Finma regulation on stablecoins: crypto scene under pressure

The Financial Market Supervisory Authority (Finma) wants to take tougher action. Finma boss Stefan Walter made this clear in his first public appearances: There must be no more regulatory failures like in the Credit Suisse case.

Walter does not yet have all the tools to meet the demands of a “best in class” authority. Nevertheless, Finma is trying to take a more decisive approach. In June, for example, it sent the digital broker Flowbank into bankruptcy – a rare event that was surprising in its severity.

The crypto industry has recently been in the sights of the authority. At the end of July, it sent out a “notice” about how to deal with stablecoins. These are crypto assets whose value is tied to a currency such as the dollar, the euro or the franc and hardly fluctuates. They are intended to bring stability to the crypto market and build a bridge to the traditional financial system.

Finma now requires that all parties involved in stablecoin transactions be identified and has formulated specific requirements for stablecoin issuers and for banks that provide default guarantees.

Anti-crypto stance like in the US?

The crypto industry clearly understood the announcement as a tightening of the rules. “The approach is reminiscent of the restrictive US stance,” says Mathias Ruch, head of the expert committee at the industry association Swiss Blockchain Federation. In the USA, the SEC and the crypto industry have been on a collision course for years. Ruch cannot understand why the practice is being tightened now. This could have been done in an orderly process with a view to the final financial market law in 2025, he says.

Finma sees things differently. Based on its supervisory notice, it does not see any major changes: the requirements are not new. The authority has merely reminded people of the obligation to combat money laundering and clarified the conditions for default guarantees by banks, it said in response to a query.

But from the perspective of the crypto industry, the announcement is anything but harmless. If it comes from Finma, it has a regulatory character, says Ruch, “it creates facts”. He is particularly critical of the supervisors’ expectation that crypto providers register all stablecoin holders as customers and monitor their transactions. This requirement goes much further than in the EU, Singapore, Hong Kong, Japan or the USA.

The stablecoin providers themselves also have no understanding. “The high compliance costs of identifying new customers are no longer sustainable for startups,” says Ralf Zellweger, co-founder of the Swiss stablecoin startup Centi. The costs would destroy the potential of stablecoins.

Advantage of stablecoins is lost

According to Zellweger, the advantage of stablecoins is that users can use them as digital cash and, thanks to the decentralized blockchain, no intermediaries such as banks are needed for transactions. This is lost due to the identification of the “middlemen” required by Finma. If a (state) institution is needed to control all transactions, that would be the death of digital cash.

It is undisputed that stablecoins are problematic from a compliance perspective. They are ideal for anonymously moving funds or covering up tracks, even on the darknet, says Detlev Basse, senior legal advisor at the auditor BDO. But the dangers posed by stablecoins should not be exaggerated. “Most money is still laundered in the traditional financial system, there are enough opportunities there,” says the compliance expert.

Zellweger from Centi does not accept the idea that stablecoin providers should also do more to combat money laundering. The relevant regulations are already being complied with today. “If someone wants to convert stablecoins worth more than 1,000 francs into fiat currency, they have to identify themselves,” he says. He believes that the requirements would undermine Switzerland’s achievement of establishing itself as an innovative financial center with progressive crypto regulation.

“Technology must adapt to regulation”

Apart from Centi, there are only a few stablecoin projects in Swiss francs, such as the Swiss Stable Coin or the book money token of the Swiss Bankers Association. Ruch believes that hardly anyone will dare to come forward with a new project now. There is great uncertainty in the Swiss crypto scene. According to reports, three projects that were about to be launched have left Switzerland for the EU, even though regulation is stricter there.

Meanwhile, Finma is continuing its course undeterred. It is relying on the principle of technology neutrality. Accordingly, the supervisors follow the principle of “same business, same risk, same regulation”. Therefore, the corresponding money laundering regulations must also apply to stablecoins.

The crypto industry is surprised, but the tightening was announced. At the beginning of July, Finma boss Walter anticipated stablecoin regulation at the “Point Zero Forum” event. Walter demanded that stablecoin providers who have a bank guarantee be supervised directly by Finma. There are loopholes that need to be filled.

Walter also stressed the importance of the so-called Travel Rule. According to this, financial intermediaries must exchange information about the origin and recipient of a payment. The Travel Rule is crucial for the fight against money laundering and terrorist financing and must also apply to the blockchain sector. “Technology should adapt to regulation, not the other way around,” said the Finma boss.

Hardly any dialogue since Amstad

Finma had already turned a cold shoulder to the crypto industry before Walter took office in April. According to Mathias Ruch, the blockchain association has not had any direct contact with Finma since the end of the pandemic. “We tried to have a dialogue, but there was apparently no need on the part of the authorities.” The topic of stablecoin was suggested for a meeting, but this did not happen.

This contrasts with the time before Finma President Marlene Amstad took office in 2021. Under the former head of the authority, Mark Branson, there was a lively exchange. Today, Finma limits itself to holding a round table once a year, where all the concerns of the fintech industry are addressed. Finma, on the other hand, says that it is in regular discussions with project initiators, associations and self-regulatory organizations.

Under Amstad, Finma has become more hostile towards crypto, says an industry expert. In 2023, Finma tried to allow so-called staking – a type of crypto dividend – only through banks. This requirement was later relaxed. A crypto entrepreneur says that Finma’s approach is disproportionate given the small size of the Swiss stablecoin market. There is suspicion that Amstad wants to play the “model boy” and is trying to overcompensate after the CS debacle.

Not the end of Swiss franc stablecoins

There are currently many stablecoin projects in the euro in the starting blocks. There are also some startups and banks in Switzerland that want to do something, says Gregor von Bergen, crypto expert at Capco. However, he does not see the Finma requirements such as the default guarantee by a bank as a death blow for stablecoin projects. Bigger hurdles are the identification of the middlemen, but also requirements such as the high capital backing of crypto assets in accordance with the Basel III rules.

Compliance specialist Basse also does not see the Finma requirements as a showstopper. The launch, operation and transactions of stablecoins are still possible under the new regime. Even promising crypto products such as stablecoins must be subject to compliance. It does put pressure on profit margins and the additional costs cannot simply be passed on to customers. But this does not stifle innovation.