EU banking watchdog proposes liquidity rules for stablecoin issuers

The European Banking Authority (EBA) has put forward a set of guidelines for stablecoin issuers that aim to ensure the stability and liquidity of these digital currencies. The proposed rules, which include minimum capital and liquidity requirements, are designed to prevent bank runs and contagion in times of market turbulence.

New guidelines for stablecoin liquidity

The EBA's proposed guidelines require stablecoin issuers to offer fully redeemable stablecoins backed by a currency. This means that stablecoin investors can quickly and easily convert their digital assets back into fiat currency, even during periods of market stress. The guidelines also introduce liquidity stress testing for stablecoin issuers, which will help identify any potential liquidity risks and shortcomings.

The EBA believes that by implementing liquidity stress testing, it can ensure that only stablecoins with sufficient liquidity buffers are approved. The testing process will enable issuers to better manage their reserve of assets and mitigate liquidity risks. If any weaknesses or lack of liquidity are identified, the EBA or relevant supervisory authority may strengthen the liquidity requirements for the issuer.

Effective from early 2024

If approved, the guidelines are expected to come into effect in early 2024. Once implemented, the authorities will have the power to enhance the liquidity requirements for stablecoin issuers based on the outcomes of the liquidity stress testing. This will help ensure that stablecoins operate with adequate safeguards and avoid unfair advantages in terms of capital and liquidity compared to traditional banks.

Consultation period and public input

The proposed liquidity rules are currently in the consultation phase, allowing the general public to provide their input. The consultation phase will last for three months, after which a public hearing is scheduled for January 30, 2024. This process allows for transparency and inclusivity, ensuring that various stakeholders have the opportunity to contribute to the development of these guidelines.