It was foreseeable that the industry's enthusiasm for the supervisory communication «Stablecoins: Risks and requirements for stablecoin issuers and guarantee-providing banks» published by the Financial Market Supervisory Authority Finma on 26 July would be limited. After all, the current practice has already been criticised by a number of players as being too restrictive.

However, the clarity with which the Swiss Blockchain Federation (SBF) comments on the Finma's interpretation in its press release published on Tuesday is a wake-up call. The SBF has nothing good to say about either the process or the content. And the word of the SBF, which was founded in 2018, carries weight. Its 80 or so members include the cantons of Ticino, Zug, Neuchâtel and Zurich - and it can be assumed that the statement would not have been issued in this way without the cantons' approval.

Finma construes «lasting business relationship»

The SER is «disconcerted» that Finma has waived its statutory participation rights and that those directly affected have not been consulted, while at the same time recalling that the association «has been committed to constructive dialogue with the authorities for years with the aim of strengthening Switzerland as a blockchain location».

However, the main criticism is directed at the content of the supervisory communication. Finma is of the opinion that issuers of stablecoins are obliged to register all holders as customers and monitor their transactions. This creates a «permanent business relationship» between the stablecoin holder and issuer and therefore a client relationship under the Anti-Money Laundering Act.

No basis in the Anti-Money Laundering Act

The consequence: «This means that all persons in possession of stablecoins must be identified by the issuing institution or appropriately supervised financial intermediaries by means of a verified copy of their passport or other official documents.»

However, Finma's interpretation that the temporary holding of a stablecoin should be categorised as a «permanent business relationship» with the issuer cannot be derived from the Anti-Money Laundering Act. Finma's interpretation therefore lacks a sufficient legal basis.

Against international practice

Stablecoins are digital currencies that are backed by one (or more) official currencies and have a more or less stable value in relation to this reference. They are used as a means of electronic payment and play a key role in decentralised finance and many other blockchain applications.

With its interpretation, Finma is violating the established practice for means of payment of only checking the counterparty when issuing and redeeming, as well as international practice, argues the SER, before immediately specifying: «Neither the EU nor Singapore, Hong Kong, Japan or the USA require the identification of all intermediate holders of a stablecoin or a restriction on its transferability.»

Unsuitable as a means of payment

The SBF emphasises that even the «international chain dog» of supervisory authorities in the area of money laundering, the Financial Action Task Force (FATF), does not advocate such a requirement, and also gives the reason for this: stablecoins that can only be transferred between customers of a single institution are unsuitable as a means of payment and therefore useless.

In the event that Finma implements its practice as envisaged in the press release, the SBF sees a bleak outlook: there would then no longer be a viable business model for the issuance of stablecoins in Switzerland. In plain language: «Swiss issuers of stablecoins will therefore be forced to realise their projects abroad.» If this were to happen in an EU member state, stablecoins could be offered freely throughout the European Economic Area.

Funding programme for abroad?

However, stablecoins could also be distributed in Switzerland «without any restrictions» as long as the issuers «do not have a permanent physical presence in Switzerland, in particular do not employ any staff».

With its supervisory communication, Finma therefore appears to have initiated an actual blockchain promotion programme - unfortunately only for abroad and not for Switzerland.