The European Union's banking regulatory authority has put forth a set of guidelines regarding liquidity requirements for entities that issue stablecoins.
The suggested guidelines are presently undergoing a public consultation period that will last for three months. If they receive approval, they are scheduled to be implemented from June 2024 onwards.
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The European Banking Authority (EBA), the regulatory body overseeing banking in the European Union, has introduced a fresh set of recommendations for stablecoin issuers. These guidelines establish minimum capital and liquidity standards.
The primary objective of these new liquidity guidelines is to guarantee that stablecoins can be swiftly redeemed, even in times of turbulent market conditions. This is intended to minimize the risk of bank runs and financial contagion during crises.
According to the proposed liquidity rules, stablecoin issuers are required to offer complete redemption at par value to investors for stablecoins backed by a specific currency. The EBA's official proposal underscores that these liquidity guidelines essentially serve as a stress test for stablecoin issuers.
The EBA anticipates that the stress test will reveal any deficiencies in the liquidity of the stablecoin, allowing the authority to approve only those stablecoins that have a sufficient liquidity buffer and are fully backed. The guidelines specify:
"The liquidity stress testing will help token issuers in better managing their asset reserves and their overall liquidity risk. Depending on the results of the liquidity stress testing, the EBA or, when applicable, the relevant competent authority or supervisor, may opt to enhance the issuer's liquidity requirements."
Once approved, these guidelines are slated to take effect in early 2024. After their implementation, authorities will possess the authority to strengthen the liquidity requirements for specific issuers based on the results of the liquidity stress tests.
These proposed liquidity regulations are primarily directed at stablecoin issuers, which may include non-bank entities. The goal is to ensure that they adhere to the same protective measures and prevent any unfair advantages in terms of capital or liquidity in comparison to traditional banks. Currently, the proposal is in the consultation phase, during which input from the general public is sought. The public consultation stage will remain open for three months, concluding with a scheduled public hearing on January 30, 2024.
