In a recent article, the chair of the European Banking Authority (EBA) commented on the rules for stablecoins to be implemented by the European Union (EU) to ensure investors’ protection.
The European Banking Authority is a regulatory agency of the EU that conducts stress tests on European banks to increase transparency in the European financial system and identify weaknesses in banks’ capital structures.
José Manuel Campa, chair of the EBA, revealed the key areas of focus of EU’s rules for stablecoins. He said that the upcoming rules to govern stablecoins will focus on ensuring issuers have diverse reserves, manage conflicts of interest, and don’t transmit risks to other players.
The EBA chair also added that the bloc’s landmark crypto regulation Markets in Crypto Assets (MiCA) rules are set to take effect as of 2024, but crypto market players should start adjusting their operations now. Notably, EBA is going to play a key role in its implementation by drafting subsidiary legislation.
Campa adds that MiCA requires issuers of stablecoins to have sufficient reserves to manage turbulence and “the EBA will be paying special attention to diversification of the deposit component of the reserve.”
Furthermore, he highlighted the importance of stablecoin issuers mitigating conflicts of interest, and mapping connections to custodians and trading platforms, to ensure risks don’t rise within the crypto ecosystem.
Drafting his views in an article produced by the Eurofi lobby group, Campa wrote that while the law, which licenses wallet providers and exchanges, is yet to be formally etched into the statute book, the “contours of MiCA are, by now, familiar and I would encourage market participants to already adjust their operations” to ensure efficient risk management.
Eurofi is a Paris-based nonprofit association that organizes non-public gatherings on European economic and financial policy. Eurofi meetings have become a regular venue for exchange between EU economic and financial policymakers and senior financial sector executives.
The EBA head also provided the reasons to divert significant attention to stablecoins. He highlighted the dramatic collapse of algorithmic stablecoin terraUSD last year as the primary reason why regulators are concerned about how to govern cryptocurrencies that are tied to the value of fiat currency or other assets such as gold.
The November collapse of crypto exchange FTX and revelations of its murky relationship with trading arm Alameda Research has also drawn attention to risks posed by large and often complex crypto conglomerates.
Simultaneously, another high-level official also poured in his views on the topic. Martin Moloney, secretary-general of the International Organization of Securities Commissions (IOSC), wrote:
The corporate structures, business models, and exposures of the main crypto market participants are not transparent. The risk is exacerbated by evident market concentration with the three largest so-called trading platforms.
The IOSCO is an association of securities and futures regulators with 35 regulators and top executives on its board. As Todayq News reported IOSC is soon to publish a consultation on crypto standards that will be finalized later in the year.
Notably, stablecoins have been a topic of talk amongst regulators across the globe. In February, Agustin Carstens, general manager at the Bank for International Settlements (BIS), said that the events of 2022 have cast “serious doubts on the ability of stablecoins to act as money.”
Several leaders across the globe have raised their voices in this regard. While Singaporean authorities suggested the stablecoin issuers maintain their peg in October last year, Israeli authorities imposed a 100% reserve requirement on stablecoin issuers.