FINMA Warns of Potential Perils for Banks Collaborating with Stablecoin Issuers

In a recent directive, Switzerland’s financial markets overseer, FINMA, highlighted the latent hazards posed by stablecoin issuers to collaborating banking institutions. The guidance underscores the intricate dynamics and potential reputational and legal risks that these financial collaborations entail.

Stablecoin issuers, who gather deposits from the populace and might typically require a banking license, can circumvent this necessity by forming agreements with licensed banks. These banks then shoulder the responsibility of repaying depositors in the event of a default. This arrangement, while seemingly practical, is fraught with complexities and perils.

“This creates risks for the stablecoin holders and the bank providing the default guarantee,” FINMA elucidated in its guidance. “In the event of irregularities at the stablecoin issuer, the bank providing the default guarantee may suffer reputational damage due to its contractual relationship with the issuer and may also be exposed to legal risks.”

Concerns about the reserves backing stablecoins, which are digital tokens pegged to assets like the U.S. dollar or gold, have been a persistent issue. In 2021, Tether, the issuer of the largest stablecoin by market cap, USDT, disclosed its reserves to address scrutiny over its backing. Circle, the issuer of the second-largest stablecoin, USDC, followed suit in 2022.

FINMA’s latest directive builds on its 2019 guidance, delineating several stipulations to ensure robust protection for customers. These requirements include granting customers a direct claim against the bank providing the guarantee, ensuring the guarantee covers the full amount of deposits and interest, and preventing deposits from exceeding the cover provided by the guarantee.

The regulator intends to address the risks associated with default guarantees in forthcoming discussions, aiming to fortify the stability and integrity of the financial system amidst the burgeoning growth of the stablecoin sector.