed into law.
However, creating a legal framework for ICOs is not enough to dramatically increase France’s market share in the global ICO economy: other non-legal challenges need to be addressed. One of them, the difficulties faced by actors of the crypto or token economy to open bank accounts, was addressed by a provision added to the Loi Pacte (see below). There remains another hurdle: the accounting, and consequently fiscal, treatment of the funds raised during an ICO. To address that issue, a working group was formed within the French Accounting Standards Authority (Autorité des normes comptables or “ANC”). The ANC is set to publish a specific regulation before the end of 2018, which would give France a comprehensive legal framework by mid-2019, when the Loi Pacte is passed into law and the General Regulation of the AMF is updated.
2.1.2. The first regulatory framework for crypto-asset intermediaries
The Loi Pacte also contains a provision which would create a new category of investment service providers: digital assets service providers (prestataires de services sur actifs numériques). The proposed definition of digital assets covers all crypto-assets, but could actually be slightly wider. Digital assets would include (i) tokens, as this term is defined in the ICO legal framework (i.e. intangible digital assets incorporating rights that can be issued, registered, held and transferred on a shared electronic recording system), as long as they do not qualify as regulated financial instruments; and (ii) any digitally registered asset whose value is not backed by a central bank or public authority and which does not legally qualify as a currency, but which is used as a medium of exchange and may be transferred, stored or traded electronically. This broad definition of digital assets is similar, but not identical, to the one introduced by Order No. 2016-1635 of December 1, 2016, which provides that crypto-asset intermediaries are subject to AML/CFT requirements.
The services related to digital assets are broadly defined to include various kinds of traditional investment services, as soon as they are performed in relation with digital assets:
- Custody of digital assets or cryptographic private keys for third parties;
- Purchase or sale of digital assets against legal currency (i.e. fiat);
- Purchase or sale of digital assets against other digital assets;
- Operation of a digital assets trading platform;
- Various other services related to digital assets: receipt and transmission of orders on behalf of third parties, asset management, investment advices related to digital assets, underwriting, and placing with or without a firm commitment.
The proposed provision sets forth two frameworks for digital assets service providers: (i) a mandatory registration for digital assets or cryptographic private keys custodians and fiat-crypto exchanges, and (ii) an optional licence for all activities defined as digital assets services. The mandatory registration should not be excessively burdensome as the AMF will only check, with the help of the ACPR, the reputation and professional qualifications of the managers and beneficial owners of the registered service providers. In addition, entities which are already providing these services would have 12 months as of the enactment of the Loi Pacte to apply for this registration.
Otherwise, obtaining a licence will be optional for digital assets service providers. To obtain such a licence, these entities will have to subscribe to a professional liability insurance (or comply with capital requirements), possess resilient IT systems, and establish adequate security procedures, internal audits, and policies to manage conflicts of interests. Moreover, depending on the digital assets service they intend to provide, service providers wishing to benefit from the optional licence will have to comply with additional requirements. For example, licensed custodians of digital assets or cryptographic private keys for third parties will be required to establish a custody policy, ensure that they are always able to return the crypto-assets and/or the keys to their clients, and implement segregated accounts.
This regulatory approach, based on optional licences intended to act as a “white list” of reputable actors, is similar to the one chosen for the draft ICO regulatory framework. It emphasises non-mandatory provisions to foster professionalisation and promote sound market practices while avoiding constraining frameworks that might deter innovation and diminish the attractiveness of France as a market for ICOs.
Finally, AML/CFT requirements will apply to both (i) registered digital assets custodians and fiat-crypto exchanges, and (ii) other digital assets service providers which obtained the optional licence.
Last but not least, the Loi Pacte also requires the French government to communicate to the Parliament a report evaluating the implementation of this regulatory framework and, in particular, discussing the opportunity to make the licence mandatory for digital assets custodians and fiat-crypto exchanges.
2.1.3. The proposed implementation of a right to open a bank account for crypto-assets issuers and intermediaries
In addition to the ICO and crypto-assets intermediaries legal frameworks, the Loi Pacte also introduces a provision which would guarantee that crypto-assets issuers and intermediaries will not be arbitrarily forbidden to open bank accounts. Once the Loi Pacte is passed into law, France would become the first jurisdiction to guarantee an access to bank accounts for the actors of the token and cryptocurrency economy, thus removing one of the main barriers they face when establishing their business.
The proposed provision states that banks will have to set up objective, non-discriminatory and proportionate rules to determine whether actors of the crypto-assets economy belonging to any of the following three categories should be allowed to open an account in their books: (i) token issuers which have been granted an optional approval by the AMF, (ii) registered digital assets custodians and fiat-crypto exchanges, and (iii) other digital assets service providers which obtained the optional licence. The provision adds that their access to basic banking services shall not be hindered by the bank once the account is open. These provisions would create a strong incentive for crypto-assets issuers and intermediaries to obtain an optional visa from the AMF or an optional licence from the ACPR instead of remaining unregulated, as the right to access bank accounts will be tied to such approval or licence.
In addition, if a bank denies an entity belonging to one of the abovementioned categories the right to open an account, it shall communicate the reason of such refusal to the AMF or the ACPR. Entities denied a bank account may also appeal against the bank’s decision – the modalities of such procedure will be set out by a specific decree after the enactment of the Loi Pacte. Furthermore, if token issuers which have been granted an optional approval by the AMF, or crypto-assets intermediaries which obtained the optional licence face continuing obstruction from banks, they may open a bank account in the books of the Caisse des dépôts et consignations (i.e. the state-owned financial institution which supports the administration in a variety of public interest policies). However, the Caisse des dépôts et consignations came out against that proposal, which may be removed from the Loi Pacte when the project is discussed by the Sénat.
This pragmatic move is expected to reinforce Paris’ attractiveness, as actors of the token and cryptocurrency economy often consider access to bank accounts to be the leading impediment to the development of their business.
It is worthwhile to note that, as early as 2014, a crypto-assets trading platform successfully argued in front of the French Central Bank that it should benefit from the right to a bank account set forth in Article L. 312-1 of the Monetary and Financial Code, a provision initially meant for the benefit of individuals. The French Central Bank ruled in favour of the trading platform and ordered the commercial bank to open a bank account in its name. This decision was later confirmed by French courts.
2.1.4. Cryptocurrencies: towards adoption by institutional investors
Beyond ICOs, cryptocurrencies themselves have been a hot topic for regulators and legislators in 2018. First, the French government tasked Jean-Pierre Landau, a former top executive of the French Central Bank, with preparing a report on cryptocurrencies, which was published in July 2018. Then, three working groups were created among the French Parliament to prepare reports on ICOs, blockchains, and/or cryptocurrencies: (i) a mission on the use of blockchains and distributed ledgers at the Assemblée nationale, (ii) a specific mission on cryptocurrencies and crypto-assets formed by members of the Finance Commission of the Assemblée nationale, and (iii) a joint working group between the Assemblée nationale and the Sénat, which published a report on June 20, 2018 on the technological challenges of blockchains. The preliminary discussions held among these working groups show that a strong interest towards blockchains and cryptocurrencies exists among députés and sénateurs, even though many of them struggle to understand key technical concepts. Some députés even established themselves as spokespersons of the French cryptocurrency ecosystem, such as the 29-year-old Pierre Person.
As in many countries, an ongoing heated debate is still taking place around the tax treatment of the cryptocurrency gains realised by individuals. In a few months, France went from being one of the worst European jurisdictions (with a tax rate of up to 60% for retail investors) to a relatively lenient one: starting in January 2019, cryptocurrency capital gains will be taxed at a flat rate of 30%, which is still, as some argue, considerably higher than the tax rate used by some neighbouring countries. Interestingly, crypto-to-crypto transactions will fall outside of the scope of the capital gains tax. Still, that clarification means a lot for thousands of individuals and will probably support the interest of retail investors in that new asset class.
The increasing interest of institutional investors towards cryptocurrencies and ICO tokens was also addressed by the Loi Pacte. France was already the home of the very first European cryptocurrency fund: Tobam Bitcoin Fund, launched in November 2017 by French alternative asset manager Tobam. However, Tobam’s fund was not licensed by the AMF, as cryptocurrencies, as an asset class, do not fit in any existing category of the regulatory framework applicable to asset managers. When the Loi Pacte is passed into law, professional specialised investments funds (fonds professionnels spécialisés or “FPS”) will be able to purchase assets registered in a shared electronic recording system, i.e. a blockchain. Only professional investors will be able to invest in such cryptocurrency FPS.
Finally, concerning cryptocurrency derivatives, websites offering retail investors to bet on cryptocurrencies through derivatives (such as contracts for difference or binary options) flourished over the past year, taking advantage of the unregulated nature of cryptocurrencies. The AMF took actions to increase the protection of retail investors and decided in February 2018 to issue an analysis stating that cash-settled contracts on cryptocurrencies qualified as derivatives under French law. Consequently, platforms which offer cryptocurrency derivatives trading must now obtain an administrative authorisation and may not target French residents in their online marketing.
2.1.5. An innovative framework allowing the issuance of securities through blockchains or distributed ledgers
Even before ICOs and cryptocurrencies began to make the headlines, the French government started to tackle the emerging concept of blockchain technology (or “distributed ledger technology”).
First, Ordinance No. 2016-520 of April 28, 2016 created a dedicated framework for the financing of SMEs through crowdlending platforms. SMEs previously used crowdlending by issuing bons de caisse (i.e. promissory notes), whose regime, created in the 1930s, had become outdated. Pursuant to the Ordinance, promissory notes issued through a crowdfunding platform are called minibons. Minibons can be issued and transferred either by using the traditional way (i.e. the issuer maintains a register of all minibons holders and updates the register each time a minibons holder notifies it that it transferred minibons to a third party) or by a “shared electronic recording system” (i.e. a distributed ledger). Articles L. 223-12 and L. 223-13 of the French Monetary and Financial Code (Code monétaire et financier) thus contain the first occurrence of the concept of blockchain in French law.
The French government’s focus on blockchain did not stop with the Minibons Ordinance. With Ordinance No. 2017-1674 of December 8, 2017, the French government took a much bigger step and initiated the creation of a framework allowing the issuance, registration and transfer of financial securities (i.e. both equity and debt securities) through a shared electronic recording system. This regime will only apply to non-listed securities.
However, as of November 2018, neither of the Minibons Ordinance or the Blockchain Ordinance was functional. Both provided that the technical requirements of the shared electronic recording system would be set out by a decree to be passed by the French government. Instead of rushing the decree, the French government chose to refer to the European Commission in order to validate its definition of the distributed ledger, by a notification dated July 17, 2018. According to the proposed decree submitted to the European Commission, a distributed ledger must (i) guarantee the recording and integrity of entries; (ii) allow the identification, directly or indirectly, of owners of securities, and the nature and number of securities held; (iii) have an up-to-date continuity plan including in particular an external system for periodic data storage; and (iv) enable owners of these securities to access summaries of their transactions. To our knowledge, the European Commission recently validated the proposed decree, which should be passed into law before the end of 2018.
The compliance of blockchains with Regulation (EU) 2016/679 (General Data Protection Regulation – “GDPR”) was also widely discussed in the past year. Indeed, per se, public blockchains are at odds with certain rights guaranteed by the GDPR, such as the right to erasure, the right to rectification and the right to object to processing. In September 2018, the National Commission on Informatics and Liberty (Commission nationale de l’informatique et des libertés – “CNIL”), France’s data protection watchdog, issued an analysis on the compatibility of public and permissioned blockchains with the GDPR. (As for private blockchains, the CNIL noted that they do not raise specific issues with respect to the GDPR, as their immutability is usually not guaranteed by design.) The CNIL stated that whenever a blockchain contains personal data, the GDPR applies. The CNIL focuses on personal data which may be uploaded to a blockchain as a way to ensure traceability of real-world documents (i.e. a diploma), but seems to acknowledge the conflict between some GDPR requirements such as the right to erasure and the very nature of public blockchains. In any case, the CNIL recommends not storing unencrypted personal data in a blockchain. The CNIL also announced that the challenges raised by blockchains regarding data protection would have to be addressed at the European level. The CNIL will “work cooperatively with its European counterparts to suggest a strong and harmonised approach.”
Finally, concerning central bank digital currencies (“CBDCs”), which emerged as a hot topic among central banks worldwide, the French Central Bank has not yet issued any statement confirming an interest towards CBDCs which would go beyond a mere R&D experience.2.2. Overview of crowdfunding and crowdlending regulation
France adopted an ad hoc regulatory framework for crowdfunding and crowdlending activities in 2014. Crowdfunding and crowdlending transactions under €1 million were exempted from public offering requirements (this amount has since been raised to €2.5 million) while before, issuers willing to raise over €100,000 in equity or bonds were subject to these requirements. The 2014 reform also included a new exemption from the banking monopoly (i.e. the rule prohibiting entities other than licensed banks from granting interest-bearing loans) allowing individuals to grant loans through crowdlending platforms.
Crowdfunding and crowdlending platforms have to register with the ACPR and/or the AMF either as crowdfunding/crowdlending intermediaries (for donations and crowdlending platforms) or as crowdfunding investment advisors (for investment-based crowdfunding).
The regulation of crowdfunding and crowdlending is another example of France making the first move towards establishing tailored rules to govern an emerging innovative industry. It is worth noting that the regulation of crowdfunding in the European Union just began in March 2018, four years after France adopted a comprehensive framework, with the Commission proposal for a regulation on European crowdfunding services providers.
Despite this bespoke regulation, French crowdfunding and crowdlending platforms have been struggling recently, even though the amount of funds raised keeps increasing (€208.6 million during H1 2018, compared to €153.5 during H1 2017). In October 2018, crowdlending pioneer Unilend filed for bankruptcy. Unilend blamed its demise on banks’ increased willingness to lend to SMEs at low rates. In retrospect, the emergence of crowdfunding and crowdlending at the beginning of the 2010s might have been a consequence of the financial crisis, which temporarily made banks unwilling to lend to SMEs.
2.3. The emergence of open banking with the implementation of the PSD2
The Directive (EU) 2015/2366 of November 25, 2015 on payment services in the internal market (“PSD2”) was transposed into French law by Ordinance No. 2017-1252 of August 9, 2017. PSD2 aims to modernise payment services in the European Union by taking advantage of the emergence of online and mobile banking. The cornerstone of that modernisation is the right to access a bank account, on which rely, for example, services which collect and consolidate information on the different bank accounts of a consumer in a single place or services which allow customers to make internet payments without using a credit card (i.e. by sending a direct wire transfer from the customer’s account to the seller’s account). Hence, PSD2’s major contribution to the growth of fintech is the creation of two new categories of payment services (the payment initiation service and the account information service) and the removal of certain barriers which prevented third party providers to provide these payment services.
PSD2 thus creates new market opportunities for fintech startups and makes “open banking” one of the hottest topics in fintech.
3. General legal challenges related to fintech
First of all, fintech startups or financial institutions wishing to launch an innovative product in France must understand that they operate in a heavily regulated sector. Although France’s reputation for being over-regulated is not undeserved, most of rules regulating the financial sector originate from the European Union. Data protection has become a key issue and compliance with the GDPR is a must for any project. Other meaningful European regulations include PSD2, which increases competition in the banking industry by creating a right for third parties to access bank accounts, and Directive 2014/65/EU of May 15, 2014 on markets in financial instrument (“MIFID 2”). These three major sets of rules all came into force in 2018.
Then, every team pursuing a fintech project must deal with the French regulatory authorities: the AMF and/or the ACPR, depending on the nature of the project. Contrary to some other European countries, such as the United Kingdom, the Netherlands and Denmark, the French regulatory agencies did not seek to establish sandboxes, i.e. a framework allowing selected companies to test their innovative products on a small scale without being subject to all the usual requirements, under the regulator’s supervision. Instead, French regulators emphasise proportionality: the enforcement of the regulatory requirements will depend on the size of the company. In addition, the AMF and the ACPR both created internal hubs in 2016 to help fintech entrepreneurs navigate regulatory issues: the Fintech Innovation Unit at the ACPR and the Fintech, Innovation and Competitiveness division at the AMF.
Finally, non-EU investors must keep in mind that foreign investments in certain sectors of the economy are subject to the approval of the French government. The approval procedure currently mostly applies to the defence industry, energy and water utilities, transportation, and electronic communications. As part of the debate around the Loi Pacte, the French government announced that this procedure would be further reinforced and include some additional sectors among which are artificial intelligence, financial infrastructures, and data storage. Foreign fintech investors may then find themselves subject to this approval procedure.