On September 11, 2019, the Swiss Financial Market Supervisory Authority (FINMA) has issued guidance on the regulatory treatment of stable coins.
As a supplement to the previously issued ICO Guidelines, FINMA outlines how it treats stable coins under the Swiss regulatory framework. In this connection, FINMA also gives initial indications on the request for a regulatory assessment filed by the Geneva-based Libra Association, a high-profile cryptocurrency project orchestrated by Facebook Inc.
There is no special regulatory regime for digital assets in Switzerland. FINMA re-iterates that it intends to apply the existing regulation in a technology-neutral manner. As previously communicated in the ICO Guidelines, FINMA looks at the economic function of a token to determine its regulatory implications (substance over form). The ICO Guidelines still apply in unaltered form.
Stable coins can have various characteristics. For instance, they may be backed by a basket of crypto and fiat currencies, commodities such as gold, real estate or other assets such as bonds. Swiss regulatory requirements can significantly differ based on the specific underlying and tokenomics of the stable coin. Applicable laws and regulations may include the Banking Act, the Swiss Financial Market Infrastructure Act, the Anti-Money-Laundering Act, the Stock Exchanges and Securities Trading Act, the Collective Investment Schemes Act and various others.
While it stresses that every case had to be assessed individually, FINMA sets out four categories of stable coins based on their underlying assets:
- Linked to currencies. If a stable coin has a currency as its underlying asset, and a redemption property, it will be classified as a deposit according to the Banking Act or a fund under the Collective Investment Schemes Act, depending on whether the tokenholder or the issuer bears risk. Certain exemptions may apply.
- Linked to commodities. To assess commodity-based stable coins, it is relevant whether the token is merely the substitute of a “deed” showing the direct ownership in a certain commodity. If this is the case, the token is not treated as a security. However, if it is merely a contractual claim for the underlying commodities, the token will typically qualify as a derivative in FINMA’s view. Furthermore, if a basket of commodities underlies the token, then the rules applicable to collective investment schemes come into play.
- Linked to real estate. If a portfolio of real estate is linked to the token, the Collective Investment Schemes Act typically applies.
- Linked to securities. While self-issuances are not generally regulated under the current Swiss law, a token with a security as an underlying asset generally qualifies as a derivative and may trigger licensing requirements. Furthermore, even self-issuances will be regulated under the Financial Services Act, which will enter into force in 2020.
It is noteworthy that FINMA has taken enforcement measures in the past where a stabilisation mechanism was dubious or the position regarding the underlying asset was not actually taken by the issuer, contrary to its promises.
Regarding the query by the Libra Association, FINMA gave a preliminary assessment of their request due to the high public interest in the project. The main points are as follows:
- Libra Association would require a payment system license under the Financial Market Infrastructure Act and the payment system would have to comply with international standards, in particular the Principles for Financial Market Infrastructures (PFMI) issued by the Bank for International Settlements (BIS).
- As a prudentially supervised entity, Libra will have to comply with the Anti-Money-Laundering Act. This implies in particular various “know-your-customer” duties.
- Additional prudential requirements are expected to apply to Libra, as it will provide more than just a pure payment service. These will relate to capital adequacy, liquidity and risk management and organization. FINMA intends to apply a “same risk, same rules” approach. For instance, if it considers that the Libra business model gives rise to typical banking risks, it will apply banking regulations.
- FINMA applies an investor-protection view and insists that risks arising from the management of the intended Libra reserve is entirely borne by the issuer and not the stable coin holders.
While the general risk-oriented approach of FINMA is certainly welcome, it should be noted that FINMA is in any case bound to the statutory provisions. Although it has certain discretion in implementing them, it can neither grant alleviations from these requirements nor impose more strict rules.