Franck Julien, President of the Commission for the Development of Digital at the National Council of Monaco answers Wealth Monaco’s questions on the Blockchain and specifically on digital finance.
For the clarity of our readers, can you recall what a financial instrument is?
To make it simplier, there are two types of financial instrument : financial securities (equity securities issued by a joint stock company, debt securities and shares or shares of a collective investment fund) and financial contracts (forward contracts and other derivative products).
But in practice, it is sometimes difficult to know whether a product is a financial instrument or not. This is the reason why the Swiss Financial Market Supervisory Authority (FINMA) has issued a methodology to help players determine how to categorize digital assets.
Will the impossibility for a Monegasque DSAP to trade financial instruments be permanent?
No. To lift it, Monaco will have to adopt adequate laws and regulations.
Theoretically, in addition to the 5th AML-CFT directive which has been transposed into Monegasque law by means of law n ° 1.503, passed last December, it would be necessary to comply with the following directives and regulations:
- MiFID 2;
- Prospectus Regulations;
- transparency directive;
- finality directive;
- Central Securities Depositary Regulation;
- market abuse regime;
- short sale regulation;
- Investor Compensation Systems Directive.
The task is huge, do you really hope that this will lead someday?
In an ideal world, the weakness represented by the lack of regulation in the sphere of financial instruments should be transformed into a strength. In the crypto-assets world, the application of the aforementioned devices poses many problems, because some requirements are simply incompatible, disproportionate or irrelevant with the operation of financial tokens.
In order to stimulate innovation around digital assets in Monaco, the way that seems to me the most pragmatic and the most elegant would be to define a transitional period during which a simplified regulation incorporating the essential and relevant elements of the aforementioned provisions would be implemented, while allowing certain derogations from the general rules that could be granted, for example by the Financial Activities Control Commission (CCAF).
Obviously, ultimately, convergence with future European rules which will aim to have a common regime dedicated to crypto-assets will be mandatory.
But while waiting for such arrangements to exist, Monaco must not waste time and occupy the ground. It is about preparing for the world of tomorrow and positioning ourselves so that we can eventually reap the benefits.
The European Commission launched a public consultation a year ago to promote digital finance within the EU. In its response, the AMF had proposed a European digital laboratory to overcome regulatory obstacles. Where is the process standing today?
The observation that was made during the consultation of the European Commission is that the frameworks applicable to crypto-assets qualifying them of financial instruments are currently inadequate.
In September 2020, the European Commission published three proposals for regulations and one proposal for a directive. The topics covered are diverse and include a pilot scheme for market infrastructures based on distributed ledger technology.
Very interesting concepts are introduced there.
On reading these documents, it is obvious that Distributed Ledger Technology applied to financial services will bring efficiency gains and significantly transform financial market infrastructures.
But from the stage of proposing regulations and directives to implementation, time will pass. Also, it is essential to move from theory to practice. Making laws is a good thing, but giving the opportunity to economic actors to develop business and to the State the opportunity to develop future sources of income is even better. Monaco should not miss this unique opportunity.
Is the implementation of a pilot phase possible in Monaco?
During the study of the Bill #995, the National Council expressed its wish to return to the original spirit of Bill #237 by reintroducing the notion of regulatory sandbox. In order to initiate this reflection, a working group within the National Council was created around the subject of innovation, and in particular on the regulatory innovation,
In my opinion, the subject of a pilot phase should be discussed with the Government.
What about the status of DSAPs in Monaco to creating a secondary market for the exchange of digital assets?
As explained previously, the Government should have tabled a bill on the status of DSAPs at the end of last year. I hope this deposit will take place very soon. As the bill has not been tabled with the Bureau of the National Council yet it is difficult for me to comment on future provisions. Nevertheless, I have some beliefs on the subject.
For example, I do not think that the scope of the future law should be strictly limited to the secondary market, namely, if they were retained, token issuance services, buyer and seller’s interest display platform for digital asset, underwriting or digital asset investment services that concern the primary market. It would be a shame to exclude them from the future regulation.
In addition, I would like the future law to be ambitious and deal with innovative topics, for the moment relatively little covered in foreign legislation. We can mention in particular the field of service providers related to smart contracts. This seems to me essential to build confidence and encourage national players to take an active part in this new environment.
I am thinking of the following services: smart contract creation, smart contract certification and oracle by human operator service. This last service deserves some explanation: it involves having a human operator who verifies the data validity and inserts it into a smart contract, when the data is not directly accessible from the Blockchain. This service could be provided by Statutory Auditors or lawyers, for example.
Find the first part of Franck Julien’s interview here