EU banking watchdog proposes liquidity rules for stablecoin issuers

The European Banking Authority (EBA) — the European Union’s banking watchdog — has proposed a new set of guidelines for stablecoin issuers that will set minimum capital and liquidity requirements.

The new liquidity guidelines aim to ensure the stablecoin can be quickly redeemed even during turbulent market conditions to avoid the risk of bank runs and contagion in a crisis.

Under the proposed liquidity guidelines, stablecoin issuers must offer any stablecoin backed by a currency that is fully redeemable at par to investors. The official proposal by the EBA noted that the stablecoin liquidity guidelines will act as a liquidity stress test for stablecoin issuers.

The EBA believes the stress test will highlight any shortcomings and lack of liquidity for the stablecoin, which can help the authority to only approve fully-backed stablecoins with enough of a liquidity buffer. The guidelines state:

“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.” 

Once approved, the guidelines are set to come into effect from early 2024. After implementing the guidelines, the authorities will have the power to strengthen the liquidity requirements of the relevant issuer to cover those risks based on the outcome of the liquidity stress testing.

Related: Binance plans to delist stablecoins in Europe, citing MiCA compliance

The proposed liquidity rules are aimed at issuers of stablecoins, which can be non-bank institutions, requiring them to meet the same safeguards and avoid unfair capital or liquidity advantages over banks. Currently, the proposal is in the consultation phase, where the general public can give their input. The public consultation phase is open for three months until a public hearing is scheduled on Jan. 30, 2024.

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