Stablecoins are the digital version of a Swiss bearer passbook.
Written by JP Koning
Compiled by: Luffy, Foresight News
Before Switzerland introduced anti-money laundering laws, anyone could walk into a Swiss bank and open an account, without having to show any ID. The bank would then give you a bearer passbook, also known as inhabersparheften. At the time, the bank considered possession of the passbook to be proof of possession of the underlying funds in the account. The account holder could keep the passbook, or, if they wished, pass it on to someone else without notifying the bank, and that person could withdraw the funds in the account.
In essence, Swiss banks issue their own cash.
Over time, as awareness of money laundering grew, the use of anonymous savings books in Switzerland was restricted by law. In 1977, banks were first required to confirm the identity of their customers. In addition, anyone who wanted to withdraw more than 25,000 Swiss francs had to get their identity confirmed by the bank. But savings books still enjoyed a considerable degree of anonymity. After the account was opened and before the funds were withdrawn, the books could continue to circulate without identity checks.
In 2003, the Swiss government banned the issuance of new bearer savings books, and existing savings books were cancelled when they were submitted to a bank’s physical counter. Bearer savings books can continue to circulate anonymously like cash, but due to constant cancellation, by 2019 they accounted for only 0.002% of total assets in Swiss bank accounts.
So ended the Swiss bearer savings book. But at the same time, a similar financial instrument emerged: the stablecoin.
To get a stablecoin, you need to deposit funds with the issuer, who will verify your identity at the time of the deposit, but after that the stablecoins can circulate freely without any form of inspection. You can send them to a friend, he can give them to a relative overseas, the relative can pass them on to a drug dealer, and all of these subsequent participants do not need to show proof of identity to the issuer. Stablecoin issuers, like the Swiss banks that once issued bearer savings books, have no idea who they are dealing with.
So, if Swiss bearer savings books have long been banned, why are stablecoins growing so rapidly?
This is exactly the point made by Swiss financial regulator FINMA last month, which said it would no longer tolerate anonymous transfers of stablecoins. The new guidelines state that the identity of anyone holding a stablecoin must be "sufficiently verified by the issuing institution." So not only you, but also your friend, his relative, and the drug dealer in the above transaction chain need to provide their ID.
To justify the new policy, FINMA appeals to the idea 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 substrate (i.e. a blockchain), does not mean that it is exempt from the same rules that already apply to equivalent products issued on the old substrate (e.g. a bank passbook). Same functionality, same regulations.
Until now, stablecoin issuers like Tether have tried to circumvent these identification requirements by arguing that only the primary holders of the stablecoin (the people who initially deposited funds to receive the stablecoin) are their customers, so they only have due diligence obligations to this group of holders. Secondary, tertiary, and subsequent holders are not "customers," so issuers say they don't need to know who they are.
But FINMA disagrees, and rightfully so. FINMA says that all holders (not just the main holders) have a "permanent business relationship" with the issuer, so everyone must be identified. You can certainly understand why FINMA wants to address this. If regular Swiss banks see that stablecoins are getting special treatment, they will all jump on the bandwagon and switch to the new base currency.
FINMA’s guidance doesn’t seem to be a big deal. There are only two Swiss franc stablecoins that are subject to the guidance, and both are small. Bitcoin Suisse’s XCHF has less than 1 million Swiss francs in circulation, while Centi’s CCHF is about the same size.
But as a regulator that plays an important role in the global financial system, FINMA is likely to be emulated by other regulators. What’s more, FINMA is a member of the Financial Action Task Force (FATF), a cooperative organization representing 38 major national anti-money laundering agencies. FATF promotes global anti-money laundering standards by blacklisting countries that fail to adopt these standards. If FINMA’s stablecoin policy is an indication that FATF is taking a new stablecoin approach, then expect it to be widely adopted.
I am surprised that it has taken this long for a major global regulator to make a concrete ruling on the issue of stablecoin anonymity. It is about time that standard AML practices require financial institutions to verify who is using their platforms, and stablecoin issuers should not be free riders.