Swiss FINMA communicates its stablecoin practice

On 26 July 2024, the Swiss Financial Market Supervisory Authority (FINMA) published a new Guidance 06/2024 on stablecoins, which covers the development of its practice and focuses on the classification of stablecoins, anti-money laundering regulations and banking guarantees issuance/requirements. This Guidance complements the supplement to the guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs) published on 11 September 2019 (2019 Guidelines).

Stablecoins classification

According to the FINMA, stablecoins pursue the objective of providing a means of payment aimed at reducing price volatility on a given blockchain. This model generally implies that the holders of the coins have a payment claim against the issuer at any time.

Therefore, stablecoins are typically qualified as banking deposits or collective investment schemes (CIS). The distinction between both qualifications depends on the risk-takers.

When the account of the underlying assets is managed and at the risk of the holders, the structure tends to be classified as a CIS and is subject to Swiss fund regulations.

If the account of the underlying assets is managed and at the risk of the issuer, the stablecoins tend to be indicative of a banking-deposit scheme and are subject to Swiss banking regulations.

This classification and distinction are not new and were described by the FINMA in its the 2019 Guidelines. The Guidance, however, confirms the continuity of the practice of the FINMA.

Anti-money laundering (AML)

Given that stablecoins are typically considered payment tokens, Swiss anti-money laundering rules generally apply. In such a set-up, the issuer of the stablecoin is qualified as a financial intermediary under Swiss AML rules. As a result, it must become affiliated with a self-regulatory organisation (SRO), if not yet prudentially regulated, and apply inter alia the Swiss AML KYC process (i.e. identification of clients and beneficial owners, which can be largely conducted online or via video means in accordance with the FINMA 2016/07 Circular on due diligence requirements for client onboarding via digital channels).

In this context, the FINMA recalls that the identity of all persons holding the stablecoins must be adequately verified by the stablecoin issuer or by appropriately supervised financial intermediaries. (The issuer can delegate the AML KYC process to a financial intermediary subject to Swiss AML requirements). Importantly, according to the FINMA, AML rules clearly prohibit anonymous transfer, and the prohibition of bearer savings books may apply by analogy to transactions with stablecoins in a technology-neutral way.

Banking guarantees issuance/requirements

If a stablecoin falls within the definition of a banking deposit pursuant to the FINMA stablecoin qualification (see above), the acceptance of such a deposit from the public on a professional basis by a stablecoin issuer requires a banking licence, unless an exemption applies as per the Swiss banking regulations. Among other exemptions, funds where the repayment and interests to be paid are guaranteed by a bank (i.e. "default guarantee") are not considered to be deposits from the public. Such guaranteed deposits fall out of scope of banking regulation. It is important to stress that stablecoin holders who are the beneficiaries of such default guarantees are not covered by deposit protection schemes under Swiss banking law.

The Guidance contains an overview of FINMA's expectations vis-à-vis the content and conditions applicable to the default guarantee on stablecoins to be issued by the bank, which can be triggered in case the stablecoin issuer falls into bankruptcy. In a nutshell, the following outlines the content and conditions of the default guarantee:

• Clients' claims: each client must have their own claim against the Swiss bank issuing the default guarantee, and be made aware or be informed of this guarantee (i.e. existence and content);
• Guarantee coverage: the default guarantee must at least cover the total of all public deposits including any interest that must be paid to clients;
• Guarantee call: the content of the guarantee (i.e. formal and material provisions) must not prevent clients from making a rapid and simple call to the guarantee of the bank;
• Defenses and objections: these, issued by the issuing bank to the extent provided for by law, are possible;
• Availability of the guarantee for clients: FINMA expects that the guaranteed claim in question must be due at the time of insolvency (i.e. at the latest when the bankruptcy proceedings is opened against the stablecoin issuer).
• Issuance of several guarantees: multiple default guarantees are permitted, but FINMA points out the need for coordination and the resulting operational risks.

The FINMA communication on these conditions do not constitute a revolution, but these regulations will be welcomed by market participants and stablecoin issuers/promoters since they promote transparent and clear practices by the Swiss supervisory authority.

Outlook

In a report on the Swiss Banking Act issued in December 2022, the Swiss Federal Council concluded that the current exception for default guarantees (possibly in combination with other exceptions) is often used to structure business models outside the scope of a banking licence. As a result, the available exemptions (set out in the banking ordinance) should be reviewed to assess whether they are appropriate in view of ensuring an adequate protection of depositors. Depending on the technical and political discussions, one may expect some impact on stablecoin issuance relying on the default guarantee exemption.

For more information on financial regulations and the regulatory compliance framework in Switzerland, contact your CMS client partner or local CMS expert.