PSAN: ADAN Warns Lawmakers About the Possible Expansion of the French System

In 2019, France adopted a groundbreaking and innovative regulatory framework to govern digital asset service providers (DASPs). But while this framework aimed to foster the emergence of a strong and competitive industry, France is now on the verge of abandoning its original ambitions. This reversal is currently under discussion: making registration mandatory for “crypto-to-crypto” operators and thereby subjecting them to heavy regulatory obligations.

ADAN wishes to express its strong opposition to this project:

• As it stands, the proposed system is ill-suited to digital assets and is therefore ineffective in combating financial crime.
• It is also disproportionate in two ways: the risks posed by “crypto-to-crypto” transactions are extremely low, and the costs imposed by this regulation—on an industry that is still in its infancy—are exorbitant.
• The economic slump we are currently experiencing is taking a toll on the entire French economy. Now is the time to support our businesses!

Consequently, Adan sent the letter below to several French elected officials, urging the authorities to suspend their project and take the time to reflect and consult.

Instead, we propose establishing rules that are more proportionate and better suited to this industry in order to ensure the financial security objectives championed by ADAN.

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Nanterre, April 29, 2020

Subject: Crypto-assets—Ruling on the extension of the Digital Asset Service Providers (DASP) regime

Dear Sir or Madam,

ADAN is a non-profit organization established under the French Law of 1901, whose mission is to bring together the digital asset industry and promote its growth. It currently comprises 24 players in the French sector, including the first—and currently only—entity registered as a digital asset service provider (PSAN); other members have submitted their applications to the authorities with the aim of becoming registered providers.

We wanted to bring this to your attention because we understandthat an arbitration process is about to begin regarding the expansion of regulatory oversight for service providers. This potential expansion could have a very negative impact on the growth of a sector that France, according to all the political messages sent since 2018, aims to see develop within its borders.

We are issuing this warning because this extension, which is already questionable in substance, would be all the more harmful given the unprecedented economic recession we are currently experiencing, which risks becoming a long-term phenomenon.

More specifically, the ongoing policy debate centers on whetherto require so-called “crypto-to-crypto” platforms (which do not conduct conversions to or from fiat currency) to comply with all rules regarding customer identification and transaction monitoring imposed on banking and financial institutions—all of which is verified by regulators through an ex ante review of their systems (compliance with AML/CFT obligations). Failing this, these entities would be barred from conducting business with the French public. As a reminder, under current regulations, these entities may voluntarily comply with these obligations in order to obtain authorization from the authorities, but are not required to do so. This is the hallmark of the French system, which is praised for its great flexibility.

We wish to express our strong opposition to this extension for the following reasons:

• An Inadequate French AML/CFT Framework. Generally speaking, the “traditional” AML/CFT framework is, in many respects, ill-suited to the specific characteristics of digital asset markets, and is therefore ineffective in preventing and managing the risks of money laundering and terrorist financing: applying it as is is therefore neither reasonable nor desirable. A quick look at the measures taken in our neighboring countries confirms this observation. In Luxembourg, for example, AML/CFT rules have been streamlined to adapt to the specific characteristics of the sector, and compliance with AML/CFT measures is verified retrospectively through audits. This approach already seems more reasonable while preserving the financial security that this framework is intended to safeguard.

• The risk associated with “crypto-to-crypto” transactions is extremely low. Money laundering and terrorist financing via “crypto-to-crypto” platforms account for a tiny fraction of all money laundering activities. This particularly low risk associated with crypto-to-crypto exchanges was explicitly noted by the Ministry of Economy and Finance in itsnational AML/CFT risk analysisreleased last September (see page 64: “[…] conversely, so-called ‘crypto-to-crypto’ conversion activities (conversion between two cryptocurrencies) are less exposed [to money laundering risks] since they do not directly allow funds to be reinjected into traditional economic circuits.”).
  The disproportion between the measure and the risks involved is real and detrimental to a nascent industry. The costs incurred by this mandatory compliance (estimated at tens to hundreds of thousands of euros annually depending on the company’s size and number of clients), as well as the additional procedures they impose on clients and service providers, would deal a significant blow to the competitiveness of the French digital asset industry, the inevitable outcome of which can only be a permanent halt to the development of French players. Moving forward alone on this issue would inevitably doom the French ecosystem, which would face an unsustainable cost structure and administrative burdens for customers that would drive them away.
• Finally, mandating regulation of “crypto-crypto” players would be disastrous in light of the unprecedented economic downturn on the horizon. This crisis has justified the adoption of numerous measures to help businesses weather the difficult times ahead. The same must apply to the measures outlined, especially when they are ill-suited and rushed, and the risk borne by the players remains hypothetical or negligible: establishing a moratorium on these measures appears essential, until the economy returns to a favorable state.

In conclusion, we believe that amending the legal and regulatory framework for PSANs—even as the statute has only just come into effect and the very first registrations have only just been issued—is premature. We understand that the urgency of the timeline was dictated by the imminent FATF audit of France, originally scheduled for June 2020. However, the FATF recently confirmed that it postponing France’s audit by one year. With this urgency now removed, and in a context where the European Union has indicated its intention to legislate quickly on digital assets, the short-term decision should lean toward postponing this extension, allowing time to carry out a thorough adaptation of our AML/CFT procedures to the world of digital assets. It is indeed essential that the rules governing these measures be adaptedto take into account the specific characteristics of digital asset markets and their unique operations. This adjustment requires concerted deliberation between authorities and businesses, as well as the necessary perspective, particularly given the exceptional circumstances we are currently facing. Since the current situation has already led the FATF to postpone its visit to France until June 2021, this delay could—and should—be put to good use by the French authorities to move forward with greater caution and foresight in collaboration with the industry.

To allow time for reflection—especially given that the European Union is set to enact legislation on these matters in the coming quarters—it is imperative that we wait. We therefore recommend rejecting this hasty extension.

We hope this position aligns with your views on the matter, and we would be delighted to discuss it further at your convenience.

Thank you in advance for your feedback and for taking the time to read this.

Best regards,

Simon Polrot
President of ADAN