In July 2022, Monaco passed a law regulating digital assets. The new law affects financial institutions, companies, and individuals alike. It clarifies how digital assets are classified and what services can be offered, including ICOs and STOs. This post explores the law’s impact, its importance to Monaco’s economy, and the risks and benefits of digital assets.
Introduction
Digital assets offer a number of benefits, including greater liquidity, lower transaction costs, and increased transparency. However, they also pose significant risks, including the potential for fraud and market manipulation.
The new law, known as Law 1528 of July 7, 2022, amending various digital provisions and regulating the activities of service providers on digital assets or crypto-assets, provides a legal framework for issuing and trading digital assets in Monaco.
Formally passed into law in 2022, it complements Law 1383 on the Digital Economy and Law 1491 on Token Offerings. Prior to the passage of these laws, digital assets were not regulated in Monaco, leaving little legal protection. Law 1528 provides clarity and legal certainty for digital assets while protecting investors and combating fraud.
Digital Asset Definitions according to Law 1528
Under Article 1, the new regulation under Law 1528 distinguishes two categories of crypto assets;
Digital Assets
Digital Assets are defined as tokens based on an entirely digital underlying and are broken down into three sub-categories;
- Virtual Financial Assets, i.e., crypto-currencies
- Non-Fungible Tokens (NFTs)
- Usage Tokens, i.e., tokens that can be exchanged for goods, services, and products
Non-Digital Assets
Tokens based on an underlying that has financial asset characteristics, i.e., tokenized stocks, bonds, and other traditional financial instruments. The Non-Digital Asset category is unique compared to other jurisdictions. France, for instance, has financial tokens and virtual financial assets.
Article 7 specifies the scope of the law regarding token offerings. Particularly interesting is that Law 1528 does not encompass the offering and exchange of Non-Fungible tokens.
Article 12 defines the possible services that can be provided for digital assets. These services include;
- The exchange of digital assets for other digital assets, i.e., crypto trading (excl. NFTs)
- The operation of a digital asset platform, i.e., crypto exchanges
- The exchange of digital assets for legal tender currency, i.e., crypto on- and off-ramps
Article 13 then specifies the allowed services related to the broader definition of crypto assets;
- The issuance of crypto assets
- Custody and administration
- Operation of a platform related to crypto assets
- Placement of crypto assets
- Order execution
- Reception and transmission
- Advice on crypto assets
While technically possible for immediate implementation, all of the above-mentioned services are subject to prior approval by Sovereign Order.
Impact on Financial Institutions and Companies
The recent law greatly impacts financial institutions and companies who want to deal with crypto assets and gather funds through ICOs and STOs. According to 1528, those issuing digital assets must meet specific requirements such as disclosing certain information to investors, using escrow accounts to hold investor funds, and creating a legal entity in Monaco. Additionally, the law mandates that issuers of crypto assets obtain approval from the Monegasque government prior to conducting an ICO or STO.
The opportunities for startups and existing institutions seem diverse and attractive. They range from STOs to tokenized real assets. “The tools are there,” – says Franck Julien, the head of the Finance and National Economy committee at the National Council. Implying that the principality counts on private initiatives to make use of the new regulations.
Companies with a Monegasque asset management license may find Law 1528 particularly interesting, as it can be incorporated based on their existing license. In other words, they do not need to obtain a specific digital asset license if the intended activities fall under an already regulated operation.
Meanwhile, early adopters among businesses are still rare. Mr. Julien mentions that two companies in Monaco have already tried to use security tokens to raise capital. Although, both used traditional instruments in the end due to the complexities of the process.
While the requirements under Law 1528 may seem onerous, they provide greater legal protection and help reduce digital asset market fraud. In addition, the new law could attract more companies to Monaco by providing a clear legal framework for digital assets.
Importance of Digital Asset Regulation to the Economy of Monaco
The recent legislation holds great significance for Monaco’s economy. It establishes a legitimate system for managing, distributing, and exchanging digital assets. Monaco has gained a reputation for its tax-friendly policies and accommodating business climate, and this new law presents yet another attractive reason for enterprises to operate within the country.
This new law’s implications may change how companies and investors view Monaco as a destination for digital assets. This is particularly important for companies operating within the financial sector. An industry that remains strongly traditional in the Principality. Monaco’s new regulatory environment could provide a competitive advantage over other jurisdictions.
Moreover, the new law could help to position Monaco as a leader in the digital asset space. As digital assets become increasingly popular, Monaco’s favorable regulatory environment could attract more companies and investors to the principality. This could lead to growth in the digital asset industry in Monaco, which could, in turn, lead to job creation and economic growth.
Industry experts, however, believe that private initiatives would be much stronger if the principality promoted opportunities related to digital assets and financial tokens more actively through agencies like the Monaco Economic Board (MEB) and the Monaco Welcome Office. The major problem is that even Monaco-based crypto entrepreneurs are predominantly not fluent in French.
Promotion of Digital Asset Regulation is Key
In a recently held panel discussion at the International University of Monaco (IUM), it became clear that Monaco yet needs to promote Law 1528. “Although in place since July 2022, Law 1528 has yet to be adopted by local companies”, says Franck Julien.
While other jurisdictions advertise their legislative efforts openly (e.g., EU’s MiCA), Monaco legislators have been quiet about their efforts and count on private initiatives to boost adoption.
Industry experts, however, believe that private initiatives would be much stronger if the principality promoted opportunities related to digital assets and financial tokens more actively through agencies like the Monaco Economic Board (MEB) and the Monaco Welcome Office.
Another major problem is that Monaco law texts are exclusively available in French. Neither are any official English interpretations available. Based on the assumption that even Monaco-based crypto entrepreneurs are predominantly not fluent in French, this further hinders adoption.
Benefits and Risks of Digital Assets
Digital assets offer a number of benefits, including greater liquidity, lower transaction costs, and increased transparency. However, they also pose significant risks, including the potential for fraud and market manipulation.
Monaco’s new law helps mitigate these risks by providing a legal framework for digital asset transactions and requiring issuers to disclose certain information to investors. However, investors should still exercise caution when investing in digital assets and should carefully evaluate the risks and potential rewards before investing.
It is important for companies and investors to understand the benefits and risks associated with digital assets before investing. Digital assets have the potential to revolutionize the way that we do business, but they also come with risks that need to be managed.
Conclusion
In conclusion, the new law on digital assets in Monaco is a significant development with far-reaching implications. Monaco’s favorable regulatory environment and the new legal framework for digital and crypto assets make the principality an attractive destination to participate in the digital asset market. With the new framework in place, companies and individuals now need to increase their understanding of digital assets:
- Conduct thorough research on the impact, risks and benefits of digital assets.
- Seek consultation with experts in the field, such as Inside The Block, to better understand digital asset regulations and opportunities.
- Stay informed on the latest developments and regulations in the digital asset industry in Monaco and globally.
To learn more about business opportunities surrounding Digital Assets in Monaco, contact us today for a consultation, browse our website, or read our articles here.
Disclaimer: The Law 1528 and other affiliated material are only available in French. Any information provided in this article is based on the interpretation of the author and does not present legal or any other actionable advice.