On 11 September 2019, the Swiss Financial Market Supervisory Authority (FINMA) published a supplement to its ICO guidelines outlining how it treats so-called ‘stable coins’ under Swiss supervisory law. The trigger for such supplement was, as FINMA confirmed, the request from the Geneva-based Libra Association for an assessment of its Libra project under Swiss supervisory law. Following such request, FINMA gives with its Stable Coin Guidelines an initial indication of how FINMA would apply the relevant Swiss regulation. Among projects based on blockchain technology. The aim of the recent stable coin projects is, as FINMA further confirmed, mostly to minimise the fluctuations in value typical of payment tokens (such as Bitcoin) by backing the tokens with assets such as fiat currencies, commodities, real estate or securities. This also is amazing news since Germany and France do not support stable coins.
- Classification of ‘stable coins’ under Swiss law
Swiss financial markets regulation is principle-based and technology-neutral. Therefore FINMA’s treatment of stable coins under supervisory law follows the existing approach taken to blockchain-based tokens, (i) the purpose of a token as well as (ii) the focus is on the economic function and (principle of ‘substance over form’). In ruling on concrete projects, FINMA will follow the proven principle of ‘same risks, same rules’ as well as the specific features of each case, whereas the requirements under supervisory law may differ depending on which assets (e.g. currencies, commodities, real estate or securities) the stable coin is backed by and the legal rights of its holders. AML, securities trading, banking, fund management and financial infrastructure regulation can all be of relevance.
- FINMA confirms receipt of an enquiry from Libra Association
FINMA confirmed that the Libra Association asked FINMA for an assessment of how FINMA would classify the planned Libra project including the issuance of a stable coin under Swiss supervisory law. In Switzerland, such requests for a legal assessment or ruling are standard practice and one of FINMA’s roles is to inform potential market participants about how it applies Swiss supervisory law. Therefore, FINMA provided, for the first time, an indicative classification of the Libra project under Swiss supervisory law on the basis of the information available so far. The classification may change as the project progresses, as FINMA clearly pointed out:
- In Switzerland, a project such as Libra would fall under financial market infrastructure regulation. The project as it is presently envisaged would require a payment system licence from FINMA, on the basis of the Financial Market Infrastructure Act (FMIA).
- Regulatory requirements for payment systems in Switzerland are based on the prevailing international standards, particularly the Principles for Financial Market Infrastructures (PFMI). These requirements also apply to the management of cyber risks.
- A Swiss payment system is automatically subject to the Anti-Money Laundering Act. The highest international anti-money laundering standards would need to be ensured throughout the entire ecosystem of the project. Such an ecosystem must be immune to elevated money laundering risks.
- Under the FMIA, all additional services that increase the risks of a payment system must be subject to corresponding additional requirements. This means that all the potential risks of a Swiss payment system, including bank-like risks, can be addressed by imposing appropriate requirements in line with the maxim ‘same risks, same rules’. Due to the issuance of Libra payment tokens, the services planned by the Libra project would clearly go beyond those of a pure payment system and therefore be subject to such additional requirements.
- These additional requirements would relate in particular to capital allocation (for credit, market and operational risks), risk concentration and liquidity as well as the management of the Libra reserve.
- The additional requirements would be based on recognised standards for similar activities in the financial markets and would need to reflect the dimension of the project. For bank-like risks, for example, bank-like regulatory requirements would apply. A Swiss payment system licence would thereby permit a combination of the strengths of banking and infrastructure regulation.
- A necessary condition for being granted a licence as a payment system would be that the returns and risks associated with the management of the reserve were borne entirely by the Libra Association and not – as in the case of a fund provider – by the stable coin holders.
- Internationally coordinated approach
The planned international scope of the project requires an internationally coordinated approach. In particular, the definition of requirements for managing the reserve, and the governance around it, as well as for combating money laundering should be developed in international coordination.
The Stable Coin Guidelines can be found under https://www.finma.ch/en/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-stable-coins.pdf?la=en&hash=70408DDE78369718148808FD4784E742373A0140.
Diego Benz, [email protected]