On July 26, 2024, FINMA published Guidance 06/2024 «Stablecoins: risks and challenges for issuers of stablecoins and banks providing guarantees» (Guidance 06/2024). Whilst the «Guidances» (Aufsichtsmitteilungen) published by FINMA are not of a normative nature and therefore may not stipulate additional requirements on financial institutions going beyond the existing legislation, FINMA utilizes Guidances to publish its supervisory practice and interpretation of the Swiss financial market laws.

What the New Guidance 06/2024 Says

Guidance 06/2024 sets out FINMA’s expectation that the identity of all persons holding stablecoins be adequately verified by the issuing institution or by appropriately supervised financial intermediaries.

This expectation is based on the notion that the stabilization mechanism used by stablecoin issuers «generally» involves a stablecoin holder having a payment claim against the issuer at any time, which may be considered a deposit if the underlying assets are managed for the account and risk of the issuer (as previously communicated by FINMA in its 2019 supplement to its ICO guidelines). It remains to be seen whether it will be applied equally to stablecoin arrangements not relying on a claim against the issuer as a stabilization mechanism or other similar arrangements involving counterparty risk.

In the new Guidance 06/2024, FINMA not only reminds financial intermediaries of the KYC/CDD requirements set out under the Anti-Money Laundering Act (identification of the customer; determination of the identity of the beneficial owner; repetition of the procedure in the event of subsequent doubts).

Guidance 06/2024 also refers to FINMA’s practice already published in its 2021 Annual Report (p. 19), according to which «contractual and, where appropriate, technological transfer restrictions are required for the issue of stable coins by supervised institutions. All persons disposing of stable coins must be sufficiently identified by the issuing institution or by adequately supervised distribution partners in order to comply with the due diligence obligations under the Anti-Money Laundering Act for all transactions with stable coins.» It further cites a 2024 report by the CGMF (interdepartmental coordinating group on combating money laundering and the financing of terrorism), which characterizes this (at p. 28) as a technology-neutral application of the ban on bearer savings accounts contained in the Swiss Bankers Association’s Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence (CDB 20), which applies primarily to banks licensed in Switzerland.

The new Guidance 06/2024 links this prohibition of anonymous transfers, which was previously primarily expressed in relation to banks, to the general obligations of all financial intermediaries under the Anti-Money Laundering Act.

In the 2019 supplement to its ICO guidelines, FINMA had already stated that the Anti-Money Laundering Act is «almost always applicable» to stablecoins, albeit based on their use as a means of payment and thus not necessarily imposing any obligations on the issuer in the context of transactions without its direct involvement.

While apparently going beyond imposing KYC/CDD requirements on stablecoin issuers only at the points of issuance and redemption, we do not believe there should be a general requirement for stablecoin issuers to identify each individual holder beforehand if contractual or technological solutions (e.g. limiting transfers to VASPs complying with anti-money laundering requirements or other forms of whitelisting) ensure compliance with the Anti-Money Laundering Act.

Guidance 06/2024 sets out restrictions on the use of default guarantees issued by regulated banks as a means for stablecoin issuers to avoid being treated as banks themselves.

Under the Banking Ordinance, claims against stablecoin issuers guaranteed by a licensed bank are exempt from the treatment as regulated deposits and therefore do not cause the stablecoin issuer to carry on an activity requiring authorization under the Banking Act. According to FINMA, various stablecoin issuers in Switzerland use such default guarantees in lieu of an authorization under the Banking Act.

Guidance 06/2024 lists a number of requirements that must be met by a default guarantee in order for the exemption from the authorization requirement to apply:

• Each customer must have their own claim against the Swiss bank issuing the default guarantee and been informed of the guarantee.
• The default guarantee must cover public deposits with interest.
• Claims to be covered by the default guarantee must not exceed its upper limit.
• The specifics of the default guarantee must permit rapid guarantee calls by customers.
• Defenses and objections by the issuing bank are permitted to the extent provided by law.
• Customers’ claims under the guarantee must become due at the latest at the time of the stablecoin issuer’s insolvency, i.e. at the latest at the time of the opening of bankruptcy proceedings against the stablecoin issuer, and not only at the time of the issuance of a certificate of loss.
• If there are multiple default guarantees, the increased need for coordination and the resulting operational risks must be highlighted and adequately addressed.

Guidance 06/2024 emphasizes that 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 issuer and may also be exposed to legal risks.

In addition, because stablecoin holders must have a direct claim against the bank issuing the default guarantee in the event of the bankruptcy of the stablecoin issuer, there is a risk that dishonest stablecoin holders may assert their claims under the default guarantee against the bank providing the default guarantee. In such cases, the legal and reputational risks would be compounded by high regulatory costs, in particular to comply with its obligations under the Anti-Money Laundering Act.

Assessment

Guidance 06/2024 comes against the backdrop of an international emergence and evolution of not only anti-money laundering but also prudential requirements for stablecoin issuers.

Most recently, on June 30, 2024, under the European Union’s Markets in Crypto-Assets Regulation (MiCAR), the issuance in the European Union of stablecoins referencing a single fiat currency (so-called «e-money tokens») was restricted to credit institutions and e-money institutions, and the issuance of stablecoins referencing multiple fiat currencies or other underlying assets (so-called «asset-referenced tokens») was restricted to credit institutions and firms that obtain specific authorizations.

In Switzerland, a bill amending the fintech license for payment service providers (including those using stablecoin) and providers of crypto assets is currently being drafted within the Federal Department of Finance and expected to be submitted for public consultation in 2025.

It therefore seems to be consistent with these developments that FINMA’s Guidance 06/2024 emphasizes the link of stablecoin arrangements to the prudentially regulated sector by highlighting the prudential considerations to be taken into account by the bank issuing the default guarantee, which currently allows stablecoin issuers to operate only under anti-money laundering regulations, and the commonalities in the respective implementations of an anti-money laundering framework that FINMA expects from regulated banks and from not prudentially regulated stablecoin issuers.

This is underlined by FINMA’s reference to the potential fragility of arrangements involving stablecoin issuers outside the prudential perimeter on the basis of a bank-issued guarantee (e.g. operational aspects relating to the terms of the guarantee, but also the lack of deposit protection for holders of such stablecoins), although some of the constraints on the use of such guarantee arrangements to be exempt from an authorization requirement under the Banking Act, as well as certain residual concerns from a prudential perspective, go beyond their application in the context of stablecoins (as Guidance 06/2024 itself points out, and as is also clear from the discussion in the Federal Council’s 2022 report on amendments to the fintech license regime).

While the requirements set forth in the text of Guidance 06/2024 are important (and potentially quite restrictive, particularly with respect to KYC/CDD requirements), Guidance 06/2024 also signals the need for stablecoin issuers to be prepared to adapt to a rapidly evolving regulatory environment and a broadening scope of prudential regulation.