Innovation 2021

Technological innovation is also opening up a wide range of opportunities for new and enhanced processes and business models in the financial markets. FINMA actively monitored these innovations in 2021 in order to offer financial institutions modern regulatory conditions adapted to the technological possibilities.

FINMA updated the circular for the online client identification process in the year under review. It also further developed the regulatory principles with the Distributed Ledger Technology (DLT) Act. (…)

Digital client onboarding – keeping up with technological developments

Digitalisation is providing companies with increasing opportunities for process optimisations and efficiency gains that also stand to benefit their clients. FINMA is open to such developments. It set out its practice for enabling new clients to be identified digitally for the first time back in 2016 in Circular 2016/07 “Video and online identification”. The requirements for effectively preventing money laundering need to be met and the specific risks in the digital environment taken into account. In order to facilitate modern processes adapted to the technological possibilities, the circular is regularly adjusted to reflect technological developments. This has already happened twice since it entered into force in 2016.

Compared to in-person interactions, the digital sphere entails higher risks of false documents (that are genuine but originate from a third party) or fraudulent documents (that have been manipulated) being used. Financial intermediaries therefore have to implement specific security mechanisms for video or online identification. Technological developments are enabling these security mechanisms to be improved and designed more efficiently.

One such development was included in the revision of the circular in 2021 for the online client identification process. Previously, financial intermediaries were obliged to check the identity of a client by means of a bank transfer from an existing bank account. As an alternative, the identity of clients can now be verified using a biometric passport chip. Financial intermediaries can also now use geolocation to verify home addresses.

Status of FinTech licence and implementation of DLT Act

The FinTech area is continuing to develop from a regulatory perspective. In the year under review, new experience was gained with the FinTech licence that entered into force in 2019. At the same time, the regulatory principles for the Distributed Ledger Technology (DLT) Act were further developed, with the DLT trading facility offering a new licence type for innovative business models.

Experience with the FinTech licence

The FinTech licence in accordance with the Banking Act (Art. 1b BA) entered into force at the start of 2019. Four institutions had obtained this licence by the end of 2021. The licensing procedure for three of these four institutions was conducted in the year under review. It appears that the FinTech licence is particularly attractive for innovative service providers in the area of payment transactions. The lower requirements compared with a banking licence take account of the lower prudential risks of payment service providers. The lower requirements facilitate access to the financial market. These simplifications continue to attract interest in the licence. FINMA has therefore conducted a large number of meetings with potentially interested parties, including in the year under review. However, some interested parties are reconsidering when they realise that despite the simplifications mentioned the applicants still have to fulfil stringent requirements. While the capital and organisational requirements are significantly reduced compared with a banking licence, no concessions are made in terms of the anti-money laundering requirements, as payment services pose high inherent money laundering risks. The requirements placed on applicants should therefore not be underestimated. Interested parties are advised to study the statutory requirements in detail and if necessary to obtain expert advice.

Changes brought about by the DLT Act

The entry into force of the Federal Act on the Adaptation of Federal Law to Developments in Distributed Electronic Register Technology (DLT Act) on 1 August 2021 extended the scope of application of the FinTech licence to certain deposit-taking activities of payment tokens. Furthermore, the DLT trading facility pursuant to the Financial Market Infrastructure Act (Art. 73a ff. FinMIA) also created a new financial market infrastructure for the multilateral trading of DLT securities (standardised book-entry securities suitable for mass trading that are held on a blockchain and can be transferred). In contrast, for instance, to stock exchanges, a DLT trading facility can also admit end customers as participants and also offer settlement and custody services alongside trading. This combination of activities that were previously not compatible serves to create scope for innovative new business models. However, it also entails a wide range of requirements for applicants. FINMA has therefore published detailed guidelines on its website. No supervisory experience has so far been gained with the new rules.

Issue of stable coins by supervised institutions

In September 2019, FINMA published an initial indicator in its supplement to its guidelines for enquiries relating to initial coin offerings of how in its supervisory practice it would assess stable coins under Swiss supervisory law. The “Libra/Diem” project, which enabled FINMA to develop its practice and expectations placed on issuers of stable coins and payment systems based on stable coins, is of particular note here. Libra/Diem decided during the year under review to launch the payment system from the USA due to the fact that the USA was intended to be an important target market, with the project set to be based solely on a stable coin linked to the dollar. FINMA remains involved with stable coin projects of existing institutions and start-ups. It responded to a large number of enquiries for such projects in the year under review. While most of these came from institutions with no financial market licence, some supervised banks also approached FINMA with stable coin projects.

When responding to these enquiries from banks, in each case FINMA conducted an overall assessment of the risks, particularly including the risks posed to the integrity of the financial market. If a bank wishes to issue stable coins on a transaction system with open access such as Ethereum, the increased money laundering and reputational risks must particularly be taken into account. Due to the open nature of such systems, the issuing institution only retains control after the stable coin has been issued in the event of a potential redemption against the underlying value. The anti-money laundering due diligence obligations can accordingly only be met vis-à-vis the first and the last person to dispose of the stable coin. Intermediate persons buying or selling the stable coin on the open platform lie outside the control of the issuing institution. This risk can create reputational damage for both the institution concerned and the entire Swiss financial market.

In order to address these risks, contractual and, where appropriate, technological transfer restrictions are required for the issue of stable coins by supervised institutions. All persons disposing of stable coins must be sufficiently identified by the issuing institution or by adequately supervised distribution partners in order to comply with the due diligence obligations under the Anti-Money Laundering Act for all transactions with stable coins.

(From the Annual Report 2021)