On 11 September 2019, the Swiss Financial Market Supervisory Authority (FINMA) published a supplement to their guidelines for Initial Coin Offerings (ICO). This supplement provides guidance on “stable coins” under Swiss financial market regulation.
On 11 September 2019, FINMA published a supplement to their guidelines for Initial Coin Offerings (ICO). This supplement provides guidance for crypto tokens whose value is linked to an underlying asset, referred to as ‘stable coins’, under Swiss financial market regulation. Among others, it is a reaction to Libra, Facebook’s stable coin, which will be pegged to a currency basket. This coin will be issued by the Libra Association, a Swiss not-for-profit organisation domiciled in Geneva. Regulators in other jurisdictions have expressed concerns about Facebook’s cryptocurrency endeavour and urged Switzerland to provide clarification on how to regulate Libra. With this supplement, FINMA responds to these international concerns and, furthermore, provides general guidance to market participants.
FINMA confirms its approach
Since there is no specific regulation governing stable coins, FINMA once again affirms its functional approach (‘substance over form’) – where the economic function and purpose of a token defines the regulatory treatment – and follows the principle of ‘same risks, same rules’, while making its assessment on a case-by-case basis.
FINMA elaborates that stable coins regularly fall within the scope of the Banking Act (BA; SR 952.0) or the Collective Investment Schemes Act (CISA; SR 951.31). Furthermore, the Anti-Money Laundering Act (AMLA; SR 955.0) is largely applicable, since stable coins are often designed to serve as payment instruments. For payment systems with significant importance, a license under the Financial Market Infrastructure Act (FMIA; SR 958.1) might be required.
Guidance for specific underlyings
FINMA outlines the regulatory implications of stable coins linked to specific underlyings.
For currency-linked stable coins, the assets underlying the value of the stable coin, i.e. a single currency or a basket of currencies, could qualify as a deposit under the banking law, depending on whether the underlying assets are managed on behalf of, and the risk lies with, the token holder or the issuer. In the latter case, the claim against the issuer could also constitute a collective investment scheme.
For stable coins pegged to physical commodities, the specific claim and the type of the commodity needs to be assessed. In particular, FINMA distinguishes between stable coins that confer a contractual claim against the issuer on the underlying assets and direct ownership rights. Contractual claims could qualify as securities and potentially as derivatives, whereas ownership rights generally do not, provided that an actual ownership right exists whose transfer is bound to the stable coin. FINMA points out that, for securities, licensing requirements under the Stock Exchange Act (SESTA; SR 954.1) apply.
For stable coins linked to real estate, FINMA indicates the possibility for such coins to fall within the scope of collective investment schemes.
FINMA generally also considers stable coins linked to a security as securities, and respective licensing requirements apply. However, the self-issuance of securities normally does not trigger any licensing requirements. FINMA highlights that under the prospectus rules of the upcoming Financial Services Act (FinSA; 950.1) prospectus requirements will also apply to self-issuance. Furthermore, a stable coin linked to a basket of securities could constitute a collective investment scheme.
Warning about dubious stabilisation mechanisms
In its supplement, FINMA warns investors about stable coins promising a stabilisation of value through implausible or unproven mechanisms. FINMA further points out that stable coin prices are not necessarily less volatile and that stable coins should also not be considered safe investments per se. Investors should evaluate stable coins with due care and also keep in mind the remaining legal uncertainty regarding the transferability and enforceability of legal claims linked to a token.
With the supplement to its guidelines for ICOs, FINMA confirms its approach to handling blockchain and DLT-based tokens and related business models. FINMA also clarifies the applicability of financial market regulation where functionally indicated. In the case of Facebook’s Libra, FINMA points out the importance of international coordination, since such a project will affect various jurisdictions, especially in the areas of capital requirements, corporate governance, anti-money laundering and counter terrorist financing.