Switzerland’s financial markets supervisor has put forward new requirements to reduce the risks associated with banks offering default guarantees to stablecoin holders. According to the regulator, if there are any issues with the stablecoin issuer, the bank providing the default guarantee could face damage to its reputation.
Stablecoin issuers in Switzerland pose a risk to the banks they collaborate with, as stated in guidance released by the country’s financial markets regulator, FINMA, on Friday. This is because these issuers, who accept deposits from the public and could potentially be considered as banks themselves, can avoid the need for a banking license by making an agreement with a registered lender to repay their clients in case of a default.
FINMA emphasized that this situation creates risks for both the stablecoin holders and the banks offering the default guarantee. The bank providing the guarantee may suffer reputational harm if there are any irregularities with the stablecoin issuer, as they are contractually linked to the issuer and could also face legal risks.
Concerns regarding the backing provided by stablecoin issuers, which are digital tokens whose value is pegged to another asset like the U.S. dollar or gold, have been growing for some time. As early as 2021, Tether, whose USDT is the largest stablecoin by market capitalization, released its first report of reserves to address concerns about its funding. Circle, the issuer of USDC which is the second largest stablecoin, followed suit in 2022.
FINMA’s guidance, which expands on an initial note from 2019, outlines several requirements to ensure sufficient protection. Customers must have a direct claim against the bank offering the guarantee, and the guarantee must cover the full amount of deposits and interest. Additionally, the bank must ensure that the deposits it receives do not exceed the coverage provided by the guarantee.
The regulator intends to address the risks associated with default guarantees in upcoming discussions to ensure they are appropriately managed and mitigated.