Switzerland’s financial markets regulator, FINMA, has proposed new measures to mitigate risks associated with banks providing default guarantees to stablecoin holders.
According to the guidance published on Friday, if there are issues at the stablecoin issuer, the bank offering the default guarantee could face reputational damage and potential legal risks. FINMA highlighted that stablecoin issuers, which accept public deposits and might otherwise need a banking license, can bypass this requirement by arranging with a registered bank to cover customer repayments in the event of a default.
“This situation creates risks for both stablecoin holders and the bank providing the default guarantee,” FINMA stated. The regulator noted that any problems with the stablecoin issuer could lead to reputational harm for the bank and expose it to legal challenges due to its contractual ties with the issuer.
Concerns about the backing of stablecoin issuers have been prominent for several years. For instance, Tether, which issues the largest stablecoin by market capitalization, USDT, published its first reserve account in 2021 to address funding questions. Circle, issuing the second-largest stablecoin, USDC, followed with similar disclosures in 2022.
FINMA’s updated guidance, which builds on a 2019 note, introduces several requirements to enhance protection. It mandates that customers have a direct claim against the bank providing the guarantee, ensures the guarantee covers the full amount of deposits and interest, and requires that the bank’s deposits do not exceed the guarantee amount.
The regulator plans to continue addressing the risks related to default guarantees in future discussions.
