Switzerland’s guidance on stablecoins — what it means for Facebook’s Libra

David Marcus of Facebook mis-stated to the US Senate hearing on Libra in July that Libra, as a Swiss non-profit, had been in touch with the Swiss Federal Data Protection and Information Commissioner — who countered that Libra had not in fact been in touch with them at all.

But Libra did finally contact the Swiss Financial Market Supervisory Authority, FINMA — to ask about the legal status of stablecoins, and apply for a licence as a payment system.

You might think they’d have done that before announcing their project to the world — but, better late than never.

FINMA published their guidance on stablecoins today, Wednesday 11 September — they explicitly note they’re answering a request from Libra, but this covers the stablecoin area more broadly. Here’s the PDF.

The guidance

Most of FINMA’s guidance reads like “here are the rules that already sensibly apply.”

The last paragraph of section 2.1 sets out that a token may need registration as all of a bank, a money transmitter and a security:

FINMA has found that projects to create ‘stable coins’ often give rise to potential licensing requirements under the Banking Act (BA; SR 952.0) or the Collective Investment Schemes Act (CISA; SR 951.31). In addition, due to their frequently intended purpose as a means of payment, the Anti-Money Laundering Act (AMLA; SR 955.0) is almost always applicable. If a payment system of significant importance is launched in connection with the creation of a ‘stable coin’, a licensing requirement under the Financial Market Infrastructure Act (FMIA; SR 958.1) as a payment system is probable.

Section 2.2.1 says that stablecoins pegged to a fiat currency at a fixed redemption rate — e.g., 1 token = 1 CHF — are regulated as bank deposits — and you’ll need to be licensed as a bank.

When a redemption claim could depend on price developments — say, when the token is pegged to a basket of currencies, as Libra plans to be — all profits and losses on price developments must be borne by the issuer, or the coin will be a collective investment scheme. (Libra plans to keep investment profits in the Association.)

The last paragraph of 2.2.1 seems to be directly about Libra — remember that only Libra Authorized Resellers can directly redeem Libra tokens, not you the end user, and Libra wants to set up a payment system:

A ‘stable coin’ that does not foresee an explicit redemption claim for the token holder but instead is based on an alternative stabilisation mechanism, can nevertheless trigger licensing requirements under other financial market regulations (alongside AMLA requirements), in particular under the FMIA if operation of a payment system of significant importance is foreseen.

Section 2.3 looks a bit pointed, and reads to me like “algorithmic stablecoins can just bugger off.” It’s not about Libra, but it does address many of the dubious magical smart-contract stablecoin projects in crypto:

From time to time FINMA is asked to assess ‘stable coin’ projects that claim to invest the proceeds from an ICO in certain assets, apparently seeking to achieve a stabilisation or even an increase in value, even though no plausible mechanism for such stabilising effects is apparent. Investors are here frequently promised an investment opportunity. Such advertising claims are often dubious in nature. When such projects are conducted in or from Switzerland, it is probable that FINMA will take enforcement measures.

Appendix 1 is “Supplementary minimum requirements for enquiries concerning ‘stable coins’” — FINMA’s questions for stablecoin issuers, which seem to have been written with Libra in mind:

Value stabilisation and claim of the token holder

How does the intended value stabilisation mechanism operate (please provide details of technical and legal aspects)?

Where the token is linked to a basket of assets: How is the individual token holder’s share of the value calculated?

Does the token holder acquire an explicit claim on the underlying assets?

If yes, what is the legal nature of the token holder’s claim (please include contractual terms and documents)?

If yes, how does the redemption or return mechanism for the token operate?

Underlying assets

Are the assets only held in custody or are they also invested? By whom are the underlying assets managed or held? If invested, what types of financial instruments are they invested in?

Who has which legal rights over and access to the underlying assets and in what way?

Who bears the risks, profits or losses and expenses resulting from the management of the underlying assets?

Appendix 2 lists categories of stablecoins. Category 2 seems to match Libra — “Linked to basket of fiat currencies / cryptocurrencies with redemption claim dependent on price development.” The account of the issuer will be regulated as a deposit under banking law; the account of the token holder, as a collective investment scheme.

What this means for Libra

Libra will need to register as a bank and as a payment provider (a money transmitter). It probably won’t need to register as a collective investment scheme for retail investors.

FINMA notes explicitly: “The highest international anti-money laundering standards would need to be ensured throughout the entire ecosystem of the project” — and that Libra in particular requires an “internationally coordinated approach.”

So the effective consequence is that Libra will be a coin for well-documented end users in highly regulated rich countries, and not so available in poorer ones.

I doubt Libra expected an easier ride from incorporating in Switzerland than it would have had in the US — this is a first world country working under developed world regulatory agreements. The rules are well-established.

The framework for stablecoins in general seems reasonable — this is the sort of thing other regulators would see and think “let’s start from that.”

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