Today the European Banking Authority published five consultations relating to the Markets in Crypto-Assets Regulation (MiCAR). Two of them relate to stablecoin reserves. The main MiCAR regulation already specifies high proportions of assets must be held at commercial banks.
The consultations use the lingo of bank compliance experts. Hence, we’ve attempted to make this a plain English version, but we don’t guarantee its accuracy.
Smaller stablecoins must hold at least 30% of their reserves at commercial banks. In contrast, significant stablecoins must keep 60% or more at banks. Both of these requirements are already specified by MiCAR. A significant stablecoin is one with at least €5 billion in reserves or more than ten million users.
The EBA’s draft technical standards add more detail. With such large amounts of money to be deposited at banks, it creates a significant interconnectedness between crypto and mainstream finance. Hence, no more than 10% of the stablecoin reserves can be held at one bank, and if the bank is not a large one, the upper limit is half of that.
Additionally, restrictions are imposed on banks themselves. The stablecoin deposits from a single coin cannot make up more than 2.5% of the bank’s assets.
There are also rules on the maturity of assets – after all not all bank deposits are on demand. Smaller stablecoins have to have 20% of assets available within one day. That can include bank deposits or reverse repurchase agreements maturing within a day. The proportion is double for significant stablecoins. There are also rules for the proportion that needs to be redeemable within two to five days. The figures are 30% for smaller stablecoins and 60% for significant ones.
Non cash liquid assets
A separate consultation outlines the requirements for non cash liquid assets. This cross references legislation relating to liquid assets that have to be held by banks. Essentially qualifying assets are government, local or quasi-government debt.
As with deposits, there are restrictions on the maximum exposure to a single issuer. That’s 35% of reserve assets for securities or money market instruments not subject to haircuts. If you’re wondering about haircuts, that’s an EU valuation methodology used to assess the possible impact on collateral valuations in a worse case (1%) scenario. A lot depends on the asset type, liquidity, currency risk and maturity. So if there are no haircuts applied this is low risk stuff.
Coming back to holding limits, it’s 10% exposure to a single issuer for covered bonds and 5% for all other securities and money market funds.
Additionally, there are restrictions on un-margined exposures to OTC derivative transactions.
Meanwhile, the UK also recently published a stablecoin consultation. It takes a different approach. Systemic stablecoins will deposit money at the Bank of England, and not earn any interest from the central bank.