EU Stablecoin Issuers with Bank Assets Will Face Extra Regulation, According to EBA Draft
EU Stablecoin Issuers with Bank Assets Will Face Extra Regulation, According to EBA Draft
The Impact of New Draft Rules on European Stablecoin Issuers
The European Banking Authority (EBA) recently circulated draft rules that could have significant implications for stablecoin issuers in Europe. These rules, known as the Markets in Crypto Assets regulation (MiCA), aim to address the potential risks posed by stablecoins that are closely connected to the financial system. If a stablecoin is deemed to be overly connected, it will face additional capital requirements and centralized supervision by the European Union (EU).
The draft rules highlight the interconnectedness of stablecoin issuers and the potential for one issuer’s financial distress to affect others in the network. This interconnectedness is due to the network of contractual obligations in which issuers operate. The draft document explains, “Financial distress at one asset-referenced token (ART) or e-money token (EMT) issuer can materially increase the likelihood of distress at other issuers of crypto-assets or at other financial institutions.”
To address these increased risks, MiCA introduces additional obligations for issuers of significant ARTs or EMTs, and assigns their supervision partly or fully to the EBA. The EBA will play a crucial role in ensuring compliance with these obligations and monitoring the stability and resilience of the stablecoin market.
To determine whether a stablecoin is linked to other parts of the financial world or is internationally significant, the EBA has identified a range of indicators. These indicators include the share of assets held in the reserve by other regulated financial institutions, the market share of cross-border payments, and metrics such as the number of users and market capitalization. These indicators will help the EBA assess the systemic importance of stablecoins and identify those that require centralized supervision.
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Under MiCA, stablecoins deemed significant will be supervised by the EBA rather than national regulators. They will also be subject to additional stress tests and must maintain their own funds equal to 3% of their reserve, as opposed to the usual 2%. These measures aim to enhance the stability and resilience of the stablecoin market, reducing the potential for systemic risks.
MiCA also introduces provisions that allow crypto wallet providers and exchanges to operate across the EU with a single license. This harmonization of regulations promotes market efficiency and encourages the growth of blockchain-based financial services. However, it is important to note that the stablecoin provisions of MiCA will not come into effect until June 2024.
These draft rules are part of a broader regulatory effort to address the risks associated with large-scale projects like the now-abandoned Libra/Diem project. A notable provision in MiCA is a controversial cap on the use of digital payments that could potentially supplant the euro. The aim is to strike a balance between fostering innovation and ensuring the stability of the European financial system.
It is worth mentioning that the EBA’s counterpart responsible for securities markets, the European Securities and Markets Authority (ESMA), has also issued its own consultation on licensing procedures. This shows the coordinated efforts of regulatory bodies to create a comprehensive regulatory framework for the blockchain and cryptocurrency industry in Europe.
Overall, the circulation of these draft rules by the EBA marks a significant development in the regulation of stablecoins in Europe. By addressing the risks associated with interconnected stablecoin issuers, these rules aim to enhance the stability, resilience, and transparency of the stablecoin market. The introduction of centralized supervision and additional capital requirements for significant stablecoins reflects the regulators’ commitment to safeguarding the integrity of the financial system. As the industry awaits further consultations and industry views on the draft rules, it is clear that regulatory bodies are actively working towards creating a regulatory environment that fosters innovation while mitigating potential risks in the blockchain industry.
