The Swiss Financial Market Supervisory Authority (FINMA) has today published guidelines on betting services.
The guidance determines FINMA’s supervisory practice. The focus is on protecting customers from the risk of bankruptcy of the service provider bet.
Staking services raise a number of questions about how to interpret the law in relation to the custody of crypto assets. In particular, there is legal uncertainty as to whether staking cryptocurrencies are protected in the event of bankruptcy of the betting service provider. Protection depends on cryptographic evidence being readily available to clients at all times. It is currently unclear whether this requirement is met.
FINMA’s guidelines aim to enhance transparency regarding the treatment of betting services under financial market legislation. Until the issue of asset separation is further clarified in legislation or case law, and in the event of bankruptcy of a supervised entity, staked crypto-assets will be separated from a bankruptcy estate and returned to custodial account clients in accordance with FINMA’s current assessment.
In addition, the stake will not attract capital requirements for the supervised institution, provided that it has implemented risk mitigation measures and informed clients of the risks in an appropriate manner.
The guidance also provides an overview of the different forms of cryptocurrency staking, describes the risks and sets out the risk mitigation steps to be implemented by the supervised institution.
Betting involves various risks. In addition to legal uncertainties, these include a number of additional risks, such as:
- technical risk of malfunction of the betting process;
- Additionally, there is a risk of truncating the cryptos due to misbehavior by the validating node.
- counterparty risk due to the unclear legal position in the event of bankruptcy; this legal uncertainty is even greater if custody or staking is entrusted to institutions outside Switzerland.
- market risk, as it may not be possible to sell staked cryptocurrencies at the right time in a volatile market if the release process includes a lock-up or exit period, causing a delay in the return of pledged cryptocurrencies.