With hundreds of cryptocurrencies being issued every month, countries face a choice: ban them, leave them unregulated, or come up with rules to tame them.
France is pursuing the third option, which might be regarded as a Gallic middle ground. It wants cryptocurrencies to be issued in France as long as those backing them agree to be regulated. In doing so, it would be one of the first major countries to regulate so-called initial coin offerings (ICOs).
If coin issuers sign up to regulation, the French argue they will be seen as more trustworthy by investors, helping the currency gain credibility in the long run. France will even offer certification if the issuer wants. There’s only one small catch: the French state will tax any profits.
"The (cryptocurrency) community is ready to pay taxes as long as they are not confiscatory," said Fabrice Heuvrard, an auditor working with a joint government-industry task force drafting accounting rules for ICOs in France.
Firms usually launch ICOs to raise money for new platforms or to fund businesses that use cryptocurrencies and blockchain. Most coins issued in ICOs are used as a means of payments on websites, although some are traded on the secondary market.
In its bid to lure the cryptocurrency community out of the shadows, France will introduce its new rules early next year.
The goal is to establish a market in Paris for companies raising capital through cryptocurrency issuance and in the process grab a portion of the expanding business, raise tax revenue and provide security to investors.
CoinSchedule, a website tracking ICOs, estimates 22 billion dollars has been raised via launches in 2018 alone.
France is not alone in seeking to find a niche in the sector, although few economies are taking its approach.
In Britain, most ICOs are unregulated, with the financial watchdog deciding on a case-by-case basis whether the issuance falls within its authority.
The U.S. Securities and Exchange Commission wants to bring ICOs under the umbrella of securities rules, but has not done so yet. In China and South Korea, there is a total ban on cryptocurrencies due to fears of fraud and speculation.
On unregulated markets where no rules apply, investors are left totally unprotected if things go sour, and they often do.
According to Coinmarketcap.com, there are 2,080 cryptocurrencies in operation. Yet DeadCoins.com has identified more than 900 that are no longer active, of which it says almost 200 qualified as "scams".
Under France's regulatory proposals, authorities would verify who is behind a new coin’s issuance, check whether the issuers have a plan to hand back money if the project fails, and force them to abide by "know your customer" rules.
Demand for rules
In France, firms have raised 89 million euros via 15 initial coin offerings so far. Sixty-eight others are in the works, of which Impak Finance is one. It says France’s approach appeals.
"The different regulators have been hyper, hyper-proactive," said Paul Allard, chief executive of the Canada-based company, which intends to raise 400,000 euros via its French offering.
The question of tax status is not yet settled, however. The idea would be to consider the amount raised as sales revenue and tax it accordingly. The question of value-added tax - which is 20 percent in France - has not yet been resolved, a finance ministry official said.
"Our plan is to declare the money raised as revenue and pay taxes on the profits we will make on those revenues," said Allard. "Since we are not close to making any profit, it doesn't really affect us."
The idea of government certification may be unattractive to some crypto enthusiasts who like secrecy, but there is a demand for regulation from many issuers, said Henry James, deputy CEO of Fincross International.
"A lot of token issuers are struggling against the stigma associated with cryptocurrencies: they are risky and present opportunities for scammers," he said.
With other financial centers hesitating, the French bet may pay off, said Impak Finance's Allard: "Cowboy capitalists will not come to Paris and, you know what, it’s better that way."