Legal Framework for Stablecoins in Switzerland

Legal Framework for Stablecoins in Switzerland

On September 11, 2019, the Swiss Financial Market Supervisory Authority (“FINMA”) published stablecoin guidelines, which outline the legal regime of stablecoins in Switzerland (“Guidelines”).

If you are following our Blog, you might remember that stablecoins are records in blockchain, tied to another asset for the purposes of reducing the price volatility and fixing their price. There are three main types of stablecoins: fiat-backed, cryptocurrency-backed (together sometimes referred to as “asset-backed”) and algorithmic stablecoins. 

As the FINMA states in the Guidelines, when applying effective legislation to stablecoins, just like with other blockchain assets, they focus on their economic function and purpose. Basically, the FINMA treats blockchain as a candy wrapper, and a backing asset – as a candy. The stablecoin will therefore receive the same treatment as the asset it is backed with.

In the Supplement to the Guidelines, the FINMA justly notes that “stable” is primarily a marketing term, although stablecoins are still more stable than traditional cryptocurrencies (payment tokens).

The FINMA classifies stablecoins the following way:

1) stablecoins linked to currencies that depending on their design might fall under the banking or collective investment regulation;

2) stablecoins linked to commodities, which might fall under the scope of property law, trigger licensing requirement for activities with derivatives or qualify as deposits under the banking legislation;

3) stablecoins linked to real estate, which imply licensing as a collective investment scheme;

4) stablecoins linked to securities that may fall under the securities (including derivatives) legislation, or, when entitling to a contractual claim to a share of the basket exists - collective investment scheme regulation. 

Interestingly enough, the FINMA does not touch upon the question of algorithmic stablecoins regulation. Algorithmic stablecoins are supported by an algorithm, that automatically corrects the supply of blockchain assets in an event of its shortage or surplus. The system with algorithmic stablecoins implies the existence of two types of assets: coins and so-called seigniorage shares, where the supply of both assets is decreased and increased based on the current need for stabilization. Because they do, at the end of the day, involve an automatically-executed contractual claim to one another, they may qualify as securities under the Swiss law, although additional clarifications are required.

Lastly, the Guidelines contain a legal qualification of the Libra Association project in Switzerland. According to the FINMA, it falls under the financial market infrastructure regulation and would require a payment system license. For being granted this permit, a necessary condition would be to ensure that the Libra’s reserve management risks are borne entirely by the Libra Association and not the stablecoins holders.

Switzerland most surely takes great effort at providing clarity to blockchain regulation, as it is the first country in the world to ever release guidelines on stablecoins. We are excited to see what effect it will have on the industry. 

Previously we have reported about the pros and cons of doing a blockchain business in Switzerland.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. 

Nik Kliapets, Legal Counsel at Legal Nodes