FINMA Issues Guidance on Stablecoin Risks and Default Guarantees

The Swiss Financial Market Supervisory Authority (FINMA) hastoday (Friday) released new guidance regarding the issuance of stablecoins. Thisdocument addresses default guarantees, associated risks, and FINMA's approachto regulating stablecoins. It also highlights increased risks related to moneylaundering.

Stablecoin Risks Highlighted

In recent years, stablecoin projects have gainedsignificance in Switzerland. These projects aim to offer a low-volatilitypayment method on blockchain technology. FINMA had previously addressedstablecoin concerns in its supplement to the ICO guidelines issued in September2019.

As described in the supplement to the ICO guidelines,projects in connection with stablecoins usually pursue the goal of providing ameans of payment with low price volatility on a blockchain, FINMA stated.

The guidance outlines various aspects of financial marketlaw pertinent to stablecoin projects and their impact on regulatedinstitutions.

Swiss regulator FINMA has published guidance on stablecoin issuers, urging them to verify the identity of all persons holding digital tokens pegged to fiat currencies https://t.co/ET38nA1Eji

Stablecoin Guarantees Raise Concerns

FINMA emphasizes heightened risks in money laundering,terrorist financing, and evasion of sanctions associated with stablecoinprojects. These risks also pose reputational challenges for the Swiss financialsector.

FINMA draws attention to the increased risks of money laundering,terrorist financing and the circumvention of sanctions. These also result inreputational risks for the Swiss financial centre as a whole, the authorityadded.

According to FINMA, the stablecoin issuer is classified as afinancial intermediary under anti-money laundering regulations. It must verifythe identity of stablecoin holders and establish the identity of the beneficialowner according to regulatory requirements.

If doubts arise about the identityof the customer or the beneficial owner during the business relationship, theverification process must be repeated.

FINMA observes that some stablecoin issuers in Switzerlanduse default guarantees from banks, potentially avoiding the need for a bankinglicense from FINMA. This arrangement introduces risks for both stablecoinholders and the banks providing the guarantees.

The guidance includes FINMA'sminimum requirements for default guarantees to safeguard depositors, applicableto stablecoins as well.

Earlier, FINMAreviewed money laundering risk analyses of over 30 Swiss banks this springand found many did not meet basic requirements, as reported by FinanceMagnates. The review followed repeated shortcomings identified duringon-site inspections.

Issues included inadequate definitions of risk tolerance andmissing structural elements essential for risk analysis. In response, FINMA releasednew guidance to address these deficiencies and enhance transparency.

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Swiss Regulator Rejected FTX Europe's Trading License Application

<p>FTX Europe, the European subsidiary of the now-collapsed global crypto giant, sought a trading license in Switzerland but failed. Meanwhile, the entity <a href="https://www.financemagnates.com/cryptocurrency/ftxs-cysec-license-suspension-likely-to-start-wider-regulatory-audits/" target="_blank">lost its Cypriot license</a> amid the fallout.</p><p>There is no official confirmation on <a href="https://www.financemagnates.com/tag/ftx/" target="_blank">FTX</a>'s attempt for a Swiss trading license, but local publication NZZ reported on it, citing anonymous people close to the situation.</p><p>Based in Pfäffikon near Zurich, FTX Europe was operating in the European Union with a Cyprus Investment Firm (CIF) license. The license was granted in September, which allowed the European arm of FTX to offer crypto derivatives to retail customers within the European Economic Area (EEA). The Cypriot license has now been suspended.</p><p>The exchange's attempt to gain an "organized trading system" from Swiss banking regulator Finma was kept out of public attention. The license would have further strengthened FTX's regulatory position, making it one of the few cryptocurrency companies with a Swiss license.</p><p>On top of that, the Australian financial market regulator <a href="https://www.financemagnates.com/cryptocurrency/asic-suspends-ftxs-afs-license/" target="_blank">suspended the license of the local FTX entity</a> until 15 May 2023, as the company entered into voluntary administration.</p><p>The Collapse of a Giant</p><p>FTX has grown aggressively since its establishment in 2019. The exchange was valued at $34 billion in its last funding round, but now venture capital firms have been writing off hundreds of millions of dollars in FTX investments.</p><p>FTX Trading Ltd., Alameda Research, and over 130 other <a href="https://www.financemagnates.com/terms/a/affiliates/" target="_blank" id="dd69a3b8-c999-4378-821f-0d49fbc5743e_1" class="terms__main-term">affiliates</a> filed for Chapter 11 <a href="https://www.financemagnates.com/terms/b/bankruptcy/" target="_blank" id="41b3ef0d-d805-441d-8443-121890264e94_1" class="terms__secondary-term">bankruptcy</a> protection in Delaware earlier this month. Interestingly, the Bahamas-based entity of FTX approached a New York court for Chapter 15 bankruptcy protection. Meanwhile, the Bahamas financial market regulator ordered the local entity to <a href="https://www.financemagnates.com/cryptocurrency/the-bahamas-regulator-orders-ftx-to-transfer-cryptos-to-government-wallets/" target="_blank">transfer all customers' digital assets to government-controlled crypto wallets.</a></p><p>Moreover, the bankruptcy filing of the exchange reveals some of the financial blunders of FTX. The exchange owes $3.1 billion to its top 50 creditors. The top individual alone is owed $226 million, and others are in the range of $21 million and $203 million.</p><blockquote class="twitter-tweet"><p lang="en" dir="ltr">FTX discloses its top 50 creditors are owed $3.1 billion. The largest creditor is owed $226 million.All names were redacted. <a href="https://t.co/JGeddvMB7w">pic.twitter.com/JGeddvMB7w</a></p>— Tom Dunleavy (@dunleavy89) <a href="https://twitter.com/dunleavy89/status/1594401172537974784?ref_src=twsrc%5Etfw">November 20, 2022</a></blockquote> This article was written by Arnab Shome at www.financemagnates.com.

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Regulator Advises Being More Proactive in Protecting Crypto Investors

Switzerland’s top market watchdog has called for regulators to take more and proper action on Wednesday to protect cryptocurrency traders from the risks involved in the sphere.

According to Reuters, regulators should protect consumers from ‘abuse in the freewheeling sector’. “There’s much more that can be done. It would seem to me that a lot of trading in digital assets looks like the US stock market in 1928, where all kinds of abuse, pump and dump, are now in fact frequently common,” Urban Angehrn, the CEO of the Swiss Financial Market Supervisory Authority (FINMA), commented during a conference in Zurich.

He added: “Let’s also think about the potential of technology to make it easy to deal with the large amounts of data and to protect consumers from trading on abusive markets.”

Regulators have been actively pushing for stricter rules in the crypto markets. The US watchdogs have warned several times about the possibility of market manipulation.

The UK’s Financial Conduct Authority (FCA) has issued similar warnings regarding the same issue.

For the first time since December 2020, Bitcoin (BTC), the largest cryptocurrency, fell below $20,000 on June 18. Stocks and other higher-risk assets have taken a beating this year due to soaring inflation and rising interest rates.

Recently, the UK FCA issued another reminder to warn consumers about the risks of investing in cryptocurrencies. In the advisory note, the watchdog raised concerns about some social media posts promoting crypto assets and non-fungible tokens (NFTs), although it clarified that comments on individual products could not be made.

Moreover, the FCA stated that marketers of crypto assets must adhere to the guidelines set by the Advertising Standards Authority (ASA) and declare that they do not regulate crypto assets. In addition, crypto assets should be clearly marketed as not being covered by financial compensation schemes. The ASA has investigated ads for cryptocurrencies because they failed to make it clear that the products are not regulated or protected in the country.

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