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FRANCE: An Introduction

1. General overview of the French fintech ecosystem

In 2019, for the second year in a row, blockchain and cryptocurrencies were the main focus of French regulators among the fintech sector.

In April 2019, during the Paris Blockchain Week, a week-long event dedicated to blockchain technology and cryptocurrencies, the Minister for the Economy and Finance and other members of the government reaffirmed their goal to turn France into a leading jurisdiction for blockchain technology.

In May 2019, almost eighteen months after the peak of the ICO and cryptocurrency craze of late 2017, the PACTE Act (which stands for “Action Plan for the Growth and Transformation of Companies”), which introduces the first comprehensive regulatory framework for initial coin offerings (“ICOs”) and intermediaries dealing with cryptocurrencies, finally entered into force.

Since the announcement of Facebook’s plan to launch a stablecoin called “Libra” in June 2019, the government’s stance on stablecoins changed rapidly. Government and central bank officials first stated that Facebook should under no circumstance be allowed to create its own sovereign currency. Then, in December 2019, the French Central Bank announced that a “central bank digital currency” (CBDC) using blockchain technology, intended to be used for large interbank transactions, would be developed in 2020.

However, while blockchain and crypto-assets remain trending topics from a legal perspective, the startups of the ecosystem themselves still struggle to scale, raise funds, and reach a critical mass of retail and professional clients. On the other hand, the broader fintech ecosystem has done exceptionally well in 2019. Fintech and insurtech startups raised EUR504.3 million during the first half of 2019, compared to EUR365 million during the full year 2018, EUR348 million in 2017, and EUR172 million in 2016. Kyriba, a cloud treasury and finance solutions provider, became a “unicorn” after raising USD160 million in April 2019. Recent high-profile deals also include payment solutions provider Wynd (EUR72 million), crowdlending platform Younited (EUR65 million), Shift Technology, which specialises in fraud detection and claims automation (EUR53 million), health insurance policy provider Alan (EUR40 million), and luncheon vouchers provider Lunchr (EUR30 million).

According to various studies, there would be between 350 and 500 active fintech and insurtech companies in France. Most of them were founded in the last few years. 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;
  • Neobanks dedicated to startups and freelancers, such as Qonto, Shine, and Margo Bank;
  • Bank-as-a-service platforms, such as Treezor and Ditto;
  • Group gifting/personal fundraising apps, such as Leetchi and LePotCommun;
  • Bank accounts aggregators and 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, LGO, Coinhouse, iExec, NapoleonX, and Paymium;
  • Robo-advisors, such as Advize and Yomoni;
  • Insurtech startups, such as Shift Technology, Alan and Luko;
  • Factoring and short-term financing providers, such as Finexkap;
  • Payroll processors, such as Payfit.

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 modernize and dematerialize 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 large financial groups.

Cooperation between fintech startups and established players occurs in two ways. First, most French financial institutions have created in-house fintech or insurtech incubators, such as L’Atelier by BNP Paribas, Le Village by Crédit Agricole, Kamet by AXA, Truffle Fintech Incubator by Truffle Capital, and Swave by a consortium of financial institutions including Société Générale 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 EUR200 million. In June 2017, Tikehau Capital, a listed asset manager, purchased Crédit.fr, a crowdlending platform, and Banque Postale purchased KissKissBankBank, a prominent crowdfunding platform. Crédit Mutuel Arkea, which owns Leetchi since 2015, purchased Pumpkin in 2017, and Budget Insight in 2019. Société Générale acquired Treezor in September 2018.

On the financing side, the French fintech startups are supported by a strong network of business angels and venture capital funds, some of them dedicated to funding fintech or insurtech startups. The French fintech economy is also bolstered by various organizations and associations. Major fintech-related organizations 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, and 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.

2. “Hot” regulatory topics in fintech 

2.1. ICOs, cryptocurrencies and blockchain technology: a proposed comprehensive legal framework

2.1.1. An optional AMF’s approval for ICOs 

France was not a major hub for ICOs in the heyday of late 2017 and early 2018. According to the AMF, French ICOs only raised EUR89 million, while the global amount raised by ICOs reached USD22 billion. The most successful French ICOs include Domraider (USD45 million), NeuroChain (USD25 million), Legolas Exchange (USD19 million), and Napoleon X (USD12 million). While these amounts are meaningful, they remain negligible in comparison to the amounts raised by some behemoth ICOs such as EOS (USD4 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 investors-friendly ICO economy. The PACTE Act, enacted on May 22, 2019, creates 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. This new framework does not apply to tokens which share the same characteristics as financial instruments: hence, the offerings of “security tokens” have to comply with existing regulations.

The AMF will grant its approval (“visa”) to public offerings of tokens which comply with the requirements set out by the PACTE Act. This approval will be optional: potential token issuers will be free to apply for the AMF’s visa or proceed with their ICO without the AMF’s 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 tokens to French investors. The AMF’s approval would act as a certification that the project is promising and the team is trustworthy.

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 General Regulation (Règlement général) of the AMF and an instruction published by the AMF also describe the content of the disclosure document, which shall contain both financial and legal information on the issuer, and certain technical information about the tokens and the methods used to secure the crypto-assets raised during the offering.

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 in opening bank accounts, was addressed by a specific provision of the PACTE Act (see below).

There remains another hurdle: the accounting, and consequently fiscal, treatment of the funds raised during an ICO. To address that issue, the French Accounting Standards Authority (Autorité des normes comptables or “ANC”) published a regulation on the accounting rules applicable to ICO issuers and investors.

2.1.2. The first regulatory framework for crypto-asset intermediaries

The PACTE Act also creates a new category of financial service providers: digital assets service providers (prestataires de services sur actifs numériques). Digital assets 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.

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.

Digital assets service providers may apply for an optional licence for all activities defined as digital assets services. Such licence will not be mandatory. However, two categories of digital assets service providers will be required to register with the AMF: (i) digital assets or cryptographic private keys custodians, and (ii) providers of the service of purchase or sale of digital assets against legal currency. Registered entities will be subject to fewer obligations than licensed ones, and the registration application will also be lighter.

To obtain the optional licence, digital assets service providers 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 ICO regulatory framework. It emphasizes non-mandatory provisions to foster professionalization and promote sound market practices while avoiding constraining frameworks that might deter innovation and diminish France’s attractiveness.

Finally, AML/CFT requirements will apply to both (i) registered digital assets custodians and providers of the service of purchase or sale of digital assets against legal currency, and (ii) other digital assets service providers which obtained the optional licence.

Last but not least, the PACTE Act 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 brokers.

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 PACTE Act also guarantees that crypto-assets issuers and intermediaries will not be arbitrarily forbidden to open bank accounts. To our knowledge, France is the first jurisdiction to guarantee an access to bank accounts for the actors of the crypto-assets economy, thus removing one of the main barriers they face when establishing their business.

The 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) ICO issuers which have been granted an optional approval by the AMF, (ii) registered digital assets custodians and fiat-crypto brokers, 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 create a strong incentive for crypto-asset issuers and intermediaries to obtain an optional approval or licence from the AMF 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 for such refusal to the AMF or the ACPR. Entities denied a bank account may also appeal against the bank’s decision.

This pragmatic move is expected to reinforce Paris’ attractiveness, as actors of the crypto-assets 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 and 2019. 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 which published a report on January 30, 2019, 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 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.

As in many countries, a heated debate took place around the tax treatment of cryptocurrency gains realized 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 are 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 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 PACTE Act. 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. A provision of the PACTE Act now allows professional specialised investments funds (fonds professionnels spécialisés or “FPS”) to purchase assets registered in a shared electronic recording system, i.e. a blockchain. Only professional investors will be able to invest in such cryptocurrencies FPS. Napoleon Asset Management, a regulated asset manager specialized in crypto-assets, launched in December 2019 the first regulated crypto-assets fund (even though this fund does not hold crypto-assets directly, but rather invests in Bitcoin derivatives listed on the CME).

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 years, 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 qualify as derivatives under French law. Consequently, platforms which offer cryptocurrency derivatives trading must now obtain an administrative authorization 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 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 only applies to non-listed securities.

A decree published on December 24, 2018 provides the technical requirements which need to be satisfied by the shared electronic recording system: the 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.

However, the decree does not specify which of the issuer or its technology provider will be responsible for complying with these technical requirements. In addition, the decree does not address the distinction between private and public blockchains. Although the decree does not exclude the possibility to issue and register securities through a public blockchain (such as Ethereum), complying with some of the abovementioned technical conditions could be more complicated if a public blockchain is used.

French startups and large corporations have already started tokenising their securities. Carthagea and Domraider announced that they planned to raise funds through the issuance of shares registered on a distributed ledger. In April 2019, Société Générale issued EUR100 million worth of covered bonds registered on the Ethereum blockchain, as part of a pilot project in which Société Générale was also the sole subscriber of the bonds. In June 2019, the share capital of a company owning a EUR6.5 million building located near Paris was tokenised by startup Equisafe.

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 EUR1 million were exempted from public offering requirements while before, issuers willing to raise over EUR100,000 in equity or bonds were subject to these requirements. This amount was later raised to EUR2.5 million, then to EUR8 million in October 2019, as part of the adaptation of French law to the Prospectus Regulation of June 14, 2017. 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.

The PACTE Act recently introduced another exemption, as part of a three-year experiment: crowdlending platforms will be allowed to act as intermediaries between employees (or managers, partners, clients or suppliers) of a single company. Employees (or managers, partners, clients or suppliers) will be able to borrow from their coworkers (or managers, partners, clients or suppliers of the company) up to EUR30,000 to fund a personal project.

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 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 (EUR402 million in 2018, compared to EUR336 million in 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 from providing 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 the 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.

Most fintech startups would also fall under the scope of the anti-money laundering legislation arising from the European anti-money laundering directives, the last of which shall be transposed into national law before January 10, 2020.

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 emphasize 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, electronic communications, cybersecurity, artificial intelligence, robotics, and semiconductors.