Switzerland’s Financial Market Supervisory Authority (FINMA) made a September 11 announcement that may prove to be a milestone for Facebook’s Libra cryptocurrency: regulatory guidance for stablecoin projects.
FINMA’s press release confirmed that the agency, which is responsible for a wide range of financial sectors, had received an inquiry from the Libra Association asking for an assessment of how it would classify the Libra project. The agency has issued guidance on how Swiss laws on banking, securities, anti-money laundering, and other fields will apply to stablecoins such as Libra.
It may be the first specific regulatory guidance on stablecoins by any regulatory agency worldwide, and it has moved Switzerland ahead of the United States, whose multiple financial regulatory agencies have not yet issued any official policies or regulatory guidance on Libra and other stablecoins.
Stablecoins and Swiss Laws and Regulations
FINMA published its guidance as a “Supplement to the guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs)”—a title reflecting the reactive nature of cryptocurrency regulation, which first arose under Swiss law as ICO guidelines issued after the ICO boom of 2017.
FINMA addressed stablecoins (“stable coins” in its terminology) generally, not providing a specific definition of them or specific criteria for considering a cryptocurrency to be a stablecoin. Observing that “’stable’ is primarily a marketing term” and that “no fully generic classification is possible,” FINMA provided the general guidelines that the “value of ‘stable coins’ is frequently linked to an underlying asset (e.g. such as a fiat currency)” and that the “usual objective of such projects is to minimise the price volatility typical of currently available payment tokens.”
The general principle of FINMA’s treatment of stablecoins is that “the focus is on the economic function and purpose of a token (‘substance over form’) and follows the tried and tested principle of ‘same risks, same rules’, while taking into account the specific features of each project.” Depending on the features of a project, various Swiss laws and regulations could be applicable:
Banking Act (BA). Banking laws apply when a token is fixed to a specific fiat currency and the issuer bears the risk of changes in the value of the underlying assets.
Collective Investment Schemes Act (CISA). CISA can be applicable when token holders bear the risk of changes in the value of the underlying assets.
Anti-Money Laundering Act (AMLA). The AMLA will be “almost always applicable” to stablecoin projects.
Financial Market Infrastructure Act (FMIA). “If a payment system of significant importance is launched in connection with the creation of a ‘stable coin’, a licensing requirement under the [FMIA] as a payment system is probable.”
Fundamental Requirements for Libra
The press release indicated that FINMA considers a license under the FMIA and compliance with anti-money laundering requirements under the AMLA to be fundamental requirements for Libra.
License under the FMIA. The Libra project would require a payment system license from FINMA on the basis of the FMIA. Moreover, this license would be subject to additional requirements related in particular to capital allocation, risk concentration and liquidity as well as management of the Libra Reserve since the Libra project offers services beyond those of a pure payment system that increase its risks. Regarding the Libra Reserve, a necessary condition for granting the payment system license would be that the returns and risks associated with management of the Libra Reserve will be borne entirely by the Libra Association and not by Libra holders.
Anti-Money Laundering requirements under the AMLA. “A Swiss payment system is automatically subject to the AMLA. The highest international anti-money laundering standard would need to be ensured throughout the entire ecosystem of the project. Such an ecosystem must be immune against elevated money laundering risks.”
Guidance for Various Types of Stablecoins
The Supplement addressed the application of Swiss laws to stablecoins with various types of assets backing them.
Linked to currencies. When a token is linked to a specific fiat currency with a fixed redemption claim (e.g., 1 token = 1 CHF), classification as a deposit under the BA is indicated. When there is a redemption claim dependent on price developments in a basket of currencies, a token can represent a deposit under the BA if the issuer bears the risk of price changes, or a share in a collective investment scheme under the CISA if the token holder bears the risk.
Linked to commodities. When a token is linked to commodities, regulatory treatment will depends on the exact nature of the claim on the assets as well as the type of commodity.
—When a stablecoin merely evidences an ownership right of the token holder, it generally does not qualify as a security.
—When a stablecoin is merely a contractual claim against the issuer on “bank precious metals,” qualification as a deposit under the BA is probable.
—When a stablecoin is a contractual claim to other commodities, the token will generally qualify as a security and possibly as a derivative.
—When a stablecoin is linked to a basket of commodities with a price-dependent redemption claim, it is likely to be a collective investment scheme under the CISA.
Linked to real estate. A token linked to individual properties or a real estate portfolio indicates a collective investment scheme under CISA.
Linked to securities. A token linked to an individual security by way of a contractual right for delivery to the token holder would normally also constitute a security.
Swiss vs. U.S. Approaches to Libra
FINMA’s press release ended its discussion of the Libra project with an acknowledgment that the “planned international scope of the project requires an internationally coordinated approach,” in particular regarding “the definition of requirements for managing the reserve, and the governance around it, as well as for combating money laundering,” which “should be developed in international coordination.”
This statement acknowledges concerns about the Libra project expressed in Washington, and FINMA may have added it at the request of U.S. officials. Treasury Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker met with FINMA in Bern on September 10 on the way to delivering an address at an International Conference on Counterterrorism on September 11. The Under Secretary’s public statement from Bern that the Libra project will have to comply with U.S. anti-money laundering/combating the financing of terrorism (AML/CFT) standards is only the first media-visible part of U.S.-Swiss official interactions regarding the Libra project.
The numerous U.S. administrative agencies responsible for financial regulation should be addressing the Libra project’s relationship to multiple federal and state laws, but it is not yet apparent what most of these agencies are doing and how they are coordinating their work on crucial interagency issues. As a result, Swiss regulators appear to be moving faster than their U.S. counterparts on addressing the non-AML/CFT issues created by Libra.
What the U.S. counterpart to the FINMA guidelines will be, and how much time will pass before it emerges, remain to be seen.