EBA Releases Liquidity Guidelines for Stablecoin Issuers

The European Banking Authority (EBA) has issued guidelines regarding liquidity and capital requirements for stablecoin issuers in line with the EU’s new Markets in Crypto Assets (MiCA) regulation.

In the latest framework published on November 8, the EBA stated that the proposed regulation envisions a liquidation stress test, which entails issuers providing a full reserve of assets pegged to stablecoins.

This means only assets meeting specific quality standards can be employed as the basis for a stablecoin or other digital assets.

The primary objective of the guidelines is to ensure that assets can be swiftly liquidated to generate cash for paying back redemptions to investors, even in highly volatile market conditions.

This is a crucial measure to prevent panic-driven asset runs and contagion crises in stress markets.

The EBA iterated that applying the guidelines would enable stablecoin issuers to manage their reserve of assets.

Based on the liquidity stress test outcomes, the agency or any relevant authority may decide to strengthen the liquidity requirements of issuers to address more risks after recommendations come into effect.

Another notable highlight of the guidelines proposal is the potential exemption of banks.

The EBA clarified that banks may be exempted from certain liquidity requirements in some cases, given that they already hold funds per existing EU bank capital and liquidity regulations.

The additional regulations are intended to prevent undue capital or liquidity advantages over banks for issuers of stablecoins, which may include non-bank institutions if they adhere to the same policies.

In a closing note, the EBA stated that the proposal is still at the consultation stage, which leaves an open window for observers and the general public to provide feedback.

The consultation period will remain open until January 30, 2024, when the MiCAR will hold its initial public hearing.

Bank of England Warns Lenders on Stablecoin Amidst Third Batch of MiCAR

As the EU’s MiCAR gains momentum, the Bank of England (BoE) and the Financial Conduct Authority (FCA) have unveiled initial proposals for regulating stablecoins as part of the first wave of forthcoming rules for the cryptocurrency sector.

In a joint framework released on November 6, the BoE and FCA emphasized that these guidelines are focused on the systemic retail payment systems that involve stablecoins and related service providers, such as payment platforms.

The entities underscored the risks of utilizing stablecoins within systemic payment systems and advocated subjecting them to equivalent regulatory standards.

In furtherance of this objective, the BoE sent a letter to bank CEOs outlining how financial institutions should manage tokenized deposits if they offer them.

According to the letter, if deposit-takers wish to issue e-money or regulated stablecoins to retail customers, this should be executed through distinct, non-deposit-taking, and insolvency-remote entities.

This is because cash deposit accounts in the United Kingdom are safeguarded by insurance in the event of a liquidation. However, the same does not apply to separate e-money or stablecoin accounts.

With the EU’s MiCAR and the UK’s recommendations set to take shape in the coming months, risks related to lack of regulatory clarity, fraud, and anti-money laundering (AML) may decline when put into effect.