France’s SEC or FCA, the AMF, has identified a number of obstacles in a report that they say is a strategic priority to remove.
They ask the European Commission to develop a European digital strategy for financial services and propose the EU should “allow the issuance and exchange of financial instruments on blockchain (“tokenization”) by eliminating existing legal obstacles.”
In a very first suggestion of its sort by a regulator, they identify a number of issue that have previously been raised by participants in this industry. We quote a rough translation at some length:
“Following an in-depth legal analysis, the AMF identified several legal obstacles to the development of blockchain securities:
(i) the need to identify a blockchain manager acting as a settlement system, which excludes de facto decentralized securities trading platforms on blockchains and, more generally, the use of public blockchains which are based on a decentralized consensus and do not allow any manager to be identified;
(ii) the obligation of intermediation by a credit institution or an investment firm so that individuals can have access to the settlement system, which does not seem compatible with the current functioning of trading platforms securities on blockchains with direct access; and
(iii) the obligation to settle securities transactions in cash, central bank money or commercial currency.
Three tracks are to be considered: (i) the amendment of European texts in which obstacles to the development of titles on blockchains have been identified;
(ii) the creation of tailor-made regulations governing securities on blockchains in order to take into account the specificities of the blockchain and its decentralized nature, such regulations being difficult to conceive at this stage given the lack of maturity of the market;
(iii) the establishment of experimentation spaces on a European scale allowing the competent national authorities (“ANC”) to waive certain obligations prescribed by European regulations and identified as incompatible with the blockchain environment, provided that the entity benefiting from this exemption complies with the key principles of the regulations and that it is subject to reinforced surveillance by its ANC.
This system would require the establishment of a governance mechanism at European level so that the NCAs can exchange and harmonize their practices.
Such a system would have the advantage of removing regulatory obstacles to the emergence of blockchain securities market infrastructure projects which could materialize in a secure environment, without immediate modification of European regulations which could intervene later once the ecosystem is more mature, in a secure way and by relying on the expertise that the ANCs would have acquired thanks to the support provided to companies.
Removing regulatory obstacles to the development of financial instruments on blockchains is a strategic priority, since projects cannot develop in the current state of regulation.”
Numerous laws that govern the investment and/or fundraising market are very outdated due to being designed for a time when all was done on paper.
Because of the limitations of paper, including forgery, companies are required to keep a register of shareholders for example.
In additions as fundraisings, like Initial Public Offerings (IPOs), usually have to go through a bank and other intermediaries, there are numerous laws and regulations that govern such intermediaries and some of these laws require that there be an intermediary.
Where the American regulator is concerned, the Securities and Exchanges Commission (SEC), they view an IPO on the blockchain as no different than on paper because they only see the similiarities.
The AMF analysis has concluded there are also differences, such as the blockchain itself being the bank in addition to it being a record keeper and being the proof of ownership and so on.
If this proposal goes through then it would be possible to have a regulated digitally native fundraising exercise in Europe, something currently not possible in America.
That would make the EU jurisdiction very attractive to this space as regulators there have clearly seen an opportunity to be accommodative, while SEC has stated : “We are not going to innovate for you.”
Making this an echo of the rivalry between London and New York after the Bitlicense debacle in 2014 that ended with London being crowned the Fintech Capital of the World.