EBA provides new rules for stablecoins

The Markets in Crypto-Assets Regulation (MiCAR) comes into effect in the European Union for certain stablecoins from 30 June 2024. The two forms of stablecoin recognised by MiCAR (Regulated Stablecoins) are:

• Asset-Referenced Tokens (ART): crypto-assets backed by non-fiat currency assets or a basket of fiat or non-fiat assets.
• Electronic Money Tokens (EMT): crypto-assets backed by one fiat currency.

Key to the issuance of Regulated Stablecoins is the assurance that they are backed by sufficient assets to allow for redemption by token-holders. MiCAR contains detailed rules for the issuers of ARTs, requiring a reserve of assets to be established, held, and managed to reduce the risks that holders of Regulated Stablecoins will be unable to exercise their redemption rights.

Following public consultation, the European Banking Authority has published several regulatory technical standards (RTS) and adopted guidelines to implement MiCAR's rules for asset reserves. Below, we describe the main features of each of these documents.

Draft Regulatory Technical Standards

RTS specifying the procedure and timeframe for an issuer to adjust the amount of its own funds to 3% of the average amount of the reserve of assets

Issuers of Regulated Stablecoins (other than credit institutions) must meet "own funds" requirements under MiCAR. One of the factors is a measurement equal to 2% of the average amount of the reserve assets for the Regulated Stablecoin. If the Regulated Stablecoin is treated as "significant" under MiCAR, and in other cases specified by competent authorities, the 2% level rises to 3%. The RTS addresses the procedure and timelines for the issuer to adjust to the higher level of "own funds."

It is left to competent authorities to determine, on a case-by-case basis, the appropriate timeline and steps for the issuer to reach the 3% threshold. However, a plan must be developed within 25 days and the time period for its implementation is limited to 6 months.

RTS for further specifying the liquidity requirements of the reserve of assets

Issuers must ensure that a proportion of the required reserve of assets for Regulated Stablecoins referencing official currencies is available on short notice. The percentages of assets which are subject to daily and weekly maximum maturities are set out in the RTS, as follows:

Assets with daily maturities

• Significant tokens: at least 40% of the total market value of the overall reserve
• Non-significant tokens: at least 20% of the total market value of the overall reserve

Assets with weekly maturities

• Significant tokens: at least 60% of the total market value of the reserve
• Non-significant tokens: at least 30% of the total market value of the reserve

Other Significant Tokens

The RTS also specifies thresholds and requirements for termination of reverse repurchase agreements for significant tokens that do not reference official currencies.

Deposits with Credit Institutions

The RTS provides for issuers to maintain the following proportions of the reserve of assets as deposits with credit institutions:

• ARTs and EMTs referencing official currencies: at least 30% of the amount referenced.
• Significant ARTs and significant EMTs referencing official currencies: at least 60% of the amount referenced.

They must also manage concentration risk by applying thresholds calculated (a) by reference to the proportion of the asset reserve that is held by each credit institution and (b) as the proportion of the total assets of the credit institution represented by the deposits of the asset reserve. Limits are provided for deposits at credit institutions, which vary depending on whether they are treated as a systemic or large institutions under the Capital Requirements Regulation.

Overall Concentration Limits

The RTS sets the overall concentration limit on the combined value of the following reserve assets, placed with a credit institution, at 30% of the market value of the reserve:

• the value of deposits;
• the market value of highly liquid financial instruments in the form of securities or money market instruments issued or guaranteed by the same credit institution; and
• the risk exposure to that credit institution in unmargined OTC derivatives. 

The calculation is to include those deposits placed with, instruments issued by or exposures to all other entities with whom that credit institution has close links.

Overcollateralisation

The EBA has established a formula for the mandatory overcollateralization of the reserve of assets. It requires a look-back over five years, using daily windows, to address the correlation between the volatilities of the market value of the reserve of assets and the market value of the assets referenced.

Self-Reporting of Deviations

Issuers will have five days to report to their competent authorities when they breach or expect to breach the RTS requirements. They will be expected to submit remediation plans for review.

Regulatory technical standards for specifying the highly liquid financial instruments with minimal market risk, credit risk and concentration risk

The RTS sets out the criteria to determine the eligibility of the assets in which the issuer of a relevant Regulated Stablecoin may invest the reserve. They must be highly liquid financial instruments with minimum market, credit, and concentration risks. The EBA considers that these include "the highest quality liquid assets in the [liquidity coverage requirements], i.e., 0% haircut and uncapped level 1 assets."

In practice, this means "sovereign bonds, regional government/local authorities/PSE bonds that are assimilated to sovereign bonds, central bank assets, promotional bonds and bonds issued by multilateral development banks and by other specific international organizations." Certain other financial instruments are also permissible when they meet quality criteria set out in the RTS.

Concentration Limits

The RTS sets a 35% limit for government bonds and a 10% limit for covered bonds in the reserve. For derivatives, the EBA intends to carry across the UCITS rule limiting counterparty exposure to 10% for credit institutions and 5% for others, but only for the unmargined part of the exposure.

Changes in Characteristics of Financial Instruments

Issuers will have five days to report to their competent authorities when they breach or expect to breach the RTS requirements. They will be expected to submit remediation plans for review.

RTS for specifying the minimum contents of the liquidity management policy and procedures

The management body of the issuer of a significant or specifically designated ART or EMT is required to approve the risk-tolerances for the firm's liquidity policy. For ARTs that do not reference an official currency (eg, gold-backed ARTs), the risk approach should address the use of synthetic strategies, including derivatives. Custodian concentration risk, including on a group level, is to be addressed.

Contingency Policy

Issuers are required to establish alerts for divergences between: (a) the market value of the issue and the market value of the reserve of assets; and (2) the market value of the reserve of assets and the market value of the assets referenced by the tokens. Liquidity risk mitigation tools, including diversified funding sources, are expected to be kept under review.

Segregation of the Liquidity Management Policy and Procedures

The liquidity management policy and procedures operated by an issuer are to be established and maintained for each token separately, and with regard to each different referenced asset. They are to be ring-fenced from any liquidity policy maintained for other business of the issuer.

Liquidity Stress Testing

The liquidity management policy must include the process and procedures for liquidity stress testing, including details of:

• the risks covered;
• parameters considered and their calibration under stress, as well as the stress scenarios and time horizons used;
• historical data and assumptions, including any expert judgments, considered by the issuer in the calibration of those parameters; and
• outcomes and remedies taken. 
  

A reverse stress test element is required.

Guidelines on Recovery Plans

The EBA has produced guidelines on the recovery plan to be maintained by the issuers of ARTs and issuers of EMTs. They are cast at a high-level, describing the format of the recovery plan, rather than prescribing a template. To support issuers and promote harmonisation, the EBA has included the following three documents:

• Annex I: List of minimum categories of recovery plan indicators and illustrative list of recovery plan indicators
• Annex II: List of items to be included in the description of each recovery option
• Annex III: Non-exhaustive list of possible recovery options that issuers could use in their recovery plans

Next Steps

The draft RTS now pass to the European Commission to consider. The Commission has up to three months to decide whether to adopt the RTS without amendment. If so, they are subject to review by the European Parliament and European Council for a period of up to two-months. If there are no objections, then they will be published in the Official Journal and enter into force twenty days later.

The EBA guidelines come into effect two months after their publication in the required languages on the EBA Web site.