REGULATION

Swiss regulatory framework imposes the biggest threat to stablecoins such as USDT: issuers must be licensed, even interest must be compensated

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Swiss regulatory framework imposes the biggest threat to stablecoins such as USDT: issuers must be licensed, even interest must be compensated

On July 26, 2024, the Swiss Financial Market Supervisory Authority FINMA issued guidelines clarifying the regulatory environment for stablecoins. With the increasing number of stablecoin projects in Switzerland, FINMA is further restricting the activities of these operators in the country.

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Swiss Regulation: Stablecoins May Be Considered Deposits or Collective Investment Schemes

FINMA states that stablecoins are designed to provide low price volatility, typically backed by assets such as fiat currencies.

Stablecoin holders usually have payment claims against the issuer, which may be classified as "deposits" or "collective investment schemes" under banking law. The classification depends on whether the assets are managed for the benefit of stablecoin holders, indicating a collective investment scheme, or for the benefit of the issuer, indicating a bank deposit. Due to the use of its payment mechanism, stablecoins often fall within the regulatory scope of AMLA anti-money laundering regulations.

Stablecoins Pose Money Laundering Risks, Issuers Obligated to KYC Holders

The Financial Action Task Force (FATF) has pointed out that stablecoins, like other cryptocurrencies, pose significant money laundering and terrorist financing risks. These risks include anonymous transfers, global coverage, and their use in the layering stage of money laundering. The stability and value storage function of stablecoins increase their attractiveness for illegal activities, including circumventing sanctions.

Stablecoin issuers are considered financial intermediaries under AMLA and must verify the identities of holders and beneficial owners. In case of doubt, re-verification is necessary. FINMA emphasizes the reputation risks of stablecoin-related money laundering and terrorist financing to the Swiss financial center.

Stablecoin Issuers Require Licensing or Guarantees from Banks

Internationally, it is expected that stablecoin issuers must be subject to national supervision, in line with the Financial Stability Board's (FSB) recommendations. In Switzerland, accepting public deposits typically requires a banking license, unless exceptions apply. Specifically, if stablecoins with default guarantee support provided by a bank meet certain conditions, a banking license is not required.

Requirements for Default Guarantee

FINMA has set minimum requirements for default guarantees related to stablecoins:

  1. Individual Claim Rights: Each customer must have individual claim rights against the Swiss bank providing the guarantee in case of issuer bankruptcy.
  2. Comprehensive Coverage: The guarantee must cover all public deposits, including interest.
  3. Maintaining Limits: The total deposit amount must not exceed the limit of the guarantee.
  4. Convenient Claims: Customers must be able to easily and quickly claim the guarantee.
  5. Legal Defenses: Banks are allowed to raise legal defenses.

These requirements strengthen depositor protection but are not equivalent to protection under banking law. Stablecoin holders are not covered by deposit protection regulations under banking law.

Reputational Risks for Banks

Banks providing default guarantees face reputational and legal risks, especially when stablecoin issuers fail to fulfill AMLA obligations. Non-compliant behavior at the issuer level can damage the bank's reputation through contractual relationships. Dishonest stablecoin holders may exploit default guarantees, increasing the bank's regulatory costs and legal risks.

Federal Council Report: Recognizing Action Needs

The Federal Council report on amending banking law emphasizes the need to reassess default guarantees and other exceptional circumstances to ensure adequate protection. FINMA aims to address these risks in future regulatory discussions to ensure proper management of default guarantees within the regulatory framework.

Survival Challenges for Stablecoin Issuers in the EU Market

The EU and countries like the UK currently share a regulatory consensus on stablecoins, which may not bode well for stablecoin issuers. They must possess local compliance licenses and require fiat reserves to be held locally. For Tether, which leans towards being "offshore" in terms of fund reserves and actively complies with anti-crime requirements, meeting the legal requirements of these jurisdictions may prove challenging.

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