FINMA thinks stablecoin issuers are a threat to Swiss banks

The Swiss Financial Market Supervisory Authority (FINMA) sees stablecoin issuers as a problem for the country’s banks. Its 2019 guidelines already highlighted concerns about the legal and regulatory aspects of stablecoins. 

Since then, several projects have launched in Switzerland, making this issue even more pressing. 

Stablecoins holders typically have a payment claim against the issuer, which categorizes these claims as either banking deposits or collective investment schemes. 

The classification depends on whether the underlying assets are managed for the account and risk of the stablecoin holder or the issuer. 

The Anti-Money Laundering Act (AMLA) applies almost always due to stablecoins’ intended purpose as a payment method.

The legal concerns

In 2020, the Financial Action Task Force (FATF) identified that stablecoins share many money laundering and terrorist financing risks with cryptocurrencies. 

These risks include anonymous transfers via self-managed wallets, global reach, and suitability for layering in money laundering. The price stability and value storage functions of stablecoins make them attractive to criminals. 

Ongoing global conflicts have shown stablecoins’ potential for sanction circumvention and terrorism financing. 

On July 9th, FATF published an update on the implementation of standards for virtual assets and service providers.

FINMA states that stablecoin issuers are financial intermediaries under anti-money laundering laws. They must verify the identity of stablecoin holders and establish the beneficial owner’s identity. If doubts arise during the business relationship, verification must be repeated. 

Earlier this year, the interdepartmental coordinating group on combating money laundering and the financing of terrorism (CGMF) also reported increased money laundering and terrorist financing risks through crypto assets. 

The CGMF’s report assumes that the prohibition of bearer savings books applies to stablecoin transactions in a technology-neutral way. This enforces financial intermediaries’ obligations to verify client identities, applying to all under AMLA.

Banking law implications

Internationally, stablecoin issuers are expected to be under appropriate national supervision, following the Financial Stability Board’s (FSB) 2023 recommendations. 

Accepting public deposits professionally usually requires a banking license. Deposits from the public are liabilities owed to customers, as per the Banking Ordinance. 

However, exceptions exist, such as funds with bank guarantees for repayment and interest, which are not considered public deposits. 

In Switzerland, some stablecoin issuers use bank guarantees, allowing them to bypass FINMA’s banking license requirements but still needing affiliation with a self-regulatory organization as financial intermediaries. 

This creates risks for both stablecoin holders and banks providing the guarantees. To protect depositors, FINMA has set minimum requirements for these default guarantees, applied in a technology-neutral manner to stablecoins. 

These include ensuring customers have individual claims against the bank, coverage of all public deposits, uncomplicated access to guarantees, and permissibility of legal defenses by the bank.

Despite these measures, FINMA says the protection offered by these guarantees does not match that of a banking license. Stablecoin holders lack deposit protection under banking law. 

Multiple default guarantees can increase coordination needs and operational risks, potentially leading to unauthorized activity if not adequately managed.