Stablecoins – a digital version of Swiss bearer savings books

Before anti-money laundering laws arrived in Switzerland, anyone could walk into a Swiss bank and open an account without showing any ID. The bank would then issue you something called a bearer savings book, otherwise known as inhabersparheften or livrets d'épargne au porteur. Ownership of the savings book was considered by the bank to be proof of ownership of the underlying funds in the account. The person who opened the account could keep the book or, if they wanted to, pass it on to someone else without notifying the bank, at which point this second person was now entitled to the underlying funds, who could pass the book on to a third person, etc.

In essence, Swiss banks were issuing their very own version of cash.

As time passed and society's awareness of money laundering grew, usage of Swiss bearer savings books accounts was circumscribed by law. In 1977, banks were required for the first time to identify the initial customer to open the account. Also, anyone who wanted to withdraw over CHF 25,000 had to be identified by the bank. But the savings books still enjoyed a significant degree of anonymity. After account opening and prior to withdrawal, books could continue to circulate without identity checks.

In 2003, the issuance of new bearer savings books was prohibited by the Swiss government. Banks were now required to cancel existing savings books when they were presented to a bank's physical desk. Existing bearer savings books could continue to circulate anonymously from hand to hand, like cash, but thanks to steady cancellations they represented just 0.002% of the total assets held in Swiss bank accounts by 2019.

And so ended the Swiss bearer savings book. In the meantime, however, a similar financial instrument has arrived: the stablecoin.

To get some stablecoins, you need to deposit funds with the issuer, which will identify you upon deposit, but after that the stablecoins are free to circulate in the wild without any sort of checks. You can send them to a friend, and she can send them to a relative overseas, and that relative can transfer them to a drug dealer, and none of these subsequent owners need to show their IDs to the issuer. Stablecoin issuers, much like Swiss banks that once issued bearer savings books, often have no idea who they are dealing with.

So if Swiss bearer savings books have long been prohibited, why are stablecoins allowed to proliferate?

This is exactly the point made last month by FINMA, Switzerland's financial regulator, when it indicated that it will no longer tolerate the anonymous transfer of stablecoins. New guidance states that the identity of anyone holding a stablecoin must be "adequately verified by the issuing institution." So not only yourself, but your friend, her relative, and the drug dealer in the above transaction chain will be required to provide their ID.

To justify its new policy, FINMA appeals to the idea of technological neutrality. My take on technological neutrality is that just because a financial product—in this case a payments product—appears on a novel medium, or substrate (i.e. a blockchain) doesn't mean it is exempt from the same rules that already apply to equivalent products like bank savings books, which are issued on older substrates. Same function, same regulations.

Up till now, stablecoin issuers like Tether have tried to dodge these identification requirements with the legal fiction that only primary holders of stablecoins (i.e. those who originally deposited funds to get stablecoins) are their customers, and so it is only to this batch of holders that they have a due diligence obligation. Secondary, tertiary, and subsequent holders are not "customers", and so the issuers say they don't need to identify them.

But FINMA isn't buying this argument, and rightly so. All holders, not just primary ones, have a "permanent business relationship" with the issuer, says FINMA, and so everyone must be identified. You can certainly understand why FINMA wants to get ahead of this problem. If regular Swiss banks all see that stablecoins are enjoying special treatment, then they'll all join in on the party by switching over to the new substrate.

FINMA's guidance may not seem like a big deal. There are only two Swiss franc stablecoins to which it applies, and they are both tiny. Bitcoin Suisse's XCHF has under 1 million CHF in circulation, and Centi's CCHF doesn't appear to have much more. (Facebook may have run into an earlier informal version of this rule when FINMA assessed initial versions of its Libra stablecoin.)

But as a respected part of the global regulatory fabric, FINMA could very well be copied by other regulators. More importantly, FINMA is a member of the  Financial Action Task Force, or FATF, an umbrella organization representing the anti-money laundering authorities of 38 major nations. FATF promotes global anti-money laundering standards by blacklisting countries that fail to adopt them. If FINMA's policy on stablecoins is indicative of an emerging FATF approach to stablecoins, then expect it to spread.

The shocking thing to me is that it has taken this long for a major global regulator to issue a concrete ruling on the issue of stablecoin anonymity. It's about time. Standard anti-money laundering practice requires financial institutions to verify who is using their platform. Stablecoin issuers shouldn't get a free ride.