In a recently published guidance on stablecoins, the Swiss Financial Market Supervisory Authority (FINMA) presents strict regulations in Switzerland. Among other things, issuers require a banking license and must identify all users through KYC procedures.
According to the FINMA notice, stablecoin issuance projects have gained momentum in Switzerland in recent years. These efforts aim to provide a low-volatility payment medium on a blockchain. A common practice is pegging to the US dollar, although Swiss companies such as Swiss Stablecoin AG (SSC) or the Swiss Narrow Bank Project (SNAB) peg to the Swiss franc. The supervisory communication provides information on financial market law aspects related to stablecoin projects and their impact on supervised institutions.
Not a new topic
In the guidelines for initial coin offerings (ICOs) of September 2019, FINMA already addressed the legal obligations of stablecoin issuers. Since then, the market has grown in importance. The legal implications however are not new. Typically, a stablecoin's peg is secured by a redemption claim on the underlying assets. This allows market participants to restore the peg through arbitrage in the event of price deviations.
According to FINMA, such projects are therefore generally classified as either a bank deposit or a collective investment scheme. The distinction between a bank deposit and a collective investment essentially depends on whether the management of the tied assets is for the account and at the risk of the stablecoin holders (indicating a collective investment) or for the account and at the risk of the issuer (indicating a bank deposit). Due to the typical purpose of stablecoins as a means of payment, they almost always fall under the Anti-Money Laundering Act.
High hurdles for stablecoin issuers
FINMA notes that several stablecoin issuers in Switzerland are using default guarantees from banks, often bypassing the need for a banking license. This creates risks for both stablecoin holders and the underwriting banks. FINMA therefore proposes that stablecoin issuers should be required to hold a banking license under existing Swiss law. The minimum requirements for depositor protection also apply to stablecoin issuers.
In addition, strict anti-money laundering requirements apply. The regular classification of the issuer's obligation to the stablecoin holder as a bank deposit results in a permanent business relationship under money laundering legislation. The issuer is thus considered a financial intermediary and must identify the stablecoin holder as a counterparty and identify the beneficial owner. In practice, this means a KYC procedure for all stablecoin holders, making the use of stablecoins almost obsolete and limiting their use to a bank's internal infrastructure.
FINMA adheres to existing Swiss law
Some observers have harshly criticized FINMA for the new requirements for stablecoin issuers, suggesting that it aims to stifle the Swiss stablecoin industry. However, the FINMA is merely applying existing law, as attorney Martin Hess explained in the August 2023 issue of the legal journal AJP/PJA. Swiss law is simply not designed for innovative payment services.
In order to provide a secure basis for stablecoins, Switzerland must change its legislation, scrap the poorly conceived fintech license, which is still based on the obligation to repay, and define a new payment service provider license in the Financial Institutions Act. The European Union has already done this. Instead of criticizing FINMA, the crypto industry should put pressure on the federal administration to speed up the work on replacing the fintech license.
