Swiss Financial Watchdog Publishes Guidelines for Stablecoins and Highlights Risks

The government of Switzerland, through its financial regulator, has released official guidance on sta 2020 Financial Action Task Force (FATF) conclusion that stablecoins are as likely to be used for terrorist financing and money laundering as other digital assets. This is because, like other assets, stablecoins have a global reach and can be transacted anonymously through self-ablecoin issuance. Published by the Swiss Financial Market Supervisory Authority (FINMA), the document highlights the risks of stablecoin use for illegal activity and problems with default guarantees used by stablecoin issuers.

The Swiss government is issuing the guidance in response to the growing popularity of these assets. Stablecoins are a popular crypto option because their value is pegged to other assets. This means that the price of a stablecoin does not fluctuate like Bitcoin (BTC), Ether (ETH), and several other new crypto launches, which are especially prone to price fluctuations when they first hit the market. Many investors appreciate the volatility of such coins, as they do have the potential to increase their value many times over.

However, stablecoins’ price stability is advantageous to businesses like online casinos that cater to a broad audience across multiple geographical locations, since deposits and winnings can be denominated in stablecoins. These casinos allow users to deposit and win real money while using stablecoins to preserve value.

FINMA’s Stablecoin Risks

FINMA recognizes the need for low price volatility on a blockchain, a major driving force behind stablecoin adoption. However, the agency highlights a few risks.

The guidance references custody wallets. FINMA also believes that the price of stablecoins and their function as a store of value makes them attractive to criminals.

"FINMA draws attention to the increased risks of money laundering, terrorist financing and the circumvention of sanctions. These also result in reputational risks for the Swiss financial centre as a whole."

The Swiss regulator requires stablecoin issuers to comply with its anti-money laundering act. According to FINMA, issuing institutions or appropriately supervised financial intermediaries must collect and verify the identities of stablecoin holders. FINMA also states that technological and contractual restrictions on transactions are necessary to adequately fulfill AML requirements and address risks.

FINMA also delves into default guarantees. This is an agreement where one party, like a Swiss bank, agrees to cover obligations a second party, the stablecoin issuer, fails to meet. According to FINMA, when applied by stablecoin issuers, this arrangement is risky for the bank providing the default guarantee and the stablecoin holder. The agency wrote:

"In the event of irregularities at the stablecoin issuer, the bank providing the default guarantee may suffer reputational damage due to its contractual relationship with the issuers and may also be exposed to legal risks."

To address the risk from default guarantees, FINMA includes a few minimum requirements. First, customers must be aware of the default guarantee and have their own claim against the providing bank for protection in case the issuer fails or faces bankruptcy. Second, the default guarantee must cover all public deposits plus interest earned by customers.

Swiss Crypto Stance

Switzerland is considered a crypto-friendly country with a vibrant community. For instance, a Swiss non-profit think tank, 2B4CH, is lobbying the Swiss National Bank (SNB) to include Bitcoin in its reserves. A report from Swiss newspaper Neue Zürcher Zeitung explains that the SNB creates reserves from its earnings and holds a portion of these reserves in gold. 2B4CH hopes the law will change to read "...gold and Bitcoin." However, the think tank must get 100,000 citizens’ signatures within 18 months before a referendum.

The Swiss National Bank is not generally averse to crypto and is developing a central bank digital currency (CBDC). The country’s apex bank extended its wholesale CBDC pilot program by at least two years instead of ending it in June. Last November, the SNB began the pilot program with stock exchange provider SIX and a few commercial banks led by Commerzbank AG and UBS Group AG. While the program has been successful, SNB Governing Board member Antoine Martin said future success will depend on new participants in the pilot, an increase in the volume of transactions, and whether the platform settles more transactions.

Recently, two Swiss lenders, Sygnum Bank AG and AMINA Bank AG, have launched payment and settlement networks to fill a void previously occupied by Signature Bank’s Signet service and the Silvergate Exchange Network (SEN). Before they collapsed in 2023, both platforms processed thousands of transactions, contributing to crypto market liquidity. In their quarter before collapsing, Signet reportedly handled $275.5 billion worth of transactions, while SEN processed $117 billion. Sygnum and AMINA hope to be the go-to alternatives for Signet and SEN. While in operation, these platforms supported business and institutional clients, improving liquidity usable for real-time settlements and fund transfers in the sector, indirectly supporting varying use cases, including market trading and even non-fungible token (NFT) transactions.

Crypto also enjoys educational support in Switzerland. The University of Applied Sciences in Business Administration Zurich plans to start a pioneering BTC course next March. Reportedly, the program is for people who need to apply Bitcoin to their business models. The 16-day course will give students a solid academic background in Bitcoin and crypto, and teach practical knowledge. It will also include real-world case studies, lectures, workshops, and an understanding of economics and how it may affect cryptocurrencies.

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