On Friday Swiss financial regulator FINMA published guidance on Swiss stablecoins, highlighting the risks of stablecoins where the issuer has a bank guarantee. FINMA wants that reviewed when the Federal Council amends the Banking Act. Additionally, the report highlights that most Swiss stablecoins require the issuer to identify all stablecoin holders.
According to the latest report and a previous one from 2019, there are three main types of fiat currency stablecoins. In rare instances, they might be classified as a collective investment scheme, where the issuer manages the assets on behalf of the stablecoin holder. However, in most cases, the assets are held for the issuer’s account, thus categorizing them as a deposit under banking law.
The banking class of stablecoin can be issued by either a bank or a non bank. A non bank issuer must secure a bank guarantee to cover them in case of default, which must cover the total deposits and any customer earned interest. The stablecoin issuance can never exceed the guarantee limit.
FINMA notes that this provides some protection for stablecoin holders, but it isn’t the same level as under banking law. For example, there’s no government deposit protection. If there’s more than one bank guarantee, it becomes messier and potentially riskier.
AML – all holders are meant to be identified
In many other jurisdictions, most stablecoins are considered bearer instruments. However, in order to comply with anti money laundering (AML), jurisdictions such as Europe require transaction monitoring by crypto asset service providers (CASPs) such as exchanges. However, person-to-person transactions between self hosted wallets are not included. Hence, in the EU not every holder is identified.
This is not the case in Switzerland, where there’s a prohibition on ‘bearer savings books’, so the issuer has to know the identity of every stablecoin holder. In a separate report earlier this year by the Federal Office of Police, it states,
“all persons holding stablecoins must be sufficiently identified by the issuing institution or by appropriately supervised distribution partners in order to comply with the due diligence obligations provided for under the Anti-Money Laundering Act for all stablecoin transactions. This is a technology neutral application of the ban on bearer savings accounts.”
Hence, a breach of these AML obligations by the stablecoin issuer can affect the guarantor bank. FINMA noted both reputational risks and a bank’s potential exposure to legal risk, presumably that includes fines.
For these reasons, FINMA wants to ensure that the Federal Council addresses the risks related to stablecoin guarantees. A solution wasn’t clear from the report, other than potentially dropping the guarantee type of stablecoin.
