FINMA Guidance 06/2024: stablecoins in the spotlight
FINMA Guidance 06/2024: stablecoins in the spotlight
On July 26, 2024, the Swiss Financial Market Supervisory Authority (FINMA) published the guidance 06/2024 on the topic of stablecoins. This guidance supplements the FINMA guidelines for enquiries regarding Initial Coin Offerings (ICOs) from September 2019..
The reason for the need for the guidance was to clarify questions regarding the licensing requirements under the Banking Act (BA) and the Collective Investment Schemes Act (CISA) for projects seeking to issue stablecoins and to explain various risks and requirements for banks providing default guarantees.
The addressees are issuers of stablecoins and banks providing default guarantees.
How are stablecoins legally categorized?
The main aim of projects to issue stablecoins is to limit price volatility through value stability mechanisms, which are, for example, links to one or more underlying assets, such as a fiat currency, from which the stablecoin derives its value.
Due to the characteristics of the stablecoin, the question often arises as to whether it is classified as a deposit under banking law or a collective investment scheme. The decisive factor is whether the linked assets are managed for the account and risk of the stablecoin holder (reference to collective investment) or for the account and at the risk of the issuer (reference to deposit under banking law).
As stablecoins are generally to be regarded as payment tokens, the duty of subordination under the Anti-Money Laundering Act (AMLA) must also be observed.
Which anti-money laundering regulations apply to stablecoins?
The stablecoin issuer is considered as a financial intermediary within the meaning of the AMLA and is therefore obliged to comply with anti-money laundering regulations - such as verify the identity of the stablecoin holder and determine the beneficial owner. If the liability of the stablecoin issuer to the stablecoin holders is qualified as a deposit under banking law, a permanent business relationship within the meaning of the AMLA is assumed. In addition, the prohibition of bearer savings books pursuant to Art. 5 para. 20 Agreement on the Swiss banks code of conduct regarding the exercise of due diligence (CDB 20) applies to transactions with stablecoins.
What requirements apply to banks providing guarantees?
In principle, the acceptance of deposits from the public requires a banking license. According to Art. 5 para. 1 of the Banking Ordinance (BO), liabilities to customers are public deposits. However, stablecoin issuers often make use of the exception under Art. 5 para. 3 let. f BO, according to which funds are not considered deposits if repayment and interest are guaranteed by a bank (default guarantee). This means that they do not require a banking license from FINMA, but only an affiliation to a self-regulatory organization for anti-money laundering purposes. However, this increases the risks for stablecoin holders and for the bank which provides the default guarantee.
For this reason, FINMA has developed the following minimum requirements for the default guarantee, which increases depositor protection:
1. in the event of bankruptcy of the stablecoin issuer, each client must have a separate claim against the guaranteeing Swiss bank. Customers must be informed about the default guarantee;
2. the default guarantee must cover at least the sum of all public deposits, including any interest earned by the customers;
3. in accordance with the scope of cover, it must be ensured that the sum of the deposits covered by the cover requirement never exceeds the upper limit of the default guarantee;
4. the formal and material provisions of the default guarantee should not prevent an uncomplicated, rapid call on the default guarantee by the depositor; and
5. the Bank's defenses and objections are admissible to the extent provided for by law.
However, these minimum requirements are not congruent with the protection afforded by a banking license (especially within the meaning of Art. 37a BA).
Are there any reputational risks for the banks providing guarantee?
Breaches of obligations under the AMLA by the stablecoin issuer can indirectly (due to their contractual relationship) lead to reputational damage and legal risks for the guaranteeing bank. In the event of bankruptcy of the stablecoin issuer, the stablecoin holders have a direct claim under the default guarantee against the guaranteeing bank.
What does the future of stablecoin regulation look like?
The Federal Council has recognized that, among other things, the exemption provision for default guarantees under the BO is used in practice to structure business models outside the licensing parameters and that a review is necessary to determine whether it is still compatible with the protection concept under Art. 1 para. 2 BA.
The addressees are issuers of stablecoins and banks providing default guarantees.
How are stablecoins legally categorized?
The main aim of projects to issue stablecoins is to limit price volatility through value stability mechanisms, which are, for example, links to one or more underlying assets, such as a fiat currency, from which the stablecoin derives its value.
Due to the characteristics of the stablecoin, the question often arises as to whether it is classified as a deposit under banking law or a collective investment scheme. The decisive factor is whether the linked assets are managed for the account and risk of the stablecoin holder (reference to collective investment) or for the account and at the risk of the issuer (reference to deposit under banking law).
As stablecoins are generally to be regarded as payment tokens, the duty of subordination under the Anti-Money Laundering Act (AMLA) must also be observed.
Which anti-money laundering regulations apply to stablecoins?
The stablecoin issuer is considered as a financial intermediary within the meaning of the AMLA and is therefore obliged to comply with anti-money laundering regulations - such as verify the identity of the stablecoin holder and determine the beneficial owner. If the liability of the stablecoin issuer to the stablecoin holders is qualified as a deposit under banking law, a permanent business relationship within the meaning of the AMLA is assumed. In addition, the prohibition of bearer savings books pursuant to Art. 5 para. 20 Agreement on the Swiss banks code of conduct regarding the exercise of due diligence (CDB 20) applies to transactions with stablecoins.
What requirements apply to banks providing guarantees?
In principle, the acceptance of deposits from the public requires a banking license. According to Art. 5 para. 1 of the Banking Ordinance (BO), liabilities to customers are public deposits. However, stablecoin issuers often make use of the exception under Art. 5 para. 3 let. f BO, according to which funds are not considered deposits if repayment and interest are guaranteed by a bank (default guarantee). This means that they do not require a banking license from FINMA, but only an affiliation to a self-regulatory organization for anti-money laundering purposes. However, this increases the risks for stablecoin holders and for the bank which provides the default guarantee.
For this reason, FINMA has developed the following minimum requirements for the default guarantee, which increases depositor protection:
1. in the event of bankruptcy of the stablecoin issuer, each client must have a separate claim against the guaranteeing Swiss bank. Customers must be informed about the default guarantee;
2. the default guarantee must cover at least the sum of all public deposits, including any interest earned by the customers;
3. in accordance with the scope of cover, it must be ensured that the sum of the deposits covered by the cover requirement never exceeds the upper limit of the default guarantee;
4. the formal and material provisions of the default guarantee should not prevent an uncomplicated, rapid call on the default guarantee by the depositor; and
5. the Bank's defenses and objections are admissible to the extent provided for by law.
However, these minimum requirements are not congruent with the protection afforded by a banking license (especially within the meaning of Art. 37a BA).
Are there any reputational risks for the banks providing guarantee?
Breaches of obligations under the AMLA by the stablecoin issuer can indirectly (due to their contractual relationship) lead to reputational damage and legal risks for the guaranteeing bank. In the event of bankruptcy of the stablecoin issuer, the stablecoin holders have a direct claim under the default guarantee against the guaranteeing bank.
What does the future of stablecoin regulation look like?
The Federal Council has recognized that, among other things, the exemption provision for default guarantees under the BO is used in practice to structure business models outside the licensing parameters and that a review is necessary to determine whether it is still compatible with the protection concept under Art. 1 para. 2 BA.