The European Banking Authority (EBA), the banking authority of the European Union, has proposed a new set of guidelines that will establish minimum capital and liquidity requirements for stablecoin issuers.
To prevent bank runs and contagion during a crisis, the brand-new liquidity guidelines guarantee that the stablecoin can be redeemed rapidly, even during volatile market conditions.
Issuers of stablecoins backed by an utterly redeemable currency at par must do so following the proposed liquidity guidelines. The stablecoin liquidity guidelines will serve as a liquidity stress test for stablecoin issuers, according to the official proposal by the EBA.
The EBA is confident that the stress test will expose any deficiencies and insufficiencies in the stablecoin’s liquidity. This information could assist the EBA in approving only completely backed stablecoins with an adequate liquidity buffer. As per the guidelines:
“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.”
After receiving approval, the guidelines are scheduled to be implemented in early 2024. The regulatory bodies will possess the authority to augment the liquidity prerequisites of the pertinent issuer to safeguard against those risks, contingent upon the results of the liquidity stress testing after implementing the guidelines.
The proposed liquidity regulations target non-bank institutions that issue stablecoins. They mandate that these issuers adhere to equivalent safeguards and prevent banks from obtaining unjust capital or liquidity advantages.
The general public is currently able to provide input during the consultation phase of the proposal. Before the January 30, 2024, public hearing, the public consultation phase will last for three months.
