This is the year the French funds regulator forged a path for alternative funds and custody banks to facilitate crypto investment. Nick Fitzpatrick reports.
Asset management is struggling with its digital transformation constantly, industry observers are told. This is correct – but regulators have a huge task, too.
At France’s Autorité des Marchés Financiers (AMF), crypto assets and the underlying blockchain are seen as two of the three topics that have defined activity within its asset management section this year. Sustainable investing is the third.
Philippe Sourlas, who heads the AMF’s asset management directorate, says the regulator has worked with the French treasury to bring clarity of rules about crypto investing for funds aimed at professional investors.
“We have created an environment for crypto, basically making MiFID II services appropriate for the crypto sector,” he says.
The crypto environment comes about under France’s PACTE Law – or Action Plan for Business Growth and Transformation – that is due to come into force next year. This far-reaching legislation touches on a multitude of economic subjects beyond digital, but does include innovations in corporate finance, for example through initial coin offerings (ICOs).
One issue that had to be ironed out had to do with funds’ investment and asset ownership rules, in the sense of whether a French alternative investment fund can invest in a crypto asset, and clarification for if an investor could be a legal owner of a fund whose liability is held on blockchain.
Natasha Cazenave, who is head of policy and international affairs at the AMF, confirms that “professional funds can buy crypto assets” and that French law recognises ownership through blockchain of non-listed shares and fund units. Also, once a decree is passed, service providers will be able to provide custody.
The custody arrangements surrounding crypto assets is an issue that has vexed a number of regulators elsewhere in the world, so it is important the AMF is creating a framework for digital asset services, which includes custody and depositary banking.
This framework includes the provision of custody services for ‘utility’ tokens. Utility tokens are issued through ICOs – a form of crypto asset that buys a specific service or product.
The AMF consulted on ICOs in 2017. Part of the regulator’s job now is addressing concerns that depositary banks have anti-money laundering procedures, as companies that undertake ICOs may not be regulated.
“We should not underestimate the importance of trust in crypto assets, and regulation has to bring about that trust. We have a lot of players in this area, and not all of them have the best intentions,” Cazenave says.
As of October 8, the AMF had issued 15 warnings of potential scams. A number were about binary options trading but the list also includes one for investment services involving derivatives with crypto assets underlying them.
As France is attempting to attract asset management and fintech firms from overseas, the regulatory environment will be a factor. Sourlas and Cazenave are mindful of this project, which the French asset management industry has called ‘Frog’.
Sourlas describes Frog as an initiative launched at a specific moment in 2016 “to identify key regulatory issues that are not efficient or modern enough” for the French industry to thrive.
Previously, in 2016 and under Cazenave’s predecessor, the AMF urged the EU to revisit rules to see if cross-border fund distribution could be made more frictionless, so that funds could gain a wider customer footprint across Europe rather than just in an asset manager’s home market.
Asked about this now, Cazenave says: “The passport system functions quite well. Forty per cent of funds marketed to customers in France come from other European member states. But it also shows the limitation of the single market for funds because the proportion is not broader than that.”
She adds that cross-border distribution still needs a rethink, but rather than add new rules, regulators should step back and look at existing ones, such as the Eligible Assets Directive passed in 2007. Proposals for reforms, some of which encompass EU legislation like Priips and MiFID II, are contained in a June AMF paper, called ‘EU24: Shaping EU27 capital markets to meet tomorrow’s challenges’.
So, what about sustainability? Funds Europe asks if the regulator is concerned about the prospect of ‘greenwashing’ now that the funds industry – including some of France’s largest players – are widely marketing their ESG [environmental, social and governance] credentials.
Sourlas says: “If we viewed that the ESG approach of a fund is non-material, we would prevent the asset manager from putting it forward to customers as an ESG fund.” He says the AMF is doing “preventative work” and there have been cases “where we’ve expressed disagreement” with firms.
The topic is complex and the challenge is how to simplify it, Sourlas notes.
“For example, a fund that wants to decarbonise its portfolio may find it difficult to see how this will impact the companies held in the portfolio. Therefore, how do you communicate this to investors? Furthermore, does the asset manager do this to meet a financial performance objective without making the client aware; or is the fund aiming at achieving a non-financial performance objective, then this has to be explained.
“The AMF has created specific communications on sustainable finance for issuers as well as asset managers.”
Crypto and sustainability were two issues for 2019. But further evolution can be expected in 2020.
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