The Swiss Financial Market Supervisory Authority (FINMA) is an independent regulatory authority with a legal mandate to supervise financial markets. Since 2013, the authority has advocated for technology-neutral crypto regulation. Over the years, however, criticism of FINMA has grown, accusing the authority of resting on its laurels.
At its annual media conference today, FINMA published its annual report for the year 2023. As expected, the authority focuses on the takeover of Credit Suisse by UBS. FINMA devotes about four of 128 pages to crypto assets. The report discusses staking, the new reporting system for crypto assets, a critical examination of decentralized finance (DeFi) and the first application of a DLT trading system.
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Digitization of the financial sector
According to the annual report, FINMA dealt with numerous practical issues related to crypto assets in 2023. It was crucial to ensure compliance with the applicable laws for the protection of financial clients. According to FINMA, interest in crypto assets remains high among both new market participants and established financial institutions. In 2023, the focus was on trading and custody of cryptocurrencies ("payment tokens") as well as staking. The latter refers to the deposit of crypto assets to secure a Proof-of-Stake network, which is typically rewarded with a yield paid out in crypto.
In addition, the first applicant submitted an application for a DLT-based trading system, and FINMA actively participated in the regulatory project for the successor to the fintech license. In 2023, approximately 100 applications for fintech subordination were submitted to the authority, similar to the previous year. Although the content of these projects varies considerably, most of them are related to trends such as DeFi, tokenization of assets or the use of tokenized objects in a metaverse.
Swiss banks start to position themselves
The number of banks and securities firms supervised by FINMA offering crypto services increased from 30 to 34 compared to the previous year. In total, there are 278 such institutions in Switzerland, representing only 12.2% of the financial institutions. In this context, FINMA has addressed various issues, taking into account the risks associated with the dynamic developments in this area. According to the information provided in the context of the crypto reporting introduced in February 2023, Swiss banks held approximately 6 billion Swiss francs in digital assets. The majority of these were client holdings, with only CHF 0.7 billion in proprietary holdings.
Among the four new banks offering crypto services are two cantonal banks, the ones from Zug and St. Gallen. Lucerne Kantonalbank and PostFinance discontinued their services in the year under review of the FINMA report. Most of the institutions surveyed also outsource their crypto services to third parties, with a focus on crypto trading and custody.
Crypto-activities of banks security companies regulated by FINMA-unterstellten / Source: FINMA yearly report 2023
FINMA faces criticism on staking and the travel rule
As the annual report rightly points out, not everything went smoothly in 2023. As the annual report rightly points out, the issue of staking gained importance due to Ethereum's transition to Proof-of-Stake ("Merge"). The report addresses the issue of staking, which has become increasingly important due to Ethereum's transition to Proof-of-Stake. In line with this trend, FINMA published its new staking practice in September 2023. Service providers would require a banking license in the future. The regulator justified this with the DLT law introduced in 2021. Outcry from the industry was significant. The Swiss Blockchain Federation (SBF) and the Crypto Valley Association (CVA) immediately sounded the alarm, saying this was a misinterpretation of the DLT proposal. If a banking license were required, it would have drastic consequences for crypto service providers. However, shortly before years end the regulator changed course.
The revision of the Anti-Money Laundering Act in 2022 was also criticized. Previously, Swiss crypto brokers could transfer cryptocurrencies to their customers' wallets without extensive know-your-customer (KYC) checks. Given that the value per transaction was less than 5,000 Swiss francs. The same threshold applied to foreign exchange transactions. The new threshold for crypto transactions was set at CHF 1,000. In a partial revision in May 2022, FINMA tightened the screws further, reducing it to 1,000 Swiss francs per month. In 2023, Bity, a Swiss crypto service provider from the French-speaking part of Switzerland, filed a complaint against FINMA. They argued that the changes violated the objectives of the Federal Council and were issued in violation of several articles of the Financial Market Supervision Act (FINMASA).
At the request of CVJ.CH, Bity co-founder Alexis Roussel once again called for resistance against FINMA's dangerous change of direction. If the regulator does not change its position quickly, Switzerland will lose its competitive advantage. The Swiss crypto industry would not be able to develop real crypto services within non-custodial business models.
"Since the departure of Mark Branson, FINMA has shown a clear lack of leadership towards the crypto industry. This has led to a series of arbitrary decisions that clearly discriminate against the crypto sector. We need to fight this through intensive lobbying, for example in the decision on staking or in court regarding the application of anti-money laundering (AML) rules to crypto transactions". - Alexis Roussel, co-founder of Bity
