The push for stablecoin liquidity rules by the EU watchdog marks a significant step towards regulation. With the proposed guidelines currently under public consultation, they have the potential to come into effect by June 2024. The European Banking Authority (EBA) has introduced a range of guidelines for stablecoin issuers, outlining minimum capital and liquidity requirements.
Meanwhile, the proposed liquidity guidelines aim to ensure that stablecoins can be easily converted into fiat currency, even during times of market turmoil. This measure is intended to reduce the risk of bank runs and contagion.
Furthermore, the proposed liquidity guidelines require stablecoin issuers to allow investors holding a stablecoin backed by a specific currency to redeem it for that currency at its full value. According to the official proposal by the EBA, these liquidity guidelines are designed to serve as a stress test for stablecoin issuers’ business models under various liquidity stress scenarios.
The EBA believes that conducting a liquidity stress test will help identify any potential liquidity issues with stablecoins. Therefore, the EBA will only approve stablecoins that are fully backed by assets and possess adequate liquidity to address any potential redemption requests. 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.”
Furthermore, after the guidelines are implemented, they are expected to take effect from early 2024. At that point, the authorities will be able to impose additional liquidity requirements on stablecoin issuers based on the results of the liquidity stress tests.
However, the proposed liquidity rules are intended to level the playing field between stablecoin issuers and banks, by applying the same safeguards to both. This is intended to prevent stablecoin issuers from gaining an unfair advantage over banks in terms of capital and liquidity requirements.
The EBA is currently seeking public input on the proposed liquidity rules, which are open for three months. The EBA will then hold a public hearing on Jan. 30, 2024, to consider the feedback.
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