The Legal Recognition of Distributed Ledger Technology in French Financial Regulations: Still a Long Way to Go

Since the end of 2017, French financial regulations have been considering the use of “blockchain” with a view to gradually integrating it into the French financial ecosystem. The purpose of this analysis is to explain the main legal bases for the use of “blockchain” but also to point out the limits of this legal initiative.

The sapin Law of 9 December 2016: an explicit legislative authorization for the French government to legally establish the blockchain.

Article 120 of the Sapin (2) law of 9 December 2016 empowers the government to reform the law applicable to financial securities. Its purpose is to enable the representation and transmission, through a “Dispositif d’enregistrement électronique partagé” ( hereinafter DEEP) — a shared digital recording device, of financial securities that are not admitted to trading by a central depositary or delivered in a settlement and delivery system for certain financial instruments (unlisted securities).

Ordinance №2016–520 of 28 April 2016 on savings bonds.

The new ordinance on savings bonds was an opportunity for the French government to create new securities called “minibons” (registered and non-negotiable securities with a commitment by a trader to pay on a fixed date, issued in exchange for a loan, see L. 223–1 of the Monetary and Financial Code). These registered securities are not financial instruments in the meaning of the French law. Please note that these securities may only be issued by credit institution or traders who have established their balance sheet for the third business year.

Article L. 223–12 of the Monetary and Financial Code specifies that “the issue and sale of minibons may also be recorded in a DEEP, enabling these transactions to be authenticated, under conditions, in particular security conditions, defined by decree in the Council of State”. This article defines, without naming it, a type of “blockchain” as a DEEP allowing the authentication of its operations.

Article L.223–13 of the Monetary and Financial Code adds one important clarification: The ownership transfer of minibons results from its registration in the DEEP mentioned in Article L.223–12, which serves as a written contract for the application of Articles 1321 and 1322 of the Civil Code. The mention is quite useful since the use of a written document is required under penalty of nullity.

Decree №2016–1453 of 28 October 2016 indicates the conditions under which “minibons” may be issued and transmitted through this DEEP.

Article D.223–1 of the Monetary and Financial Code provides for the information that must be included in the certificate of registration in the register given to the owner of a savings bond (information relating to the issuer and then to the owner of the savings bond) and the characteristics of the loan for which the savings bond is issued (C. mon.fin.,art. D. 223–2 et seq.).

This introduction into the Monetary and Financial Code of a technology likely to create new financial uses is a real innovation.

Ordinance №2017–1674 of 8 December 2017 on the use of the DEEP for the representation and transmission of financial securities.

Then the French legislator adopted this definition in the context of the Ordinance of 7 December 2017 on the DEEP for the representation and transmission of financial securities.

In this regard, it should be highlighted that the Report to the President of the Republic accompanying the Order of 7 December 2017 specifies that the term “Dispositif d’enregistrement électronique partagé” (DEEP), used in the authorization, corresponds to the way in which “blockchain” technology, among other things, is already referred to by the provisions of Article L. 223–12 of the Monetary and Financial Code relating to minibons, introduced by Order No 2016–520 of 28 April 2016 on savings bonds.

The ordinance has opted for the widest possible scope because it deals with:

-All the securities which are not admitted to the operations of a central securities depository, and, in practice, those which the issuer may decide to register in a DEEP. As a reminder, this category covers: negotiable debt securities; units or shares of collective investment undertakings; and unlisted equity securities issued by joint-stock companies and debt securities other than negotiable debt securities.

In essence, the Ordinance of 7 December gives the registration in this new technology the same value as registration in a securities account. Indeed, according to Article L. 211–3 of the French Monetary and Financial Code, “Registration in DEEP shall take the place of book entry.”

Besides, the article L. 228–1 of the French Commercial Code, resulting from the 2017 Ordinance, specifies in paragraph 6 that securities must be registered in an account or on a DEEP.

In this way, the ordinance ensures that the registration of an issuance or a transfer of financial securities in a DEEP is treated in the same manner as the entry in the securities account of the company’s registers. Previously, these assets were required to be registered in a securities account. From now on, with the same legal value, they can be registered directly on a DEEP, and then be exchanged without having recourse to any intermediary, whether it is an account keeper or a central custodian or depositary.

As a result, the use of DEEP is a modernisation of the way in which shareholders’ “securities accounts” are kept, especially for companies with a large number of shareholders and/or those managing large movements of securities or funds (asset managers, crowdfunding platforms, etc.). This modernization will make movement management easier, less time-consuming and at a reduced cost.

It should also be noted that the use of “this blockchain” technology enables any transaction affecting the right of ownership to be carried out beyond the transfer of ownership: loan, fiduciary transfer, lease, pledge, etc.

Conclusion

The French legislator aims at integrating blockchain technology into his Monetary and Financial Code.

As mentioned above and to some degree, securities transactions registered on the “blockchain” may be enforceable against third parties on legal grounds and allows the litigant to assert his rights before the courts with this means of proof.

However, it should be noted that the French legislator acts cautiously.

French financial law raises many unanswered questions, particularly with respect to the technological neutrality of the blockchain, the law applicable to data management, the security, interoperability or customer knowledge
(Know Your Customer, or KYC) requirements.

The French legislator defined blockchain technology as a “Dispositif d’enregistrement électronique partagé”, opting for the expression “Dispositif partagé” — shared device — instead of the expression commonly used “Registre distribué” –distributed ledger. Besides, the parliamentary activities specify that the term “DEEP” corresponds to the way in which “blockchain” technology, among other things, is already referred to by the provisions of Article L. 223–12 of the Monetary and Financial Code. There is therefore no question of limiting the scope of the law to the “blockchain technology”.

More specifically, the regulations do not give a real definition of the DEEP. Transaction security is by no means defined in terms of technical standards.

French law is therefore still silent on the implementation of this technology (the last paragraph of Article L. 223–12 of the Monetary and Financial Code is significant on this point).

Furthermore, from a technical viewpoint, the use of the term “dispositif partagé” is not sufficiently accurate to understand that we are talking about decentralization. A “DEEP” is not necessarily decentralized in contrast with an “distributed ledger system”.

This legal definition remains open to criticism insofar as it does not specify an essential element of the blockchain: its decentralized nature.

It is precisely this decentralization that disrupts the traditional architecture of financial transactions, eliminating the mandatory presence of intermediaries acting as trusted third parties.

Therefore, it would have been more relevant for this technology to retain the expression “distributed ledger”.

This is certainly due to the fact that the blockchain technology has not yet reached a sufficiently advanced level of maturity. The notion of a “Dispositif partagé” remains therefore deliberately broad. To be convinced of this, it is sufficient to have regard to the Report of the President of the Republic concerning Ordinance №2017–1674 of 8 December 2017 about the legal definition of the “Dispositif d’enregistrement électronique partagé (DEEP)” ; “This designation remains broad and neutral with regard to the various processes in order not to exclude subsequent technological developments”.

It is to this end that the Court of Auditors created, in June 2017, an experimental blockchain platform for the management of registered shares reserved for the equity financing platforms of SMEs called minibons. The Caisse des Dépôts (CDC) and the Financement Participatif France (FPF) association announced on May 29, 2009, that they were working on the implementation of a blockchain infrastructure dedicated to managing loans to SME’s through equity financing. The current prototype being worked on by the CDC and the FPF will present a blockchain architecture including all participatory financing platforms that can manage minibons. It will also allow users to issue, subscribe and, in the long term, exchange minibons on the secondary market. The project also aims to contribute to the development of regulatory conditions for the use of blockchain in the French financial ecosystem in partnership with the regulator.

Predictive justice is the bearer of major transformations and can no longer ignore the fundamental movement that leads the financial world towards distributed ledger technology (of which the blockchain is a variation) through multiple initiatives.

Bibliography:
Articles

-S. Schiller, « Représentation et transmission des titres financiers par une blockchain À propos de l’ordonnance n° 2017–1674 du 8 décembre 2017 », La Semaine Juridique Edition Générale n° 3, 15 Janvier 2018.

-D. Legeais, « Utilisation d’un dispositif d’enregistrement électronique partagé pour la représentation et la transmission de titres financiers, Ordonnance n°2017–1674, 8 déc. 2017 : JO 9 déc. 2017, texte n° 24 », La Semaine Juridique Entreprise et Affaires n° 4, 25 Janvier 2018.

-Quéméner M., “ Le droit face à la disruption numérique”, Gualino, 2018. pp. 46–47.

-« Bons de caisse », Fiche d’orientation, Dalloz, Avril 2018

• D. Legeais, « La blockchain », RTD Com., Dalloz, 2016.

-« Organisme de placement collectif en valeurs mobilières (OPCVM) », Fiche d’orientation, Dalloz, Avril 2017.

• Cabinet d’avocats Simmons & Simmons LLP, « Le droit et la technologie blockchain : une approche sectorielle », Revue Contrats, Concurrence et Consommation n°10, Octobre 2017, étude 10.

-X. Vamparys, « Blockchain et droit des sociétés, Quelques réflexions d’un praticien », La Semaine Juridique Entreprise et Affaires n° 17, 26 Avril 2018.

Law text

-Ordonnance n° 2016–520 du 28 avril 2016 relative aux bons de caisse, JORF n°0101 du 29 avril 2016 texte n° 16.

• Loi 81–1162 1981–12–30 JORF 31 décembre 1981 rectificatif JORF 3 mars 1982;

-Rapport au Président de la République relatif à l’ordonnance n° 2017–1674 du 8 décembre 2017 relative à l’utilisation d’un dispositif d’enregistrement électronique partagé pour la représentation et la transmission de titres financiers.

-Ordonnance n° 2017–1674 du 8 décembre 2017 relative à l’utilisation d’un dispositif d’enregistrement électronique partagé pour la représentation et la transmission de titres financiers JORF n°0287 du 9 décembre 2017 texte n° 23.

Author: Matias Gross.

All rights reserved. This article’s content (texts, trademarks, illustrations, photos, graphics, files, designs, arrangements etc.) is protected by copyright and other protective laws. The copyright for this article belongs to Matias Gross.