Europe's Banking Watchdog Targets Stablecoin Liquidity To Prevent Future Crises

Zinger Key Points
  • Proposed guidelines ensure stablecoins are redeemable at par, acting as a 'liquidity stress test' for issuers.
  • EBA's rules to level the playing field between stablecoin issuers and banks, avoiding unfair competitive advantages.

The European Union's banking regulator, the European Banking Authority (EBA), has put forward a draft of new regulatory requirements that will affect stablecoin issuers, particularly focusing on bolstering their capital holdings and ensuring ample liquidity.

These suggested regulations are designed to protect against the risk of rapid withdrawals that could lead to wider financial instability, particularly during times of market stress.

The timing of the EBA's move coincides with the broader industry discussions expected at Benzinga's Future of Digital Assets conference on Nov. 14, where the resilience and stability of digital assets in crisis situations will be a topic of considerable interest.

The EBA's liquidity proposal mandates that stablecoins, especially those pegged to traditional currencies, should be readily convertible at their face value for holders, thereby enforcing a measure to test the liquidity strength of issuers.

The EBA’s document explicitly states, "The liquidity stress testing will help issuers of tokens to better manage their reserve of assets and generally their liquidity risk."

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This process is envisioned as a way to reveal potential deficiencies in the liquidity of stablecoins, guiding the EBA to sanction only those stablecoins that demonstrate adequate liquidity buffers.

The rules, once finalized, are expected to be implemented starting in early 2024.

With these guidelines in force, regulatory bodies will acquire the authority to mandate more stringent liquidity provisions for issuers based on the insights gathered from liquidity stress tests.

Issuers of stablecoins, which may include entities outside the traditional banking sector, are expected to comply with these standards to maintain a level playing field with banks and ensure they do not have undue capital or liquidity advantages.

As of now, these proposals are open for public commentary, with the consultation period set for three months and a public hearing on the draft guidelines scheduled for Jan. 30, 2024.

Read Next: SEBA Scores SFC License To Offer A Crypto-Related Suite Of Services In Hong Kong

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