EU Banking Watchdog Proposes Liquidity Rules for Crypto Banks

Stablecoin Issuers Must Meet Minimum Capital and Liquidity Requirements

The European Banking Authority (EBA) — the European Union’s banking watchdog — has proposed a new set of guidelines for stablecoin issuers that will set minimum capital and liquidity requirements. These liquidity guidelines are intended to ensure that investors can quickly redeem any stablecoin backed by a currency at par, even during turbulent crypto market conditions, to prevent the risk of bank runs and contagion in a crisis.

The official proposal by the EBA stated that the liquidity stress test for stablecoin issuers will highlight any shortcomings or lack of liquidity for the stablecoin, and will help the authority to only approve fully-backed stablecoins with enough of a liquidity buffer. The guidelines state:

The proposed liquidity rules, targeting issuers of stablecoins such as non-bank institutions, are intended to ensure that these entities meet the same safeguards and do not gain any unfair capital or liquidity advantages over banks. The public consultation phase is open for three months, culminating in a public hearing on Jan. 30, 2024, and once approved, the guidelines are set to come into effect from early 2024. Additionally, the authorities will have the power to strengthen the liquidity requirements of the relevant issuer based on the outcome of the liquidity stress testing.

The crypto market is a buzzing topic and investors are wondering if they can invest in Web 3.0, the advantages and disadvantages of it, and what the latest crypto crisis is. Banks are also getting involved in crypto, with Bank of America being one of the first to explore the possibilities.