French quarterly crypto legal & tax briefs - October 2023

With cutting-edge expertise in blockchain since 2016, the Financial Markets and Tax teams in Simmons & Simmons' Paris office are pleased to bring you the 2nd quarterly newsletter on French regulation and taxation of crypto-assets.

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Our team of lawyers is at your disposal to discuss the topics covered in this newsletter.

1 - Regulatory

JONUM: the future framework for GameFi

The bill to secure and regulate the digital environment, which was tabled in the Senate on 27 June 2023, devotes an entire title to the regulation of Games with Monetisable Digital Objects (Jeux à Objets Numériques Monétisables or JONUM).

The French government wishes to regulate online games based on blockchain technology, in which digital objects required to participate and progress in the game are offered for purchase or gain, in the form of non-fungible tokens (NFT). These digital objects can then be resold to third parties on the game publisher's platform or on a secondary market place.

Today, JONUMs that can be likened to gambling activities (i.e. (i) offered to the public, (ii) giving rise to the expectation of a gain, (iii) due even partially to chance and (iv) requiring a financial sacrifice on the part of the player) are prohibited in France, unless they appear on the list of exemptions maintained by the National Gaming Authority (Autorité Nationale des Jeux or ANJ).

Under the new law, JONUMs would be authorised on an experimental basis for a period of three years from the promulgation of the bill. JONUMs would be defined as "games offered via an online public communication service that enable players who have made a financial sacrifice to obtain monetisable digital objects, based on a mechanism that relies on chance, to the exclusion of any gain in legal tender, provided that these objects cannot be transferred, directly or indirectly via any natural or legal person, for consideration, either to the gaming company that issued them, or to a natural or legal person acting in concert with it.".

It is therefore considered that JONUMs meet three of the four criteria for the definition of a game of money and gambling; the expectation of winning, on the other hand, is transformed into the expectation of receiving a monetisable digital object (MDO). The latter may be an NFT. Note that if the digital object cannot be exchanged for money or transferred outside the game, the game will not be considered as JONUM but as a classic video game.

Lastly, the offer of a JONUM to the public in France must be declared to the ANJ and may only be made by a publisher whose registered office is in the European Union and who has appointed a representative domiciled in France.

The law is still being drafted and changes to the framework may still occur.

Regulation of promotion by influencers: beware of joint and several liability of the advertiser crypto-asset service provider

France recently adopted a legal framework for commercial influence on social networks (Law no. 2023-451 of 9 June 2023 aimed at regulating commercial influence and combating abuse by influencers on social networks). The law came into force on 11 June 2023.

This law is a real point of attention for advertisers, such as crypto-asset service providers, who use online marketers/influencers because, although the requirements contained in the law are not all new - influencers were already subject to certain requirements arising in particular from consumer law - the law introduces a principle of joint and several liability between the advertiser (i.e. the company providing the product or service) and the commercial influencer (and where applicable the influencer's agent) for any damage caused to third parties.

Consequently, it is strongly recommended that crypto-asset services providers acting as advertisers exercise all due diligence in the selection and monitoring of commercial influencers who promote their services to an audience located in France.

The terms of the contract concluded between an advertiser and an influencer and/or their agent must also comply with specific obligations detailed in the law.

It should be noted that this law applies to any influencer whose activities are aimed at an audience established on French territory, regardless of whether that influencer is located on French territory (so even influencers living in Dubai are caught up in these new obligations).

DASP: enhanced registration and pre-MiCA approval

The DDADUE Act of 9 March 2023 strengthened the registration regime for digital asset service providers (DASPs). As a result, applications filed after 1st July 2023 or incomplete by that date will lead to enhanced registration being granted from 1st January 2024.

In practical terms, this law brings all the general obligations applicable to authorised DASPs under the enhanced registration regime. The specific obligations applicable to the digital asset custody service also fall within the scope of enhanced registration.

There is also the Order of 21 July 2023 by which the Autorité des Marchés Financiers (AMF) amends its General Regulation and its doctrine to reflect MiCA requirements. In doing so, the French regulator is anticipating the requirements of the crypto-asset service provider (CASP) regime.

As a result, from 1st January 2024, authorised DASPs and those seeking authorisation will have to comply with MiCA provisions one year in advance. Consequently, the new enhanced registration obligations will automatically be aligned with MiCA requirements.

In broad terms, there are not many new features. Indeed, the French DASP licence regime was largely inspired by financial market regulations, with the French legislator anticipating that this was the approach that would subsequently be adopted at European level. However, there is a new obligation to have a business continuity and termination plan, and greater control over outsourcing. The details will be set out in the many Level 2 and 3 texts expected from ESMA, but both registered and authorised DASPs will have a transition period ending in July 2026 to comply.

2 - Taxation

International standards for the automatic exchange of information for tax purposes: publication by the OECD of the Cryptoasset Reporting Framework (8 June 2023)

The Common Reporting Standard (CRS) published by the OECD in 2014 aimed at ensuring the transparency of international financial investments and preventing international tax evasion. Signatory states are subject to automatic exchange of information obligations on an annual basis with taxpayers' jurisdictions of residence, regarding the accounts held abroad with financial institutions.

While crypto assets have until now been exempt from these reporting obligations, which mainly apply to traditional financial assets held in accounts opened with financial institutions (excluding assets held directly by individuals, e.g. via cold wallets), the publication of a Crypto asset Reporting Framework (CARF) is intended tobroaden the scope of the CRS.  

The crypto assets covered by the CARF are assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries, including stable coins, derivatives issued in the form of crypto assets and certain non-fungible tokens (NFTs).

The intermediaries or service providers concerned by the reporting obligation are entities or individuals who, acting in a business capacity, provide services in the form of Crypto Asset Exchange Transactions concerned, for or on behalf of customers. This definition thus includes exchange platforms, but also brokers and traders in crypto assets in particular.

These providers will be subject to CARF rules when they :

(i) are resident for tax purposes in a jurisdiction that has adopted the rules ;
(ii) are incorporated or organised under the laws of, and have legal personality in any such jurisdiction, or are subject to tax reporting requirements in such jurisdiction ;
(iii) are managed from such a jurisdiction, have a habitual place of business, or carry out Relevant Transactions through a branch located in such a jurisdiction.

The operations concerned will cover :

• Exchanges between crypto assets and fiat currencies ;
• Exchanges between one or more of the crypto assets concerned;
• Certain crypto asset transfers (air drop, staking, lending, etc.).

In a decision dated 28 June 2023, the French Supreme Court (Cour de Cassation) specified the notion of professional investor.

In a court ruling issued on 28 June 2023, the French Supreme Court (Cour de Cassation) specified the notion of professional investor from the perspective of consumer law.

This decision relates to a dispute between a private individual, M.X., who was victim of hacking, and the Lithuanian company Spectrocoin, with which he held a virtual cryptocurrency portfolio. In order to avoid prosecution in France, the company attempted to demonstrate that the contract between Spectrocoin and M.X. had been concluded in connection with the latter's professional activity.

It was established that M.X. was a voluntary member of the NEM foundation, dedicated to the development of NEM blockchain technology, of which he was also a member of the Board of Directors. In return for his participation in development projects relating to the XEM crypto-currency, M.X. received a donation of XEM 2,250,000. He subsequently opened an online account on Spectrocoin’s platform in order to create a portfolio via which he carried out regular conversion transactions that provided him with a source of profits.

According to Spectrocoin, the deposit agreement between the parties was therefore necessarily linked to Mr X’s professional activity in the crypto-currency sector.

However, the Supreme Court held that the extent of the amounts received upon the creation of his crypto-currency portfolio, which suggested that this was his only source of income, was not a criterion for qualification as a consumer (being noted that the contract was subject to a loss risk). Accordingly, even if this activity had been usual, i.e. 200 transactions within 9 months, the profit made was deemed as part of Mr X’s private assets management. Although he had specific knowledge of crypto-currencies, he only participated in these activities on a voluntary basis and was no longer a member of the board on the day the contract was entered into. Those elements did not establish enough the professional nature of the contract at hand.

However, this conclusion would not be extended to tax matters. In fact, the autonomous criteria used to classify an activity as professional within the meaning of tax law, according to the bundle of evidence method, include:

• The purchaser's intention to resell;
• The holding period of crypto-currencies;
• Recourse to bank loans;
• Use of securities;
• Use of trading tools normally reserved for professionals, such as futures trading and leverage;
• Proportion of crypto revenues in total revenues ;
• The use of professional tools or "bots", depending on the complexity and extent of the use of the tool and the amounts invested for this purpose;
• Participation in the development of a tool or algorithm used to carry out operations.

The tax authorities also take into account the amount of the profits and the frequency of the transactions. There is therefore reason to believe that in the case at hand, the qualification of professional would be retained from a tax perspective.