FINMA Issues Guidance on Stablecoin Risks and Default Guarantees

The Swiss Financial Market Supervisory Authority (FINMA) has today (Friday) released new guidance regarding the issuance of stablecoins. This document addresses default guarantees, associated risks, and FINMA's approach to regulating stablecoins. It also highlights increased risks related to money laundering.

Stablecoin Risks Highlighted

In recent years, stablecoin projects have gained significance in Switzerland. These projects aim to offer a low-volatility payment method on blockchain technology. FINMA had previously addressed stablecoin concerns in its supplement to the ICO guidelines issued in September 2019.

“As described in the supplement to the ICO guidelines, projects in connection with stablecoins usually pursue the goal of providing a means of payment with low price volatility on a blockchain,” FINMA stated.

The guidance outlines various aspects of financial market law pertinent to stablecoin projects and their impact on regulated institutions.

Swiss regulator FINMA has published guidance on stablecoin issuers, urging them to verify the identity of all persons holding digital tokens pegged to fiat currencies https://t.co/ET38nA1Eji

Stablecoin Guarantees Raise Concerns

FINMA emphasizes heightened risks in money laundering, terrorist financing, and evasion of sanctions associated with stablecoin projects. These risks also pose reputational challenges for the Swiss financial sector.

“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 authority added.

According to FINMA, the stablecoin issuer is classified as a financial intermediary under anti-money laundering regulations. It must verify the identity of stablecoin holders and establish the identity of the beneficial owner according to regulatory requirements.

If doubts arise about the identity of the customer or the beneficial owner during the business relationship, the verification process must be repeated.

FINMA observes that some stablecoin issuers in Switzerland use default guarantees from banks, potentially avoiding the need for a banking license from FINMA. This arrangement introduces risks for both stablecoin holders and the banks providing the guarantees.

The guidance includes FINMA's minimum requirements for default guarantees to safeguard depositors, applicable to stablecoins as well.

Earlier, FINMA reviewed money laundering risk analyses of over 30 Swiss banks this spring and found many did not meet basic requirements, as reported by Finance Magnates. The review followed repeated shortcomings identified during on-site inspections.

Issues included inadequate definitions of risk tolerance and missing structural elements essential for risk analysis. In response, FINMA released new guidance to address these deficiencies and enhance transparency.