The Swiss Financial Market Supervisory Authority (FINMA) recently presented new guidance for stablecoins. According to a warning letter from the Swiss Blockchain Federation, these rules make it impossible for Swiss issuers to issue competitive stablecoins.
Stablecoins are digital assets with a stable peg to a specific asset. In the crypto industry, stablecoins are primarily pegged to the US dollar. However, some issuers are working on alternatives pegged to the Swiss franc. Under the new regulations, these issuers will be required to obtain a banking licence. In addition, all stablecoin holders must be identified through a Know Your Customer (KYC) process. According to CVJ.CH's coverage of the issue, the latter requirement is an almost impossible hurdle for issuers to overcome. The Swiss Blockchain Federation is now also warning against these stringent regulations.
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Questionable legal basis
According to the Federation, it is common practice for payment instruments to verify the counterparty only at issuance and redemption. Contrary to this practice and international standards, FINMA has now established a "permanent business relationship" between stablecoin holders and issuers based on the existence of a claim. This implies a customer relationship under anti-money laundering (AML) laws. Consequently, all individuals holding stablecoins must be identified by the issuing institution or by appropriately supervised financial intermediaries using a verified copy of their passport or other official document.
The Swiss Blockchain Federation believes that such a requirement cannot be derived from current AML laws. Classifying the temporary holding of a stablecoin as a "permanent business relationship" with the issuer goes far beyond what the relevant regulations intend to cover. FINMA therefore lacks a sufficient legal basis for this practice.
Switzerland no longer competitive
FINMA's interpretation of the AML framework goes well beyond what is required by international standard-setters and other countries. Neither the European Union, Singapore, Hong Kong, Japan nor the United States require the identification of all intermediate holders of a stablecoin or impose restrictions on its transferability. Even the Financial Action Task Force (FATF) - the leading international body on AML rules - does not require this. There are good reasons for this: stablecoins that can only be transferred between clients of a single institution are unsuitable as a means of payment and therefore useless.
If FINMA's practice were to prevail, it would be virtually impossible to issue stablecoins from Switzerland. Under these restrictions, there can be no viable business model. Swiss issuers of stablecoins would be forced to realise their projects abroad. If they implement them in an EU member state, they would be subject to regulations tailored to this use case and could freely offer the stablecoin throughout the European Economic Area. They would also be able to distribute the stablecoin in Switzerland without any restrictions. However, they would not be permitted to maintain a permanent physical presence in the country, in particular to employ staff.
Finally, the Association is astonished that FINMA has waived its statutory right of participation (Art. 7 Para. 4 FINMAG) and has not consulted the parties directly affected. There was no consultation on the regulations.
