Swiss FINMA Issues New Guidance to Address Risks in Stablecoin Issuance

The Swiss Financial Market Supervisory Authority (FINMA) has issued updated guidance concerning the issuance of stablecoins, highlighting critical areas such as default guarantees, regulatory requirements, and the associated risks of money laundering and terrorist financing. This move underscores FINMA’s ongoing efforts to ensure stability and transparency in the rapidly evolving financial technology sector.

In recent years, stablecoins have gained significant traction within Switzerland’s financial landscape. These digital tokens, typically pegged to stable assets such as national currencies, are designed to offer a low-volatility payment method on blockchain platforms. FINMA’s guidance, building on its initial framework from 2019, aims to provide clarity on the legal and regulatory aspects of stablecoin projects and their implications for regulated institutions.

FINMA’s guidance brings to light several key risks associated with stablecoins, particularly in the realms of money laundering, terrorist financing, and the circumvention of sanctions. The authority notes that stablecoin issuers are considered financial intermediaries under Swiss anti-money laundering (AML) laws. Consequently, they are required to verify the identity of token holders and establish the identity of beneficial owners. This process must be repeated if doubts about the customer’s or beneficial owner’s identity arise during the business relationship.

The Financial Action Task Force (FATF) has identified stablecoins as posing similar money laundering and terrorist financing risks as cryptocurrencies. This includes the potential for anonymous transfers and the ease with which these assets can be used in illicit activities. The inherent stability and value retention of stablecoins make them particularly attractive to criminals, thereby amplifying these risks.

One of the critical issues addressed in FINMA’s guidance is the use of default guarantees by banks to support stablecoin issuers. Under Swiss banking law, deposits from the public generally require a banking license. However, stablecoin issuers can bypass this requirement by securing a default guarantee from a bank. This mechanism, while offering certain protections, also introduces substantial risks.

FINMA outlines minimum requirements for these default guarantees to protect depositors. These include ensuring that each customer has a direct claim against the bank providing the guarantee in case of the issuer’s bankruptcy, covering the total of all public deposits and interest, and guaranteeing that the default guarantee can be accessed quickly and easily. However, these measures do not provide the same level of protection as a full banking license, and stablecoin holders are not covered by Swiss deposit protection schemes.

Moreover, the relationship between banks and stablecoin issuers can expose banks to reputational and legal risks. Any AML breaches by stablecoin issuers can indirectly impact the banks providing guarantees, potentially resulting in significant regulatory and compliance costs.

FINMA’s guidance also references a report from the Federal Council, which highlights the need for more stringent regulatory measures to address gaps in the current framework governing stablecoins. The report suggests that existing exceptions allowing stablecoin issuers to operate without a banking license should be reviewed to ensure they provide adequate protection.

As stablecoin projects continue to proliferate, FINMA’s proactive stance aims to mitigate associated risks and maintain the integrity of Switzerland’s financial system. By establishing clear regulatory expectations and addressing potential vulnerabilities, FINMA seeks to balance innovation with robust oversight, fostering a secure environment for both issuers and users of stablecoins.