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In short
The situationIn 2017, the French authorities amended the laws to allow the use of blockchain, or accounting distribution technology ("DLT"), for the trading of unlisted securities.
The result: The regulation governing the use of DLTs and its impact on securities laws was approved in December 2018.
Looking forward: While the new rules only apply to unlisted securities (not using the settlement systems of current securities), they can be extended to listed securities.
In December 2018 a decree n. 2018-1226 ("Decree") which provides the provisions of law on the use of the DLTs for the trading of securities not listed in France.
Since 1984, all French securities have been represented in the form of accounting entries (through claims on securities accounts held electronically by the issuers). This dematerialization process applies to listed or unlisted securities held in bearer form or registered.
The order no. 2017-1674 ("Ordinance"), on 8 December 2017, established new rules to allow the trading of unlisted securities using the DLT, modifying the current procedures previously in force for securities credited to the securities account. These rules were provided with further provisions, described below, effective immediately.
Integrity of DLT
The ordinance required the integrity and security of the DLTs, in which the securities would be registered, to be detailed. A new article D. 211-9-7 of the French Financial Code ("Code") establishes that the DLTs are constructed and managed in order to: (i) ensure the registration and integrity of data relating to securities; and (ii) identify, directly or indirectly, the owners of the securities and the nature and amount of such securities. As for the accredited titles in the registration form, no modification or alteration of the data will be made possible without being traced or verified. DLT operators are free to implement the technology to achieve these objectives, public or private, according to the ordinance.
The order also required that registrations be recorded with an external database for reasons of continuity and security.
Pledges on securities held in the DLT
The ordinance referred to the decree to take any measure to adjust the current pledging of securities accounts to securities held in the DLT. Under the current regime, a lien may be set up on a securities account (all securities credited to this account are covered by the pledge) or on certain securities identified within the securities account (earmarking).
In addition to minor changes (to refer not only to the securities account, but also to the DLT), three main provisions have been added:
- In the event that a notification should be made, or an action is envisaged by the holder of the securities account, it was necessary to designate a legal entity responsible for the registration and management of the guarantee on the securities registered in a DLT. Since Article L. 211-20 II refers to the assignment of securities by an electronic process, it was inferred from this sentence that the person responsible for such assignment within a DLT would be responsible for the registration and the management of the commitment on behalf of pledge and pledgee (new article R. 211-13 of the Code).
- If the issuer or its agent responsible for the management of a DLT is not a credit institution, the proceeds and income generated by the constituted securities (dividends, interest, etc.) must be credited to a specific guarantee account considered as a party pledge on the securities registered in the DLT (new article R. 211-14-1 I).
- The pledge certificate, which lists the securities pledged, is issued at the request of the pledge to the manager of the DLT in which the securities pledged are registered (new article R. 211-14-1 III).
Three take-out keys
- The French regulators are eager to make French legislation as attractive as possible for the application of new technologies to financial activities.
- Now, unlisted French securities can be registered, transferred and committed through DLT.
- If it is widely used, the DLT can be extended to listed securities once the settlement processes have been adjusted to accommodate this technology with payment systems.
