National governments the world over are working on cryptocurrency regulations intended to rein in the crypto universe before it gets out of control. Setting aside the philosophical arguments over whether or not this should be done, regulating crypto is not as easy as it might sound. Regulators have to walk that fine line between encouraging innovation and stifling it. France may have found the sweet spot.

French regulators have been working on a framework for quite some time. That framework was finally approved by legislators and must now be implemented in several stages before it becomes official. Final implementation is expected sometime later in 2019, perhaps by late summer.

While the framework is rather complex in what it accomplishes, there are three main priorities: guaranteeing the right to a bank account for crypto related businesses, offering optional certification to new crypto businesses, and allowing life insurance and private equity funds to invest in more crypto assets.

Needless to say the framework goes well beyond depositing some bitcoin so you can play a few games of Mega Moolah. It even goes beyond cryptocurrency investing. The framework ostensibly encourages all sorts of crypto and blockchain businesses to both operate and innovate in France.

The right to a bank account

Crypto related businesses in many countries find it difficult to operate because they do not have access to bank accounts. This may sound counterproductive in that the whole point of cryptocurrency is to get away from the traditional banking sector. But the fact remains that traditional banking is inescapable at the moment.

Someone might be interested in setting up a new exchange in France. That is all well and good, but that entrepreneur is going to have to pay for hardware, software, and network infrastructure. That means at least some fiat will be changing hands. It would be nearly impossible to get the exchange up and running without fiat.

Once the exchange is up and running, its operator must be able to convert cryptocurrency into fiat in order to pay his own expenses. Moreover, he will also need some sort of facility for paying his bills. How is he going to do it without a bank account? It is highly unlikely that all of his creditors would accept cryptocurrency payments, if any did at all.

French regulators have said enough is enough. They want companies in the crypto space to have access to traditional banking services just like any other business. So one of the main provisions of the new framework is the legal right to a bank account granted to crypto businesses willing to be regulated.

The willingness provision is important. There may be some crypto enterprises that either do not want to, or cannot practically, be regulated. One example would be a decentralized autonomous organization that exists only as a community of users executing smart contracts in a blockchain environment. That sort of entity cannot be regulated because the structure needed to do so is not there.

By including the willingness provision, French regulators have given crypto enterprises the option to be regulated or remain regulation free. Those willing to be regulated are automatically granted the right to a bank account under the new framework. Those that choose to remain unregulated may still have trouble with traditional bank services.

Optional certification

Regulators have also included an option to be certified in their new framework. What does this mean? It means that crypto-based enterprises looking to set up shop in France - whether they are located domestically or internationally - can apply for an operational visa. Approval of such a visa would certify that the enterprise has been reviewed by regulators and approved for operation.

Why would an enterprise want to be certified? For starters, certification proves that an enterprise has agreed to be regulated. Management can then take that certification to a bank in order to exercise the right to open an account.

Certification is also proof that a crypto enterprise is aligned with regulatory standards. This may be important in helping that enterprise establish itself and its reputation. Simply put, proof that an enterprise is meeting government standards makes it easy to attract customers.

Regulators decided to make certification optional for the same reason the banking provision is based on a willingness to be regulated. There are some crypto enterprises that simply cannot be certified for practical reasons. Therefore, certification has to be optional. If one were mandated, certain kinds of crypto enterprises would not be able to exist.

Covering most crypto enterprises

It is important to point out that these first two provisions cover nearly every kind of crypto enterprise looking to operate in France. It will cover local and global exchanges, crypto custodians, payment processors, and even ICOs. Depending on its final implementation, it might also cover merchants who deal in crypto payments.

Covering ICOs is especially intriguing given their history. An ICO, or initial coin offering, is the vehicle by which new cryptocurrency platforms are launched. The ICO is the cryptocurrency equivalent of a stock exchange's initial public offering (IPO). ICOs are launched in order to solicit investments from people who want in on the ground floor.

ICOs have taken a hit in recent years as it became too easy to run a pump and dump scheme. As such, investors have been pulling back on their ICO participation. That could change in France with certification. An ICO with a valid cryptocurrency visa would be a safer bet for investors, thereby encouraging them to put their money into new coins.

Life insurance and private equity

The third of the three major provisions in France's new framework allows life insurance and private equity funds to invest more of their resources in crypto-related assets. This would include ICOs and exchange traded funds. Of special interest might be digital assets somehow related to stable coins.

As important as this provision might be, it is probably going to be some time before any noticeable differences occur. Regulators enacted this provision largely with a forward-thinking view of what cryptocurrency might look like in the future. For now, price volatility makes it highly unlikely that large numbers of life insurance and private equity funds would take the risk on crypto assets.

Any that do so right away would probably limit their exposure to comparably small amounts. The initial goal would be to add a bit more diversification in hopes that price fluctuations will eventually work out in the funds' favor. Only the least risk-averse funds will even entertain large-scale investments in the short term.

A framework for Europe

Reading what French politicians have to say about the new framework makes it clear they are excited by what regulators have accomplished. Some of those regulators have gone so far as to say they want to present their framework to the EU as a model for a unified cryptocurrency policy across the bloc.

French regulators clearly believe that they have come up with a framework model suitable for most of Europe. Whether or not that is true remains to be seen. Much of the success of the framework will rest on the number of crypto enterprises agreeing to be regulated and applying for certification.

Assuming a good response, French regulators will be in a position to shape the future of crypto assets in that country. Should the initial interest be followed by general malaise, regulators could discover they put all that effort into a framework that is going nowhere.

The most interesting thing will be to see how the post-regulation market does in France as compared to the U.S. Across the pond, U.S. regulators seem to go out of their way to discourage crypto related businesses in any way they can. Bank accounts are a good example.

U.S. banks are not prohibited by law from doing business with cryptocurrency enterprises. However, regulators have gone out of their way to warn banks of reputational risks. As such, they have essentially scared banks away from crypto for the most part. Would things be different for crypto enterprises there if they also had the legal right to a bank account?

The role of regulation in crypto

France's new cryptocurrency framework will definitely influence crypto enterprises in that country one way or another. Regardless of how it all turns out, we inevitably will be talking about the role of regulation in crypto once we see the outcome. Some will undoubtedly view the regulation as a good thing and want more of it. Others will view it as a bad thing. They will advocate for no further regulation.

The reality is that defining the role of regulation in cryptocurrency is a very difficult thing to do. We would like to think that regulations are completely unnecessary thanks to the decentralized nature of crypto in general. Yet we also know that there are always people willing to do whatever they can to take advantage of others.

There has to be some point in the middle where crypto enterprises are free to innovate as they please while the entire market is protected against people willing to harm others for their own advantage. France believes they have found the sweet spot with their new framework. Time will tell if they have.