Leaked Email: FinMa Abused Authority To Implement New KYC Rule

• A leaked email from the Swiss banking authority FinMa shows that the agency instructed independent regulatory bodies to implement a monthly 1.000 CHF limit to no-KYC Virtual Asset Service Providers
• FinMa has abused its authority by attempting to regulate the Swiss cryptocurrency market in secret, a lawsuit claimed
• FinMa has since officiated its guidance, but has failed to present evidence of the need for the new rule to prevent money laundering

Cryptocurrency brokers across Switzerland have announced the implementation of a new regulatory limit for no-KYC purchases, from 1.000 CHF per day down to 1.000 CHF per month.

In Switzerland, anti-money laundering (AML) regulations for financial intermediaries is enforced by so-called Self-Regulatory Organizations (SROs) – independent entities in charge of overseeing compliance with anti-money laundering laws. SROs, in turn, follow the guidance of the Swiss Financial Market Supervisory Authority (FinMa), but do not directly underlie FinMa's authority in shaping directives.

This regulatory independence, in which SROs have some discretion in how to apply the law, and financial intermediaries not directly overseen by FinMa may choose which SRO to join, has now been threatened, a lawsuit claimed, as FinMa attempted to instruct SROs in secret via email.

Alexis Roussel, a self-described "legal hacker" who serves as an expert on cryptocurrencies to the Swiss SRO ARIF, leaked the email FinMa sent to SROs asking for the adjustment, because FinMa may issue guidance for SROs, it is forbidden to instruct them.

According to Roussel, FinMa not only abused its authority by directly instructing SROs, but additionally lacked data to back up the need for such a rule. Instead of citing scholarly research or governmental assessments on the use of Bitcoin for crime, FinMa cited an article titled "This is how drug dealers abuse Post and SBB," which offer Bitcoin ATMs at Swiss train stations, from the tabloid newspaper "BLICK".

"What a tabloid newspaper writes can hardly be used to make regulations," says Roussel, "especially in the absence of any serious, additional research on the topic." According to Switzerland's National Risk Assessments – a Financial Action Task Force (FATF) process to determine possible AML deficiencies – data on the use of cryptocurrencies for crime in Switzerland is not conclusive, Roussel says, which should be a minimum requirement to pass new regulations.

Roussel is not only an expert working for SROs, but also former Chairman of the early Swiss Bitcoin exchange BITY. Together with BITY, he decided to file a lawsuit against FinMa against the implementation of the 1.000 CHF limit on the grounds that the agency abused its powers and discriminates against technology providers.

"According to Swiss AML laws, currency exchanges are freed from the KYC process for up to 5.000 CHF per day. Why wouldn't this be the same for crypto? And why does FinMa apply an ever stricter limit than recommended by the FATF?", asks Roussel.

According to recommendations issued by the FATF, cryptocurrency exchanges should employ a no-KYC limit of 1.000 CHF per transaction, but FinMa is already applying a stricter limit of 1.000 CHF per day. "This is clear discrimination against technology providers that should be firmly based on research and facts to be deemed appropriate," says Roussel.

BITY's lawsuit attempted to achieve two things: first, to prove that FinMa abused its authority by attempting to instruct SROs, and second, that the application of the regulation is unlawful in and of itself.

FinMa bases the application of the monthly 1.000 CHF rule on existing AML laws akin to the Travel Rule, which governs transactions in and out of the country – but the article the law refers to does not include the application to cryptocurrency exchanges.

BITY asked FinMa in court to clarify whether the article directly applies to SROs and if so, what exactly the point of the SRO process is if independent regulators are directly bound by FinMa.

"This really puts FinMa in a lose-lose situation," Roussel says. "If the agency says the monthly 1.000 CHF regulation applies to cryptocurrency exchanges, it is misapplying the law. If FinMa says that the law does not apply, then SROs remain free to choose no-KYC limits based on their own risk appetite in coherence with existing AML frameworks."

FinMa has responded that it is not qualified to answer whether the law applies to SROs. Roussel has since left BITY as chairman, causing the exchange to drop the suit.

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