The new legal framework for local currencies in France

[This a translation of my contribution (in French) to the Report of the French MP’s mission on local currencies, to be published in October]

            Last August, the French legislator passed a new in tilted “loi sur l’économie sociale et solidaire” (ESS) (law on the social and solidary based economy)[1] which introduced the concept of local currencies in the French legislation.     

            You can read the first general remarks we wrote on the subject in June while the Law was still a project. 

            The law now definitely inserts in the French monetary and financial code (CMF) two new articles (articles L.311-5 and L.311-6) in a section entitled “bills of local and complementary currencies” (“titres de monnaies locales complémentaires”).

            The first article (L.311-5) states that Social and Solidarity based economy undertakings (label acronym in French - EESS) are allowed to issue and to manage local currencies when it is it’s only corporate purpose. The regime relating to these currencies will be called 311-5 currencies.

            The second article (L311-6) then states that “when” a local currency “pertains to” banking payment services, payment services, electronic money then it must be issued and managed by a bank, a payment provider or an emoney issuer. The regime relating to these currencies will be called 311-6 currencies.

I.                   Local currencies are legal currency

By referring to local currencies as “bills of local and complementary currencies”, the French legislator has clearly intended these new legal instruments to be “legal means of payment”. The law does not state it be it is understood that local currencies are issued at par with national currency. If these currencies were floating against national currency they would find themselves much nearer the heterogeneous category of “virtual currencies”.

The main consequence is that when handing in these local currencies, they shall be accounted for as money and not goods. The law is expected to make acceptation easy for everyone including local authorities. However, as most means of payment except legal tender cash, the acceptation cannot be forced upon the creditor.

Local currencies are legal instruments of debt. – To promote this acceptation, the legislator combines the idea of money (or currency) that reflects its ability of local currencies to circulate without any legal constraints. The statement is important since the local currencies are also referred to as “titres”. A “titre” is legal instrument that is supposed to carry (or incorporate) the debt of the issuer (i.e. like a bill or a security). 

II.               Local currencies in between regimes

Local currencies can appear in reality in very different forms: a one size fits all regulation would have seem difficult to implement. The present legislation divides local currencies into two main categories to which apply two different legal regimes.

1.     A new sub-banking law legal framework

Legal category. – In order to understand the first legal category of local currencies (the one designated by article L.311-5), reference should be made to the October 2103 issue of the French Banking Authority’s journal (La revue de l’ACPR[2]). The presentation made by the regulator is inspired by a Cour de cassation (French civil supreme court) decision of 2001 on the legal definition of paper gift coupons. The Court said that when the coupons were not redeemable or fungible instruments they did not qualify as means of payment in law. In other words once issued, the local currencies of article L.311-5 should not be reimbursable to the barer (nor can change be given) even if they could be made payable to a limited number of enlisted merchants.

Article L.311-5 regime. – Local currencies that enter this category can be issued without prior notification or registration. That is the straight forward wording of article L.311-5. The law grants an issuer the right to issue a local currency as long as three conditions are met: the issuer has to be an undertaking of the social and solidary economy (the ESS law explains which and how undertakings can get the certification: it combines different criteria that greatly limit profit pursing activities…), such issuance and management of a local currency must be its only corporate purpose and finally, the local currency issued must not be redeemable.

The issuer of such local currency falls out of the scope of banking regulation on both grounds of prudential supervision and of payment services framework. Rather, les “titres” (the bills) are subjected to French civil law of things and obligations.

Special regimes due to currency forms. – As favorable to local currencies as these provisions seem, they actually work mainly with physical local currencies (on paper or plastic). Indeed only physical local currencies can be issued on the receipt of funds in national currency. Therefore, such form of currency has an immediate advantage on other forms of money.

 On the opposite, scriptural local currencies – those detained in a scriptural (written) form on an account – can be issued as long as they are not issued on the receipt of national currencies (usually they are also redeemable). Currencies of Local exchange and trading systems (LETS) are the best example of an implementation of the tolerance for non-convertible payment instruments.

The logic applies also to electronic local currencies: if the currency is issued on receipt of funds there is a strong probability that it will be considered as Electronic money in the legal sense[3]. Yet, it could be possible to issue an electronic local currency under the L.311-5 provisions if the funds are paid out not at issuance but at the moment they are redeemed.

The logic here is common to scriptural money and electronic money: as soon as an undertaking issues a payment means (or in this case local currencies) on receipt of funds, in French law, it is subject to banking regulations.

2.     Local currencies as banking currencies

Category: commercial means of payment. – As soon as local currencies are either redeemable for any bearer (physical local currencies) or issued on receipt of funds (scriptural or electronic local currencies), they pertain to regulation on means of payment. That is the point made by article L.311-6.

Payment services legislation: When payment instruments are no longer physical and cannot be “handed over”, their circulation among people relies on a framework of rules (event crypto-currencies like bitcoin need rules). The rules have become legislation across the EU as “rights and obligations in relation to the provision and use of payment services”. Conforming to these rules calls for a strong infrastructure as well as technical and legal resources that can cost too much for a local currency economic model.

However, besides the full legislation applicable to payment services in the EU, a lower level set of payment rights and obligations for “low-value payment instruments and electronic money” (Payment service directive, art.34). To be eligible for the “low-value payment instruments” provisions, instruments must be capped to 30 EUR operations, a spending limit of 150 EUR or a maximum storage capacity of 150 EUR.

Article L.311-6 and L.311-5 Issuers. – Not only do means of payment have to conform to payments laws but the issuer of such instruments has to have a banking license. Such licenses are quite disproportionate for must local currencies schemes. Some schemes will prefer to subcontract their issuing activities to banks (preferably cooperative ones). However, license exemptions are possible for banking payment services (mainly physical means of payment), payment services (means of payment for scriptural money) and electronic money issuing.

The three French license exemptions are based on the same criterion which is formulated in the Payment services and electronic money directives: the clause states that the European legislation shall not apply to the services issued “under a commercial agreement with the issuer either within a limited network of service providers”.

This criterion was conceived for business models with a little number of shops and a high volume of cash. On the opposite, local currency schemes operate with small cash volumes but a high number of little businesses.  It is still not quite clear how it should apply to local currency schemes. Up to now, it seems that the French regulator has applied the rule in a quite literal way. Indeed, the objective of the European legislator was to distinguish general payment instruments from payment instrument with a specific scope. The legal framework was to apply completely to the first category of payment instruments but instruments from the second were to be exempted. The first were also to be completely assimilated to banking currencies and means of payment regulations, the second were to be left out. This legislative model was implemented through “the limited network” held by a commercial agreement criterion. What is needed here, if to keep the philosophy of how categories are divided and yet, understand how local currencies can fit in. We are back to the basic criteria.

The French legal innovation has come up with different elements to designate the particular monetary activity of local currency issuing. The law was drafted in a way that promotes the use of local currencies but yet meets the difficulties of a complex legal framework. As a consequence, the new legislation treats differently physical, scriptural and electronic local currencies. Yet, article L.311-5 of the Monetary and financial code introduces a proper infra-banking legislation of local currencies with three types of criteria: nature of the issuer, activity of the issuer, and nature of the instrument. 

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[1] Loi n°2014-856 sur l’économie sociale et solidaire, 31 août 2014, JORF n° 0176 du 1 août 2014.

[2] « Les monnaies locales », Revue de l’ACPR, n°14, septembre - octobre 2013, p.14-15.

[3] Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC, Official Journal L 267 , 10/10/2009 P. 0007 - 0017