Stéphane de Navacelle
Partner, Navacelle, Paris
sdenavacelle@navacellelaw.com

Julie Zorrilla
Partner, Navacelle, Paris
jzorrilla@navacellelaw.com

Thomas Lapierre
Associate, Navacelle, Paris
tlapierre@navacellelaw.com

Introduction

Transactions, deals, and contracts are key in structuring economic, legal and political systems. They have been traditionally record-kept in centralised registers such as banks, leading to monopolist positions and therefore undermining competition.¹

The blockchain technology may be a solution to efficiently solve the problem of record-keeping, as it provides free entry of record-keepers (known as ‘miners’) and portable information: anyone having access to it may write on the block. Defined as an ‘open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way’,² blockchain was created in 2008 by a person or group of computer experts named Satoshi Nakamoto.

Blockchains could enable a world, without intermediaries such as lawyers, brokers and bankers, to store, share, protect, tamper and review business relationships. This breakthrough makes the blockchain a foundational technology, having the potential to create new grounds for the economic, legal, and social systems.³ In that respect, the blockchain technology could have major impacts on French Law in the near future.

What is blockchain and how does it work? How can blockchain be used?

A blockchain is a peer-to-peer technology to store and share information and transactions, without trusted intermediaries. Trust relies on the technology itself. Each block corresponds to the movement of an asset that can be tangible or intangible (an apple or an intellectual property right). Access to the block, which gathers transactions, is granted to miners whose computers are named nodes. These blocks gather transactions that have been previously verified and validated by members of the network, which creates the chain. Changes to the register, for instance a sale of goods, are made thanks to an electronic sentence known as the ‘hash’. It needs to be later timestamped on the register to authenticate the transaction. The longer the chain is, the more reliable it is.⁴

Blockchain therefore delivers immediate, shared and completely transparent information on an immutable ledger whose access is limited only to members of a network. No participants can change or tamper with the register after it has been recorded to the shared ledger. Correction to a former transaction must be added to reverse it.

Given that blocks are unforgeable and confidential, they may considerably change the practice of law by limiting the need for trusted intermediaries and may be used in diverse situations as blockchain technology may facilitate record-keeping of any type of information. Blockchain also allows timestamping contracts by providing a definite date which ensures their opposability and enforceability.⁵ It may also protect innovation before a patent is filed, certify the author of an invention, register intellectual property rights and changes how royalties are collected.⁶

Blockchain technology could also enable ‘smart contracts’ whose clauses are performed automatically. It could, therefore, limit the negative outcome of contractual bad faith and speed up the exchange of a contractual information (for instance, technical documents in real estate sale contracts may be shared in a blockchain between seller, buyer, real estate agents and experts).⁷

Blockchain may also have an impact on how corporate compliance is managed. Since blockchain provides traceability of transactions hashed in the register, the drafting of the risk map and the assessment of a third party’s integrity are easier while still maintaining confidentiality.⁸ Likewise, as exemplified by a Mercedes initiative, a company could have a clear view on its whole supply chain thanks to the blockchain technology.⁹

However, the most famous practical application of blockchain technology is, without a doubt, cryptocurrency such as BitCoin or Ether.¹⁰

How does French law deal with blockchain?

According to French authorities, blockchain constitutes;

‘a mode of recording continuously produced data in the form of blocks linked together in the chronological order of their validation, in such a way that the blocks and their sequence are protected against modification’.¹¹

In France, the first step for a regulation occurred by Ordinance No 2016-520 of 28 April 2016 authorising dematerialised cash vouchers on a crowdfunding platform. Following the Ordinance, Article L. 223-12 of the Financial and Monetary Code states that the issuance and disposition of minibonds can be recorded in a ‘shared electronic device that allows for the authentication of such transactions’. In other words, regarding minibonds, a transaction on a blockchain is deemed the equivalent to a written contract.

Since Order No 2017-1674 of 8 December 2017 completed by Decree No 2018-1226 of 24 December  2018, Article L. 211-3 of the French Monetary and Financial Code  allows representation and transmission of financial securities thanks to ‘distributed ledger technology’, that is, blockchain technology. Article L. 211-20 of the same Code states that the registration of a purchase of financial securities in a blockchain has the same value as a book entry security and blockchain may be used as a guarantee.

To this end, the blockchain must guarantee the integrity of registrations, enable directly or indirectly the identification of the securities owners and the nature of securities held, be subject to an ‘updated business continuity plan including, in particular, an external system for the periodic preservation of data’; and provide the owner of the registered securities records of his or her own transactions.¹²

The recent Plan d'Action pour la Croissance et la transformation des Entreprises (PACTE) Law No 2019-486 of 22 May 2019 relates to initial coin offering (ICO), supported by blockchain technology - and legally defines tokens. Tokens are any intangible asset representing, in digital form, one or more rights that may be issued, registered, retained or transferred through a distributed ledger technology (DLT). The DLT makes it possible to identify, directly or indirectly, the owner of such an asset.

It also sets up an optional legal framework for ICO (public proposal of tokens), supported thanks to the blockchain technology, and digital asset service providers.

Digital asset service providers must at least be registered with the French Financial Market Authority (AMF).¹³ Nonetheless, seeking an administrative approval is optional.¹⁴ Digital asset service providers are free to subject an ICO to the provisions of the PACTE law, for instance, to certify it by sending a ‘white paper’ with relevant market information to the AMF.¹⁵

In any case, blockchain may be used as written evidence to be produced before courts since electronic evidence has the same probative value as a paper document, as long as its integrity is guaranteed and the person from whom it emanates can be duly identified.

Blockchain and anti-money laundering obligations of crypto currencies service providers

Despite the many possibilities offered by the blockchain technology, there are some concerns that have been raised about the illicit use of cryptocurrencies supported by this technology.

Due to their decentralised, disintermediated and pseudonymous nature, these cryptocurrencies are indeed ideal tools for money laundering, terrorist financing and criminal activities. For instance, terrorist organisations such as Daesh might have been financed thanks to cryptocurrencies.¹⁶

The European Union (EU) highlighted the risks of improper monitoring of cryptocurrencies, considering how they preserve anonymity and the absence of intermediaries. They are, indeed, outside the regulatory perimeter, that could allow shady transactions to occur and easy access to clean cash.¹⁷

The 5th EU Directive on money laundering is intended to fill the gap in preventive measures opened by cryptocurrencies supported by the blockchain technology.¹⁸

Following the transposition of the Directive into French law in February 2020 and a recent ordinance taken on 9 December 2020, digital asset service providers are now required to register with the French regulator for financial markets (AMF) before being able to start their activities. In that regard, service providers include sellers and storers of cryptocurrencies as well as trading and swapping platforms.

Additionally, service providers in cryptocurrencies, as per the general rules against anti-money laundering rules in France, are required to put in place anti-money laundering procedures and internal controls.¹⁹ Companies must have ‘know your customer’ (KYC) procedures in place and are required to verify the identity of their clients. Holding anonymous accounts for customers has also been prohibited.²⁰ A risk-mapping of their activities must also be established, and service providers are also required to monitor and report transactions which may constitute money laundering to the authorities.

This spur of new legislation emphasises the recent struggles of states like France when facing cryptocurrencies and their decentralised nature. In that regard, whilst the blockchain technology and cryptocurrencies are very innovative and still at an early stage in their development, the French and European legislations are also still in their infancy as authorities grapple with the new technology and the way in which to handle the uncertainties surrounding it. Other texts, therefore should complete the legislative arsenal in the years to come.

Notes

1 Joseph Abadi and Markus Brunnermeier, ‘Blockchain Economics’, in ‘National Bureau of Economic Research Paper Series’ (December 2018), accessible at: www.nber.org/system/files/working_papers/w25407/w25407.pdf.

2 Marco Iansiti and Karim Lakhani, ‘The Truth About Blockchain’, in Harvard Business Review (January 2017), accessible at: https://hbr.org/2017/01/the-truth-about-blockchain.

3 Ibid.

4 Satoshi Natakomo, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, in bitcoin.org (1 November 2008), accessible at: https://bitcoin.org/bitcoin.pdf.

5 ‘Les mystères de la blockchain’, Mustapha Mekki, in Recueil Dalloz (2017), p 2160.

6 Brigit Clark, ‘Blockchain and IP Law: A Match made in Crypto Heaven?’,WIPO Magazine (2018), accessed 6 September 2021, accessible at: www.wipo.int/wipo_magazine/en/2018/01/article_0005.html.

7 See n 4 above.

8 Mustapha Mekki, ‘L’intelligence contractuelle et numérique au service de la responsabilité sociétale des entreprises’, AJ contrat 2020, p 112.

9 ‘Pilot Project with future technology: Mercedes-Benz Cars develops Blockchain-prototype for sustainable supply chains for the first time’, Daimler, Press Release, 25 February 2019.

10 ‘The great chain of being sure about things’, The Economist, 31 October 2015, accessible at: www.economist.com/briefing/2015/10/31/the-great-chain-of-being-sure-about-things. See also, Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, in bitcoin.org, 1 November 2008, accessible at: https://bitcoin.org/bitcoin-paper.

11 ‘IT Vocabulary (list of adopted terms, expressions and definitions)’, Official Journal of the French Republic No 0121, 23 May 2017, text No 20, unofficial translation, accessible at: www.legifrance.gouv.fr/jorf/id/JORFTEXT000034795042.

12 Article R. 211-9-7 of the Financial and Monetary Code.

13 Article L. 54-10-3 and 4 of the Financial and Monetary Code (respectively ‘Before carrying on their activity, providers of the services mentioned in 1° to 4° of Article L. 54-10-2 established in France or providing these services in France shall be registered by the Autorité des marchés financiers …’ and ‘Any person who has not been registered with the AMF is prohibited from providing the services referred to in 1° to 4° of Article L. 54-10-2’).

14 Article L. 54-10-5 of the Financial and Monetary Code.

15 Article L. 552-4 of the Financial and Monetary Code. See also, Article 712-2 of the Financial Market Authority Regulation.

16 ‘France arrests 29 people over cryptocurrency financing of terror in Syria’, in Middle East Monitor, 30 September 2020, accessible at: www.middleeastmonitor.com/20200930-france-arrests-29-people-over-cryptocurrency-financing-of-terror-in-syria.

17 Robby Houben and Alexander Snyers, ‘Cryptocurrencies and blockchain – Legal context and implications for financial crime, money laundering and tax evasion’, EU Policy Department for Economic, Scientific and Quality of Life, July 2018, available at: www.europarl.europa.eu/cmsdata/150761/TAX3%20Study%20on%20cryptocurrencies%20and%20blockchain.pdf.

18 Article 1(c)(g) of Directive EU 2018/843 of 30 May 2018.

19 Article L. 561-2 7° bis of the Financial and Monetary Code.

20 Ordinance n°2020-1544 of 9 December 2020.