Risks Associated with Stablecoin Issuers in Switzerland

Stablecoin issuers operating in Switzerland pose significant risks for the banks they collaborate with, according to the Swiss Financial Markets Authority (FINMA). In a guidance document published recently, FINMA highlighted the potential dangers arising from the relationship between these issuers and banks, particularly regarding the handling of customer deposits and the implications of default guarantees.

Stablecoins are a type of cryptocurrency designed to maintain a stable value by being pegged to traditional assets, such as the U.S. dollar or gold. This characteristic makes them appealing for various financial transactions. However, the operational model of stablecoin issuers often raises regulatory concerns. Many of these issuers accept deposits from the public, which could classify them as banks under Swiss law. Nevertheless, some issuers can circumvent the need for a banking license by establishing agreements with existing registered banks to provide default guarantees. This arrangement allows them to operate without the same level of regulatory scrutiny that licensed banks are subject to.

Concerns Over Default Guarantees

FINMA’s guidance outlines specific concerns regarding these default guarantees. The primary issue is that if a stablecoin issuer encounters financial difficulties or engages in irregular practices, the bank providing the default guarantee may face substantial reputational damage. This is due to their contractual relationship with the issuer, which could lead customers to question the bank’s credibility and reliability. Additionally, there are legal risks involved, as the bank could be held liable for the financial fallout experienced by stablecoin holders.

Regulatory Framework and Requirements

To mitigate these risks, FINMA has established a series of requirements that stablecoin issuers and their partner banks must adhere to. Key aspects of this framework include:

• Customer Claims: Customers must possess a direct claim against the bank that provides the default guarantee. This ensures that stablecoin holders have a clear path to recourse in the event of an issuer’s failure.
• Full Coverage of Deposits: The guarantee must encompass the total amount of customer deposits and any accrued interest. This requirement aims to protect consumers by ensuring they can recover their funds in full.
• Deposit Limits: The bank must monitor the deposits it receives to ensure they do not exceed the coverage provided by the guarantee. This measure is crucial to maintaining the solvency and integrity of the financial arrangement.

Future Considerations and Ongoing Discussions

FINMA’s guidance is a step towards solidifying regulatory oversight in the rapidly evolving world of cryptocurrencies and stablecoins. The authority is committed to addressing the potential risks associated with default guarantees in future discussions with stakeholders in the financial sector. As the market for stablecoins continues to grow, it will be vital for both issuers and banks to navigate these regulations effectively to protect consumers and maintain the stability of the financial system.

In summary, while stablecoins offer innovative financial solutions, the frameworks surrounding their issuance and the partnerships with banks need to be carefully managed. The guidance from FINMA serves as an essential point of reference for both issuers and financial institutions, highlighting the need for clear protocols and safeguards to protect users and uphold the integrity of the banking system.