At the beginning of September, the Swiss Financial Market Supervisory Authority (FINMA) announced a change in practice regarding staking services, indicating that a banking licence would be required to offer such services in the future. After months of criticism from various industry representatives, FINMA has now reached a compromise, according to a new announcement.
The term "staking" refers to the practice of depositing a certain amount of cryptocurrency to support the operation of a blockchain. Participants are usually rewarded with additional income in the same cryptocurrency. Ethereum, the second largest blockchain, rewards stakes with an annual return of around 5%. Swiss crypto banks have long offered this passive income opportunity to their clients. According to FINMA's original change of practice, staking providers would need a banking licence in the future. However, Swiss industry representatives were quick to oppose the new regulations, as reported by CVJ.CH in early September. Now FINMA is relaxing its rules for staking providers.
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Staking now regulated as a deposit
Since its introduction in 2021, the Distributed Ledger Technology (DLT) law, which has been widely celebrated in the blockchain industry, allows custodians to segregate their clients' crypto assets in the event of bankruptcy. In addition to this bankruptcy-related privilege, the law exempts service providers from certain regulatory requirements. Cryptocurrencies held by clients can be treated as 'custodial assets', similar to traditional assets held off balance sheet. As a result, no additional capital is required.
To qualify as a custodial asset, assets must be kept available at all times. A few months ago, FINMA stated that this did not apply to staked cryptocurrencies. However, in its latest supervisory announcement, FINMA revises its opinion, stating that the regulations are not precisely defined in the DLT Act.
"As long as the overarching law or case law does not further specify the point of segregation, in the event of the bankruptcy of a FINMA-supervised entity, staked crypto-based assets must, according to FINMA's current assessment, be segregated from the bankruptcy estate in favour of the custody clients, and no capital backing is required by the supervised institution in this respect if risk-reducing measures are implemented and the client has been adequately informed about the risks." - FINMA supervisory announcement on staking services
A breather for the Swiss blockchain industry
The criticism from industry representatives seems to have had an effect. In a joint statement in September, the Swiss Blockchain Federation (SBF) and the Crypto Valley Association (CVA) highlighted the negative consequences of the banking licence requirement for staking service providers coming into force. According to the associations, the original change in practice would have jeopardised the legal certainty achieved through the unanimously adopted DLT legislation. In addition, such a change would have led to an exodus of this business abroad.
On the one hand, non-banks would not have been allowed to further offer this service. On the other hand, even if banks had the necessary licence, they would have been subject to prohibitive capital requirements in the crypto business, making them uncompetitive. Swiss clients would have been at a disadvantage, as deposit insurance would not have applied to staked assets. FINMA's announcement on the new staking regulation was therefore welcomed by industry representatives.
"After months of hard work and discussions, a compromise is now on the table that guarantees legal certainty for the players and Switzerland as a blockchain location. FINMA's requirements for the recognition of staked assets as custody assets are reasonable and correspond to the status quo for professional service providers. The special issues in connection with custody chains are justified. Finally, it is positive that regulated service providers (SROs) can continue to operate. We would like to thank everyone who worked to achieve this positive result." - Heinz Tännler, President of the Swiss Blockchain Federation