Key takeaways:
- The new liquidity guidelines aim to mitigate the risk of bank runs and contagion in a crisis by guaranteeing that the stablecoin may be swiftly redeemed even in volatile market conditions.
- The stress test will reveal any flaws and liquidity issues with the stablecoin, enabling EBA to only certify fully backed stablecoins with a sufficient cushion of liquidity.
The new liquidity guidelines aim to mitigate the risk of bank runs and contagion in a crisis by guaranteeing that the stablecoin may be swiftly redeemed even in volatile market conditions.
Stablecoin issuers are required by the proposed liquidity guidelines to provide investors with any stablecoin that is fully redeemable at par. According to the official European Banking Authority (EBA) plan, stablecoin issuers will be subject to a liquidity stress test per the stablecoin liquidity rules.
According to EBA, the stress test will reveal any flaws and liquidity issues with the stablecoin, enabling EBA to only certify fully backed stablecoins with a sufficient cushion of liquidity. According to the formal proposal:
“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 plan is scheduled to go into force in June or early January of the following year, if authorized. Based on the results of the liquidity stress test, the authorities will have the authority to increase the relevant issuer’s liquidity requirements to address those risks after putting the recommendations into effect.
The proposed liquidity regulations are intended to prevent undue capital or liquidity advantages over banks for stablecoin issuers, which may include non-bank institutions if they adhere to the same precautions.
The idea is currently in the consultation stage, during which the general public is invited to provide feedback. Before a public hearing is set for January 30, 2024, the public engagement phase will remain available for three months.
The European Union’s (EU) banking authority, the EBA, has put up a set of new regulations for stablecoin issuers that will establish minimum capital and liquidity needs.
