Should Stable Coin not be anonymous? What does the Swiss Financial Market Supervisory Authority Stable Coin Guidelines reveal?

Author: JP Koning

Compiled by: Luffy, Foresight News

Before the enactment of anti-money laundering laws in Switzerland, anyone could walk into a Swiss bank and open an account without presenting any identification documents. The bank would then give them an anonymous passbook, also known as an inhabersparheften. At the time, the bank believed that possessing the passbook was proof of ownership of the basic funds in the account. The account holder could keep the passbook or, if they wished, transfer it to someone else without notifying the bank, and that person could withdraw the funds from the account.

Essentially, Swiss bank issuance is their own cash.

As time goes on, society’s understanding of Money Laundering has been constantly improving, and the use of Swiss anonymous savings books has been restricted by law. In 1977, banks were first required to confirm the identity of their account-opening customers. In addition, anyone wishing to withdraw more than 25,000 Swiss francs must have their identity confirmed by the bank. However, savings books still enjoy a considerable degree of Anonymity. After opening an account, before making a withdrawal, the savings book can continue to circulate without identity checks.

In 2003, the Swiss government banned the issuance of new anonymous savings account books, and existing account books submitted to physical counters of banks would be canceled. Anonymous savings account books could continue to circulate anonymously in people’s hands like cash, but due to constant cancellations, by 2019, they accounted for only 0.002% of the total assets of Swiss bank accounts.

The era of anonymous savings passbooks in Switzerland has come to an end. However, at the same time, a similar financial instrument has emerged: stablecoins.

To obtain Stable Coin, you need to deposit funds to the issuance party. The issuance party will verify your identity during the deposit process. However, after that, Stable Coin can circulate freely without any form of inspection. You can send them to fren, who can send them to overseas relatives, and the relatives can transfer them to drug dealers. None of these subsequent participants need to present identification to the issuance party. The issuance party of Stable Coin is like the Swiss bank that used to issue anonymous savings account books and has no knowledge of who they are dealing with.

So, if anonymous savings accounts have long been banned in Switzerland, why is Stable Coin rising rapidly?

This is exactly the point raised by the Swiss Financial Market Supervisory Authority (FINMA) last month, which stated that it will no longer tolerate anonymous transfers of stablecoins. The new guidelines indicate that the identity of anyone holding stablecoins must be ‘fully verified by the issuance institution’. So not only yourself, but also your friends, their relatives, and the drug dealers in the transaction chain mentioned above, all need to provide their identification cards.

To demonstrate the rationale of the new policy, FINMA appeals to the concept of technological neutrality. My view on technological neutrality is that just because a financial product (in this case, a payment product) appears on a new medium or platform (i.e., blockchain), it does not mean that it can be exempt from the same rules that already apply to equivalent products (such as bank passbooks) issued on the old platform. Same functions, same regulations.

So far, stablecoin issuers like Tether have been trying to evade these identity verification requirements by confronting the law, suggesting that only the main holders of stablecoins (those who initially deposit funds to obtain stablecoins) are their customers, and therefore they are only responsible for due diligence on this group of holders. Secondary, tertiary, and subsequent holders are not ‘customers’, so the issuers claim that they do not need to know who they are.

However, FINMA does not agree with this view, which is understandable. FINMA states that all holders (not just the main holders) have a ‘permanent business relationship’ with the issuer and therefore the identity of each person must be identified. You can certainly understand why FINMA wants to address this issue. If ordinary Swiss banks see Stable Coins enjoying special treatment, they will all join the ranks and switch to using new base coins.

FINMA’s guidance doesn’t seem to be a big deal. Currently, only two Swiss Franc Stable Coins are covered by the guidance, and both are very small in scale. Bitcoin Suisse’s XCHF Circulating Supply is less than 1 million Swiss Francs, while Centi’s CCHF is also similar in scale.

However, as a regulatory agency that plays an important role in the global financial system, FINMA is likely to be emulated by other regulatory agencies. More importantly, FINMA is a member of the Financial Action Task Force (FATF), which is a cooperative organization representing 38 major countries’ Anti-Money Laundering agencies. FATF promotes global Anti-Money Laundering standards by blacklisting countries that fail to adopt these standards. If FINMA’s Stable Coin policy indicates that FATF is adopting a new Stable Coin strategy, it is expected to be widely adopted.

I am surprised that it took such a long time for an important global regulatory body to make a specific ruling on the Stable CoinAnonymity issue. It is time for standard Anti-Money Laundering practices to require Financial Institutions to verify who is using their platform, and Stable Coin issuers should not ride on the coattails.