European Banking Authority Proposes Liquidity Rules for Stablecoin Issuers

• For stablecoin issuers, the EBA’s liquidity criteria will serve as a liquidity stress test.
• The regulations are expected to go into effect at the beginning of 2024 if they are approved.

The EU’s banking regulator, the European Banking Authority (EBA), has suggested new rules for stablecoin issuers that would establish minimum capital and liquidity criteria. With the new liquidity requirements in place, the stablecoin should be easily redeemable even when markets are volatile, mitigating the risks of bank runs and contagion.

The proposed liquidity requirements would require stablecoin issuers to make available to investors stablecoins backed by a currency that can be redeemed at face value. For stablecoin issuers, the EBA’s liquidity criteria will serve as a “liquidity stress test,” as stated in the formal proposal.

Focusing on Liquidity Requirements

Moreover, the EBA thinks that the stress test will reveal any problems and insufficient liquidity for the stablecoin, allowing the authority to sanction only fully-backed stablecoins with sufficient liquidity.

The guidelines read:

“The liquidity stress testing will help issuers of tokens to better manage their reserve of assets and generally their liquidity risk. Based on the outcome of the liquidity stress testing, the EBA or, where applicable, the relevant competent authority/supervisor, may decide to strengthen the liquidity requirements of the issuer.”

The regulations are expected to go into effect at the beginning of 2024 if they are approved. Once the standards are in place, authorities may use the results of the liquidity stress testing to increase the relevant issuer’s liquidity requirements, mitigating the aforementioned risks.

The proposed liquidity standards are intended at issuers of stablecoins, which may be non-bank entities, requiring them to fulfill the same protections and prevent unfair capital or liquidity advantages over banks. The idea is now in the consultation process, during which the public may provide feedback. There will be three months of public comment before the hearing on January 30, 2024.

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