In a Supplement to the Guidelines for Subordination Requests regarding Initial Coin Offerings (ICOs) of 11 September 2019, the Swiss Federal Financial Supervisory Authority FINMA publishes for the first time an assessment of stable coins under Swiss supervisory law. It should be noted that the concrete design of a stable coin can vary greatly in legal, technical, functional and economic terms.
Neither in Switzerland nor abroad there are any special regulations on stable coins. Financial market law in Switzerland is based on the principle of technology neutrality. FINMA's supervisory assessment of stable coins is therefore based on the tried and tested token approaches used to date:
- The focus is on the economic function and purpose of a token;
- FINMA takes into account both the proven evaluation decisions "same risks, same rules" and the special features of each individual case.
Experience has shown that FINMA frequently raises questions about licensing requirements under the Banking Act or the Collective Investment Schemes Act (CISA). Due to the usual purpose of the payment instrument, it is very often subject to the Money Laundering Act (AMLA). Other financial market legislation, in particular the Financial Market Act (FinfraG) on the operation of payment systems, may also be relevant.
FINMA makes a fundamental distinction between whether a stable coin has a claim under the law of obligations against an issuer for the tied assets (a so-called redemption claim) or a claim under the law of property against the custodian of the tied assets.
Linkage to Currencies
If a Fiat currency is pegged to it and a fixed redemption claim exists (e.g. 1 token = CHF 1), a qualification as a bank deposit may be considered. In the case of value-dependent redemption claims, e.g. through a linkage to a currency basket, the distinction between a deposit under banking law and a collective investment scheme may be necessary. It is important whether the tied assets are managed for the account and risk of the token holder (third-party management as a reference to collective investment) or for the account and risk of the issuer (reference to banking deposit). The latter mainly means that all individual opportunities and risks of asset management in the form of gains or losses due to interest, fluctuations in the value of investment products, counterparty and operational risks, etc. must be borne by the stable coin issuer.
The existing exceptions to a bank authorisation requirement, such as the acceptance of deposits only from banks and other supervised entities or from institutional investors with professional treasury operations in accordance with Art. 5 para. 2 of the Banking Ordinance, remain reserved.
If a stable coin is not redeemable by the token holder, but is subject to an alternative stabilisation mechanism, other financial market laws, in particular the FinfraG for the operation of payment systems, may still apply.
Linkage to Commodities
If a stable coin fulfils the function of a simple proof for a property position of the token holder, there is usually no qualification as security. The following prerequisites must be met:
- There is a right of ownership to commodities and not only a claim under the law of obligations;
- the transfer of the token results in the transfer of the respective property;
- the stored commodities are not to be qualified as a deposit of fungible goods within the meaning of Art. 481 of the Swiss Code of Obligations (CO).
If a claim to bank precious metals is based solely on the law of obligations, a qualification as a deposit under banking law is usually obvious due to the proximity to precious metal accounts. In the case of a claim under the law of obligations for other commodities - provided that they can in principle be assigned to the financial market - they usually qualify as securities and, if necessary, as derivatives. This may also raise the question of a licensing requirement as a derivatives house pursuant to Art. 3 para. 3 of the Stock Exchange Ordinance (SESTO). If a token is linked to a basket of commodities (incl. bank precious metals) with a value-dependent redemption claim of the token holder, a collective investment scheme can usually be assumed from an economic point of view.
Linkage to Real Estate
If a token is linked to an individual property or to a portfolio of properties, and if the token holder has a right of redemption, the third-party management of the property portfolio, which is normally performed, has characteristics for a collective investment scheme.
Linkage to Securities
If a token is linked to an individual security by means of a claim for delivery under the law of obligations of the token holder, it is regularly also a security. Whilst a corresponding own issuance generally does not require a licence under the Stock Exchange Act, the question of an issuing house activity may arise in the case of the acquisition and primary market offer of corresponding stable coins (see Art. 3 para. 2 SESTO). In addition, from the entry into force of the relevant provisions, the prospectus obligation under FIDLEG must also be complied with in the case of mere self-issuance. If a token is linked to a basket of securities with a claim under the law of obligations of the token holder to a portion of the basket, it makes sense to require authorisation as a collective investment scheme.
Download the Supplement to the Guidelines for Subordination Requests regarding Initial Coin Offerings (ICOs) of 11 September 2019 here!
The supplement to the guidance on FINMA's Initial Coin Offerings (ICOs) regarding stable coins provides a good overview of the relevant problem areas under financial market law. It is very welcome that FINMA is one of the first regulators in the world to comment in detail on this issue.
From a purely supervisory, practical perspective, it makes sense to categorise tokens on the basis of their economic function and purpose ("substance over form") and to take into account the approach of "same risks, same rules". However, the principle of legality in administrative law and civil law sets certain (important) limits to this approach. In other words, "same rules" can only be applied to comparable risks where there is a corresponding legal basis. Since, for economic reasons, it is often not possible for young FinTech companies to have FINMA's decisions reviewed in court, it is to be hoped that the supervisory authority will take sufficient account of the legality principle when applying the "same risks, same rules" approach and proceed with a sense of prudence.
FINMA also emphasises that, in addition to the (economic) function, a distinction must be made between claims under the law of obligations and claims under property law (i.e. between relative and absolute rights) in order to be able to logically determine the corresponding regulatory consequences (cf. MME Token Classification BCP 2 and BCP3). It thus also clarifies that, according to the ICO guidelines, securities-type asset tokens are limited to claims under the law of obligations and must be distinguished from "asset-backed tokens" based on property law.
Unfortunately, the criteria for the corresponding legal consequences remain vague, such as the prerequisites for qualification as a collective investment scheme (or the differentiation from an operational activity). In addition, other topics such as the deposit of fungible assets or the segregation (or pooling) of blockchain-based assets (e.g. payment or utility tokens) are not sufficiently addressed.
Finally, FINMA very often assumes that the tokens qualify as securities in the case of claims under the law of obligations. FINMA thus implies that such tokens (or such an entry in a DLT-based registry) can be either a certificated security or a uncertificated security under civil law. According to current doctrine, however, this civil-law qualification is rather controversial or should be further specified (following a functional interpretation).
The (interesting) field of purely smart-contract-based, decentrally run stable coins without legal claim (cf. MME Token Classification BCP 1), on the other hand, is not mentioned at all. Since there is usually no issuer and the transactions are processed algorithmically, such token allocations are likely to take place in many constellations outside the currently regulated frameworks.