Date: 08 November, 2023
On November 8, the European Union’s banking watchdog introduced proposals mandating that issuers of stablecoins backed by currencies must possess adequate funds for complete investor redemption starting from June. As part of the world’s first comprehensive set of rules for cryptocurrency and stablecoin markets, the European Banking Authority (EBA) outlined minimum capital and liquidity requirements for stablecoin issuers and other forms of digitized tokens. The EBA initiated public consultations specifically on liquidity requirements for the reserve of assets supporting a stablecoin, emphasizing the use of eligible high-quality assets.
The objective is to ensure that these assets can be swiftly liquidated, even in stressed markets, to generate cash for meeting redemption obligations, thereby preventing runs and contagion during a crisis. The EBA stipulates that issuers of stablecoins backed by a currency must be capable of offering full redemptions to investors at par. In contrast, stablecoins backed by assets such as gold are only required to offer redemptions at the prevailing market price for the asset at the time of redemption.
Post-application of the guidelines, supervisors may enhance liquidity requirements for relevant issuers based on the results of liquidity stress testing, as outlined in a statement by the EBA. Notably, the proposed liquidity rules consider potential exemptions for banks in specific cases, acknowledging their existing liquidity buffers under EU bank capital and liquidity regulations. This approach ensures that stablecoin issuers, even if non-bank entities, adhere to equivalent safeguards, preventing any unfair advantages in capital or liquidity compared to banks.
Key Points:
- European Union’s banking watchdog proposes regulations for stablecoin issuers, requiring sufficient funds for full investor redemption starting from June.
- European Banking Authority (EBA) outlines minimum capital and liquidity requirements as part of the world’s first comprehensive rules for cryptocurrency and stablecoin markets.
- Public consultations initiated by EBA focus on liquidity requirements for the reserve of assets supporting stablecoins, emphasizing eligible high-quality assets.
- Objective is to enable swift liquidation of assets, even in stressed markets, to generate cash for meeting redemption obligations and preventing runs and contagion during crises.
- Issuers of stablecoins backed by currency must offer full redemptions at par to investors, while those backed by assets like gold only need to offer redemptions at the prevailing market price.
- Supervisors may enhance liquidity requirements for issuers based on liquidity stress testing results after the guidelines’ application.
- Proposed liquidity rules consider potential exemptions for banks, recognizing existing liquidity buffers under EU bank capital and liquidity regulations.
- Ensuring that stablecoin issuers, even if non-bank entities, adhere to equivalent safeguards, preventing unfair advantages in capital or liquidity compared to banks.
References:
https://www.reuters.com/markets/europe/eu-watchdog-sets-out-capital-liquidity-rules-stablecoin-issuers-2023-11-08/
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