EU Banking Watchdog Proposes Liquidity Rules for Stablecoin Issuers

The European Banking Authority (EBA), the banking watchdog for the European Union, has introduced a new set of guidelines aimed at regulating stablecoin issuers by setting minimum capital and liquidity requirements.

The proposed liquidity guidelines are designed to ensure that stablecoins can be swiftly redeemed even in volatile market conditions, thus mitigating the risk of bank runs and contagion during financial crises.

Under these proposed guidelines, stablecoin issuers must provide any stablecoin that is backed by a currency and can be fully redeemed at par to investors. The EBA’s official proposal emphasizes that these liquidity guidelines will serve as a liquidity stress test for stablecoin issuers.

The purpose of the stress test is to identify any weaknesses or lack of liquidity in the stablecoin, helping regulatory authorities approve only those stablecoins with sufficient liquidity buffers. 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, these guidelines are expected to take effect from early 2024. Following their implementation, authorities will have the authority to enhance the liquidity requirements of the relevant issuer to address risks identified through liquidity stress testing.

These proposed liquidity rules specifically target stablecoin issuers, which can include non-bank institutions. The aim is to ensure that they adhere to the same safeguards and avoid enjoying unfair capital or liquidity advantages over traditional banks. Currently, the proposal is in the consultation phase, during which the general public can provide input. The public consultation phase will remain open for three months until a public hearing is scheduled on January 30, 2024.

By Urik

My professional background is in public relations and I am the founder of Cryptochating. My journey into blockchain technology started four years ago, and I haven't looked back since then. The future of decentralized technology is incredibly fascinating to me, and I am passionate about communicating how it will change the world.

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