Swiss Blockchain Federation criticizes FINMA’s supervisory communication on stablecoins

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The Swiss Blockchain Federation is concerned about the supervisory communication from the Swiss Financial Market Supervisory Authority FINMA on stablecoins. The comprehensive identification of all users demanded by FINMA has no recognizable legal basis. FINMA’s requirements make it impossible for Swiss issuers to issue competitive stablecoins. In addition, the announcement came as a surprise and without consulting those affected.

Bern, 13 August 2024 – On 26 July 2024, FINMA published the supervisory communication “Stablecoins: Risks and requirements for stablecoin issuers and guarantee-issuing banks” (06/2024), which has caused unrest and criticism in the blockchain industry, as FINMA is going far beyond previous practice, which has also been criticized by the industry.

In this supervisory communication, FINMA expresses the view that issuers of stablecoins are obliged to register all holders of stablecoins as clients and to monitor their transactions. Stablecoins are electronic means of payment. The established practice for means of payment is to check the counterparty only at the time of issue and redemption. In a departure from this practice and international custom, FINMA now construes the existence of a claim between the stablecoin holder and the stablecoin issuer as a “permanent business relationship” and therefore a client relationship under the Anti-Money Laundering Act. 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 passport copy or other official documents.
In the opinion of the Swiss Blockchain Federation, such a requirement cannot be derived from the current Anti-Money Laundering Act. Classifying the temporary holding of a stablecoin as a “permanent business relationship” with the issuer goes far beyond what would be justifiable according to the meaning and purpose of the relevant regulations. In this respect, FINMA does not have a sufficient legal basis for its practice.

 

FINMA’s interpretation of the legal framework for money laundering goes significantly further than what is required by international standard setters and other countries. Neither the European Union nor Singapore, Hong Kong, Japan or the USA require the identification of all intermediate holders of a stablecoin or a restriction on its transferability. The Financial Action Task Force (FATF) – the most important international body for money laundering regulations – does not require this either. There are good reasons for this: Stablecoins, which can only be transferred between clients of a single institution, are unsuitable as a means of payment and therefore useless.
If this FINMA practice were to prevail, the issuance of stablecoins from Switzerland would effectively be made impossible because the restrictions communicated by FINMA would not allow for a viable business model. Swiss issuers of stablecoins are therefore forced to realize their project abroad. If they implement it in a member state of the European Union, they are subject to regulation tailored to this use case and can freely offer the stablecoin throughout the European Economic Area. In addition, they can also distribute the stablecoin in Switzerland without any restrictions, provided they do not have a permanent physical presence in Switzerland and, in particular, do not employ any staff.

Finally, the SER is disconcerted that FINMA has waived its statutory participation rights (Art. 7 para. 4 FINMASA) and that those directly affected have not been consulted. The SER has been advocating a constructive dialog with the authorities for years with the aim of ensuring the long-term stability of the financial centre and strengthening the pioneering role, competitiveness and future viability of Switzerland as a blockchain location.

What are stablecoins?
In order to exploit the potential of applications based on distributed ledger technology, digital means of payment are needed that enable transactions in an official currency such as the Swiss franc, the euro or the US dollar. Stablecoins are digital currencies that are backed by deposits or financial instruments in the corresponding official currency and therefore have a more or less stable value against the reference currency. In contrast to cryptocurrencies, which are unsuitable for transactions in official currencies due to their strong price fluctuations, stablecoins play a central role in decentralized finance and many other blockchain applications.

FIVE QUESTIONS FOR HEINZ TÄNNLER ABOUT THE JURY EXCELLENCE AWARD 2024

In the interview, Heinz Tännler, President of the Swiss Blockchain Federation and Zug’s Finance Director, discusses the significance of the Excellence Award 2024 for the organization and the Swiss blockchain landscape. Under his leadership, the Swiss Blockchain Federation has achieved significant successes and milestones, making the blockchain ecosystem in Switzerland unique worldwide. Tännler shares his perspectives on the greatest successes, future challenges, and his personal motivation to engage in the economic and innovation landscape of Switzerland.

Heinz Tännler, what does the Excellence Award 2024 mean to you as President of the Swiss Blockchain Federation?

The award is a wonderful and well-deserved recognition for the Swiss Blockchain Federation. The 80 members have been tirelessly committed to the blockchain location in Switzerland for six years. They intensively engage with regulatory, political, and legal issues, publish highly regarded foundational papers, network actors from industry, administration, science, and politics, and thus contribute to solid framework conditions and a globally unique blockchain ecosystem.

What are the greatest successes of the Swiss Blockchain Federation?

I would first mention the high quality of our working groups, the commitment of the board, the expert council, and the office. What they achieve in volunteer work, how they accompany and shape the regulatory and political process with their publications, and thereby succeeded with the DLT law or recently with the staking topic, is simply great. We are a respected and important player in Switzerland and have contributed to our country being among the global blockchain pioneers. That should fill us all with pride.

Where do you see the next challenges?

We must not rest on our laurels. We have reached important milestones, but we must not fall asleep now. Other locations are catching up and trying to copy Switzerland’s success model. We need to remain agile and cooperative. Especially the professional and trustworthy collaboration with the administration is central. Here we are working to strengthen the dialogue, not least with a new political group consisting of members of the Council of States, National Council, and Government Council. There are a number of challenges we need to master. I mention two: the Basel crypto standard, which the Swiss Blockchain Federation has already warned about, or the new EU regulation MiCA, which will strongly affect the blockchain and crypto location Switzerland.

What do you wish for the future?

We had two political driving forces with the former Federal Councillors Johann Schneider-Ammann and Ueli Maurer, who not only engaged for the blockchain location Switzerland but also for the fintech, startup, and generally the innovation industry. I miss this commitment at home and abroad from the current federal government. Switzerland is excellently positioned worldwide in the areas of artificial intelligence, drones, quantum computers, blockchain, and generally in fundamental technology and top research.

What personally motivated you to engage as President for the Swiss Blockchain Federation?

I still remember well how I felt like an alien when I first met with blockchain enthusiasts in Zug. I didn’t understand their language. But the entrepreneurial spirit, the will, and the conviction to create something new fascinated me. And then in the beautiful canton of Zug. That was the trigger for me to engage in the economic and innovation location Switzerland, the settlement of new companies, and the creation of new jobs. And with the Swiss Blockchain Federation, we have succeeded.

Swiss Blockchain Federation wins Excellence Award 2024

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Swiss Blockchain Federation is partner of the Point Zero Forum 2024

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We are delighted to announce that the Swiss Blockchain Federation is once again proud to be a Community Partner at Point Zero Forum 2024!

The Point Zero Forum is an initiative of Elevandi and the Swiss State Secretariat for International Finance to promote a policy and technology dialogue in Financial Services.
Held annually in Zurich, Switzerland, the Forum convenes central bankers, regulators, policymakers, and industry leaders to address the latest developments in financial technology and the future of finance.
Across a series of leadership dialogues, public-private roundtables, deep-dive workshops and networking events, the Forum aims to drive confidence, adoption and growth of transformative technology and assess and promote the appropriate governance and risk frameworks.

Find out more here.

Swiss Blockchain Federation Updates Circular on Staking

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The Swiss Blockchain Federation updates its Staking Circular to reflect FINMA’s supervisory notice on staking.

Download the updated circular on staking (German only)

Bern, April 3, 2024 – Staking is an energy-efficient mechanism for consensus building in public blockchain networks such as Ethereum, Solana and Cardano. Participants receive a fee for depositing cryptocurrencies and validating transactions. Staking is becoming increasingly important. The market capitalization of staked assets is currently over USD 300 billion. Various staking models are available, including user-controlled staking (self-staking) and staking by service providers. Staking services are currently offered in Switzerland by both banks and other service providers that are subject exclusively to the Anti-Money Laundering Act.

FINMA published Supervisory Communication 08/2023 on this topic in December 2023. This was in response to a change in practice announced in summer 2023, which had met with strong resistance from the blockchain industry. According to the supervisory notice, under certain conditions, staked crypto-based assets also qualify as separable assets in bankruptcy. Accordingly, Swiss staking service providers still do not require a banking license. In addition, the prohibitive capital requirements in the crypto sector do not apply to banks that offer staking services.

The update of Circular 2023/01 “Staking” published today clarifies questions relating to bankruptcy and banking law that arose, among other things, on the occasion of the publication of the supervisory notice. Although the supervisory notice has clarified the fundamental issue of the bankruptcy law treatment of staked crypto-based assets in the sense of the blockchain industry, the conditions formulated by FINMA raise a whole series of new questions. This applies, for example, to the analogous application of the guidelines for fiduciary investments in multi-tier custody relationships. The circular also contains a new classification of staking under tax law. Both versions of the circular are available on the website of the Swiss Blockchain Federation (German only).

Like the first version, the update of the Staking Circular was prepared by a sub-working group of the Digital Assets Working Group under the leadership of Fabio Andreotti (Bitcoin Suisse). The Swiss Blockchain Federation would like to thank him and all members for their contributions.

The race for Bitcoin has been relaunched

NZZ am Sonntag, 14.01.2024 – The Swiss Blockchain Federation (SBF) is on the road to success and has made an important contribution to the blockchain and crypto ecosystem over the past five years. NZZ am Sonntag spoke to SBF President and Zug Finance Director Heinz Tännler. Here are the most important statements:

▪ The SER played a leading role in helping to develop the favourable framework conditions that attracted many foreign pioneers and specialists to Switzerland.
▪ Switzerland has benefited enormously from the fact that it set the right course early on. Other countries have noticed this and are catching up.
▪ Switzerland must therefore always be “one step ahead” in terms of regulation. It is important that the national government once again fully supports the “Blockchain Nation Switzerland”.
▪ Former Federal Councillors Johann Schneider-Ammann and Ueli Maurer have been promoters of Switzerland as a blockchain location at home and abroad. “Switzerland has benefited enormously from this commitment. And I currently miss this commitment,” says Tännler.
▪ The SER will become more politically active again from this year, Tännler promises. To this end, it is currently setting up a political advisory board with cantonal councillors and national parliamentarians under the leadership of Councillor of States Matthias Michel.
▪ The SBF recently scored an important success: it was able to significantly mitigate a change in practice announced by the Swiss Financial Market Supervisory Authority FINMA in the area of staking. This had led to great uncertainty in the industry.

Download article (in German only)

Compromise of the FINMA practice change for staking services

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Bern, 21.12.2023 – The Swiss Blockchain Federation (SBF) welcomes the announcement by the Swiss Financial Market Supervisory Authority (FINMA), which has clarified how staking services for cryptocurrencies are to be handled under financial market law. An announced change in practice had caused uncertainty and strong criticism in the industry.

The Swiss Blockchain Federation’s commitment and willingness to engage in dialogue have now borne fruit. The SBF published a circular on the topic of staking, issued a high-profile media release together with the Crypto Valley Association opposing FINMA’s planned regulation of staking services, pointed out the potential competitive disadvantages of Switzerland as a business location, organised two round tables with all key industry representatives and took part in two exchange meetings with the Swiss Financial Innovation Desk (FIND) and FINMA.

After months of hard work and discussions, a compromise is now on the table that guarantees legal certainty for the players and Switzerland as a blockchain location. FINMA’s requirements for recognising staked assets as safe custody assets (client consent, risk disclosure, clear allocation, BCM) are reasonable and correspond to the status quo for professional service providers. The special issues in connection with custody chains are justified. Finally, it is positive that regulated service providers (SROs) can continue to operate.

We would like to thank everyone who contributed to this positive result!

SBF Newsletter #03/2023

Review of a turbulent but successful blockchain year 2023

Read our last newsletter of the year for a look back at the turbulent but successful blockchain year 2023, the projects supported by the Innovation Booster Blockchain Nation Switzerland and the Swiss Blockchain Federation’s latest success in staking.

READ NEWSLETTER (in German only)

Swiss blockchain industry warns against planned FINMA practice on staking

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The Swiss Financial Market Supervisory Authority (FINMA) has announced a change in practice according to which a banking license would be required for staking services in the future. The Swiss blockchain industry warns that staking can thus no longer be offered from Switzerland at competitive conditions. This is emphasized by the two associations Swiss Blockchain Federation (SBF) and the Crypto Valley Association (CVA) in a joint statement.

Bern, September 6, 2023 – Staking is an energy-efficient mechanism in blockchain networks such as Ethereum, Solana and Cardano. Participants receive a fee for depositing cryptocurrencies and validating transactions. Staking is becoming increasingly important. The market capitalization of staked assets is around USD 350 billion. There are different staking models, including user-driven staking (self-staking) and staking by service providers. Staking services are currently offered in Switzerland by both banks and service providers, which are exclusively subject to the Anti-Money Laundering Act.

FINMA justifies the change in practice with the temporary blocking of assets by staking protocols (lock-up) and the risk that, in the event of a false validation or other breach of the rules by the participants, their assets will be confiscated (slashing). In FINMA’s view, these characteristics of staking protocols mean that the assets are no longer available at any time, which is why they would no longer qualify as custody assets under banking law, but as deposits from the public. The commercial acceptance of deposits from the public requires a banking license.

The Swiss blockchain industry believes this interpretation is wrong and warns of potential negative consequences. Staking is in no way linked to transformation services and is thus not comparable to the banks’ lending business. The intended change in practice would also jeopardize the legal certainty achieved with the DLT legislation unanimously passed by the Parliament. Among other things, this has strengthened the protection of customers in the bankruptcy of depository institutions.

The blockchain industry points out that the new FINMA practice would lead to the migration of this business abroad. Non-banks would no longer be allowed to offer this service. Banks would have the necessary authorization but would be subject to prohibitive capital requirements in the area of crypto business. They would thus no longer be competitive. Swiss customers would also be worse off, as deposit insurance would not apply in the event of staking.

The blockchain industry calls on FINMA to make the regulatory process transparent and to actively involve the stakeholders concerned. The proposed practice is not in line with FINMA’s mandate to strengthen Switzerland as a financial center – on the contrary, this practice would massively limit Switzerland’s innovative strength as well as its competitiveness in international comparison.

Federal Council report “Legal framework for distributed ledger technology and blockchain in Switzerland”

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Summary

With this report, the Federal Council aims to provide an overview of the relevant legal framework and to clarify the need for action. The report should show

  • that the Swiss legal framework is already suitable for dealing with business models based on DLT and blockchain,
  • that Switzerland wants to further improve the innovation-friendly framework conditions and
  • that the Swiss authorities are determined to rigorously combat abuses.

Civil law

  • Civil law imposes no requirements – and accordingly no obstacles – for the transfer of cryptocurrencies. Consequently, there is no need to adapt civil law with regard to the transfer of cryptocurrencies.
  • Tokens that represent a legal position (claim, membership, right in rem) should fulfil a function similar to the function presently and traditionally fulfilled by securities. Since an entry in a decentralised register accessible to interested parties can create publicity similar to the ownership of a security, it seems justified to attach similar legal effects to this entry. The Federal Council is proposing an amendment to securities law to increase legal certainty. The proven principles of securities law should be retained as much as possible. Digital representation and transfer is therefore possible only for those rights which could also be represented by a security and which are freely transferable. The planned legislative amendment should enable the legally secure transfer of uncertificated securities by means of entries in decentralised registers and be designed as technology-neutral as possible.

Insolvency law

  • The Federal Council considers it necessary to provide for unambiguous rules regarding the segregation of crypto-based assets from the bankrupt’s estate. Such a right would require in any case that these assets could be unambiguously allocated to the third party. Additionally, the Federal Council considers it necessary to examine whether a right to segregation should be created with regard to data without financial value. As part of the planned consultation, the Federal Council will thus propose a legislative amendment that addresses these issues.

Financial market law

  • In banking law, the Federal Council – in the light of the aforementioned proposed amendment to the Debt Enforcement and Bankruptcy Act – will examine a corresponding adjustment of bank insolvency law provisions (particularly in the area of the segregation of custody assets) and submit any adjustment proposals in the planned consultation.
  • In financial market infrastructure law, the Federal Council is proposing the creation of a new authorisation category for infrastructure providers in the blockchain/DLT area. Furthermore, related amendments to the Financial Market Infrastructure Act and the new Financial Institutions Act are to be proposed with the aim of creating more flexibility.
  • The Federal Council currently sees no need to amend the Financial Services Act (that will enter into force at the start of 2020) due to blockchain/DLT. The designated requirements, for example for informing customers, are particularly relevant for financial instruments based on blockchain/DLT, as such financial instruments are innovative and sometimes difficult to value, and they can experience very sharp fluctuations in value.
  • In terms of collective investment schemes law, the Federal Council instructed the FDF in September 2018 to prepare a consultation on amending the Collective Investment Schemes Act by mid-2019 in order to allow for a new category of funds (so-called limited qualified investment funds, L-QIFs). As a result, new innovative products could be placed on the market more quickly and cost-effectively in the future.
  • In the insurance sector, many blockchain/DLT projects are currently in their infancy. So far, no need for action in terms of financial market law has become evident, but a conclusive assessment is not yet possible.

Anti-money laundering law

  • The Anti-Money Laundering Act is currently sufficiently technology-neutral to also cover activities related to cryptocurrencies and initial coin offerings (ICOs) to a large extent. The general principles of the Anti-Money Laundering Act also apply to cryptobased assets. The activities of most players in the crypto sector already qualify as financial intermediation and are therefore subject to the Anti-Money Laundering Act.
  • So-called non-custodian wallet providers and certain decentralised trading platforms for cryptobased assets are not subject to the Anti-Money Laundering Act at the moment. The challenges arising in this connection generally have to be addressed internationally within the context of the work of the Financial Action Task Force. Against this backdrop, the Federal Council is currently refraining from proposing that non-custodian wallet providers be subject to the AntiMoney Laundering Act.
  • In contrast, in order to increase clarity for market participants, the current subjection of decentralised trading platforms to the Anti-Money Laundering Act should be anchored more explicitly in law and the possible subjection of other such platforms should be examined in the light of international developments.

    Source: https://www.newsd.admin.ch/newsd/message/attachments/55153.pdf

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