Stablecoins hold considerable promise for Switzerland, with the potential to improve the payment system, strengthen the digital economy, and reinforce Switzerland’s position as a global innovation hub, according to a new report by the Swiss Bankers Association (SBA). However, their introduction entrails risks, particularly to financial stability and the effectiveness of monetary policy, which must be carefully managed.

The new report, released on April 30, analyzes the potential implications of issuing a regulated stablecoin in Switzerland, exploring the opportunities and challenges posed by the technology.

A regulated stablecoin for Switzerland

According to the report, a regulated and trusted stablecoin could represent a strategic initiative for the future of Switzerland’s financial sector, broader economy, and society.

These digital assets have the potential to streamline payment processes, reducing transaction times and costs. They can complement existing payment methods by enabling faster and more efficient digital transactions.

Stablecoins also support various use cases, including digital asset trading and decentralized finance (DeFi). They can bridge traditional finance and decentralized systems, and their programmability enables innovations in areas such as smart contracts, automated payments, and digital services.

Furthermore, stablecoins can enable faster and more cost-effective cross-border transactions. For Swiss companies engaged in exporting goods and services, this could significantly reduce transaction costs, improve liquidity, and increase operational efficiency.

Ultimately, all of these benefits could contribute to building a more efficient, transparency and resilient payment ecosystem for Switzerland, the report says. By embracing the technology, the country would not only strengthen its role as a leading global center for financial services and innovation but also reinforce its financial sovereignty.

But more concerningly, the report warns that without a Swiss franc stablecoin for the general public, many applications will likely switch to foreign stablecoins. This growing reliance could potentially hinder the development of blockchain-based innovations, reduce monetary sovereignty, and limit Switzerland’s influence over its digital financial ecosystem.

Swiss banks must lead the change

The SBA argues that as regulated and supervised financial intermediaries, banks are best positioned to issue stablecoins. Their existing infrastructure, client trust, and alignment with the strategic digital trends provide them with a competitive edge.

There are a number of benefits for banks issuing stablecoins. For one, they can earn a profit if the assets backing the stablecoins, such as government bonds or other high-quality liquid assets (HQLA), earn higher interest than what is paid to stablecoin users.

Additionally, banks can supplement their revenue by charging fees for stablecoin issuance and management. This would be similar to how they presently earn commission income in traditional banking services, such as wire transfers or foreign exchange (FX) conversion.

In addition to income from issuing stablecoins, banks can leverage stablecoins to provide innovative customer services and strategically position themselves in the evolving financial landscape. These services could include faster cross-border payments, tokenized deposit accounts, or programmable money services, such as automated payroll, conditional payments, or escrow.

Challenges remain

Despite their promise, stablecoins present several risks. For one, stablecoins are subject to solvency and liquidity risks.

Solvency risks arises when the stability of the stablecoin comes under pressure if credit and market risks call into question the value of its reserve backing for the purpose of maintaining redeemability.

Liquidity risk is also notable, where, despite promises of stability, users still face the risk that they will not be able to redeem their stablecoins at face value.

Another risk outlined is how the large-scale issuance of stablecoins by banks can affect their traditional financial roles, particularly by altering the structure of their balance sheets and reducing their ability to lend. Since stablecoins must be backed by HQLA that cannot be used for lending, this could lead to disintermediation, a weakening of the bank’s role as an intermediary between savers and borrowers.

Finally, stablecoins can impact financial markets and monetary policy. As demand for stablecoins grows, especially those backed by HQLA, it can lower interest rates due to limited supply, potentially increasing debt issuance. Large, global stablecoin providers may also influence the Swiss franc exchange rate.

A sudden loss of confidence could trigger a stablecoin run, disrupting markets and straining institutions that lack access to central bank liquidity.

The rise of stablecoins

The stablecoin market has risen significantly over the past years. In H1 2024, the global trading volume of stablecoins exceeded US$2.6 trillion, with more than 20 million users carrying out at least one stablecoin transaction every month.

However, the number of stablecoins issued by banks remains limited. SG Forge’s stablecoin EURCV is currently the only stablecoin issued by a wholly owned subsidiary of a major bank. It is fully backed by EUR bank deposits and high-quality, liquid EUR securities held at Société Générale.

JP Morgan’s JPM Coin, meanwhile, is reserved for a narrowly defined group of institutional users intended to facilitate interbank payments.

The Sterling Fnality Payment System, launched by Fnality in 2023, claims to be the world’s first fully regulated, blockchain-based wholesale payment system. This system enables real-time, 24/7 settlement of wholesale payments using digital representations of funds held at the Bank of England.

Other institutions such as ING and Deutsche Bank have also announced plans to launch their own stablecoins. In July 2024, Deutsche Bank-owned asset management company DWS announced a new joint venture to launch the first German-regulated, euro stablecoin, Reuters reported.

Most recently, in April, news emerged that Dutch Bank ING was working on a stablecoin project with “a few other banks”, sources with knowledge of the plans told CoinDesk. Progress has been slowly due to the need for board approval across the participating institutions to set up the new joint entity.

In Switzerland, banks are actively exploring blockchain solutions. A 2024 study conducted by the University of St. Gallen revealed that nearly 60% of the Swiss banks surveyed had already developed or were working on a blockchain strategy, with 16% ranking blockchain topics as highly prioritized. Almost all banks with an existing strategy had management support and launched their first blockchain offering in 2023 or earlier.

The Swiss government is also promoting tokenization and distributed ledger technology (DLT). Andréa Maechler, a governing board member of the Swiss National Bank (SNB), emphasized during an event in 2023 the central bank’s commitment to leveraging technologies and processes including tokenization and DLT to establish a more efficient, reliable and secure payment ecosystem in Switzerland.

Featured image: Edited by Fintech News Switzerland, based on images Image by Roy Buri from Pixabay