France clarifies the accounting rules applicable to ICO issuers and investors

by KRAMER LEVIN NAFTALIS & FRANKEL LLP - December 20, 2018

France took another step towards becoming a major hub for initial coin offerings (“ICOs”) with the publication by the Accounting Rules Authority (Autorité des normes comptables or “ANC”) of Regulation No. 2018-07 of December 10, 2018.

This regulation, which has yet to be ratified by the Government, establishes the accounting rules applicable to ICO issuers, ICO investors, and more generally any company holding any kind of cryptocurrency or crypto-asset.

Once the Loi Pacte is passed into law (around summer 2019), France will boast a comprehensive legal framework for ICO issuers and businesses dealing with cryptocurrencies and crypto-assets, which will contain (i) a legal definition of tokens and crypto-assets, (ii) an optional approval from the Autorité des marchés financiers (AMF) for ICOs, (iii) a legal framework for crypto-asset intermediaries (e.g. exchange platforms, custodians, investment advisors, etc.), (iv) a right to a bank account for approved ICO issuers and crypto-asset intermediaries, (v) a clarification of the AML-CFT rules applicable to ICO issuers and crypto-asset intermediaries, (vi) an ad-hoc tax regime for investors and ICO issuers, and (vii) this accounting regulation.

On the issuer’s side, the accounting treatment of the tokens will depend on the rights and obligations associated with the token:

• If the tokens may be assimilated (even temporarily) to a reimbursable debt, they will be recorded as “loans and similar debts”.
• If the tokens represent services to be provided or goods to be delivered in the future, they will be recorded as prepaid income. Interestingly, the ANC considers that payment/exchange tokens (i.e. regular cryptocurrencies) will fall into that category, even though most would not represent any future service or good. More broadly, all cryptocurrencies (including bitcoins and ethers) will qualify as “tokens” under this regulation, and not only tokens issued by a specific company following an ICO.
• Otherwise, if the issuer has no implicit or explicit obligation towards the token holders, the funds collected by the issuer will be recorded as income.

In most cases, the funds collected by the issuer will eventually be recorded as income. Then, although there has not been any specific regulation on this matter yet, VAT and income tax will likely have to paid by the issuer.

On the token holder’s side (which also include token issuers whose ICO was subscribed with cryptocurrencies), the accounting treatment of the tokens will depend on the proposed use of the tokens by their owner:

• If the tokens are meant to be held until the services associated with them are provided (or until the goods are delivered), these tokens will be recorded as intangible assets, and amortized and/or depreciated as such.
• If the tokens are held for any other reason (including as an investment), they will be recorded in a newly created account under the short-term financial instruments category, and their market value will be reassessed each year.

The notes to the financial statements of the issuer will contain various information concerning notably the issuance, the rights and obligations attached to the tokens, the accounting principles applied with respect to the tokens, the token’s market value as of the end of the period, etc. In addition, the notes to the financial statements must provide precise information regarding the amount of tokens already issued and yet to be issued, including how many tokens have been or will be freely granted to the issuer’s founders, employees, or advisors.

Lastly, it is worth mentioning that none of this regulation will apply to tokens which share the same characteristics as financial instruments (i.e. “security tokens”). As regularly repeated by the AMF, there is currently no such thing as a “security token” under French law. Any security token would be recorded as a regular financial instrument, and may not benefit from any provision of this regulation.