EU banking watchdog proposes liquidity rules for stablecoin issuers

The proposed guidelines are currently in the public consultation phase for the next three months, and if approved, it will come into effect starting in June 2024.

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

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 EBA noted that the stablecoin liquidity guidelines will act as a liquidity stress test for stablecoin issuers.

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

“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 official proposal read.

Once approved, the proposal is set to come into effect from June to early next year. 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.

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

European Banking Authority (EBA), the banking watchdog of the European Union (EU), proposed a set of new guidelines for stablecoin issuers that will set minimum capital and liquidity requirements.

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