EU Regulator Draws Up Liquidity Rules for Stablecoin Issuers

• The EU has proposed some rules for stablecoin issuers.
• The proposed rules will undergo public consultations.
• If approved, the rules will be effective as early as next year.

As the European Union (EU) prepares to inaugurate its Markets in Crypto Assets Regulation (MiCA) regime, the bloc’s banking watchdog has proposed several rules for issuers of stablecoins and digitized tokens.

On November 8, the European Banking Authority (EBA) released a third batch of MiCA public consultations, making up part of the prudential package of the regime’s deliverables. This batch covers several topics, including capital and liquidity requirements for stablecoin issuers.

Proposed Rules for Stablecoin Issuers

Under the proposed liquidity guidelines , stablecoin issuers are mandated to offer “high-quality” stablecoins that are backed by a currency that is fully redeemable at par with investors.

According to the regulator, this provision will ensure digital assets can be quickly sold to raise cash for redemptions, even in stressed markets. This is a proactive step to ensure peg stability, as well as mitigate runs and contagion in a financial crisis.

For stablecoins backed by assets, such as gold, EBA proposes that they offer redemptions at the asset’s going market price during the redemption period.

Further, the EBA proposes regular liquidity stress-testing programs for all stablecoin issuers.

“The stress testing should take into account severe but plausible financial stress scenarios, such as credit, liquidity, interest- and exchange rate shocks, market risk, and non-financial stress scenarios, such as operational risk related shocks,” the document read.

The EBA proposed that banks that issue stablecoins may be exempt from certain liquidity requirements, given that they are already compliant with enough liquidity buffers under the existing EU bank capital and liquidity rules.

The proposals will undergo public consultation over the next three months. If approved, they’ll be effective as early as June next year. However, after implementation, the rules will not be a one-size-fits-all.

The Regulator’s Discretion

According to the EBA, “competent authorities” can strengthen liquidity requirements for individual stablecoin issuers if they observe higher degree risks based on the outcome of the liquidity stress testing.

“Given the novelty of issuers of asset-referenced tokens and the tokens themselves, no universal assessment framework exists.” The regulator stated.

The regulator said this would ensure stablecoin issuers meet the same safeguards as bankers and avoid unfair capital or liquidity advantages over them, especially if they are non-banking institutions.

Stay updated on the latest crypto tax reporting rule adopted by the EU Council:
EU Council Adopts New Crypto Tax Reporting Rule

Read how France is preparing for MiCA:
France Prepares for MiCA with Focus on 6 Key Areas