This final report presents regulatory technical standards aimed at specifying liquidity requirements for asset-referenced tokens. It mandates issuers of asset-referenced tokens to maintain a reserve of assets to ensure timely payment to holders upon redemption request. The requirements include minimum percentages of reserve assets with specific maturities and liquidity management techniques.
- Title: Final report on draft RTS further specifying the liquidity requirements
- Author: European Banking Authority (EBA)
- Date: 13 June 2024
- Type: regulatory standard
- Scope: specification of liquidity requirements related to the asset reserve of issuers of asset-referenced tokens (ARTs) and electronic money tokens (EMTs) under Regulation (EU) 2023/1114 (MiCAR)
- Target population: issuers of significant or non-significant asset-referenced tokens, electronic money institutions issuing significant or non-significant EMTs (upon request of the competent authority)
- Sector: crypto-asset markets
- Period: regulatory framework applicable from 2024, analysis based on data up to 2023 (p. 1-4)
The EBA final report responds to the mandate of Article 36(4) of the MiCAR regulation aiming to specify the liquidity requirements of the asset reserve that issuers of asset-referenced tokens (ARTs) and electronic money institutions (EMTs) must establish and maintain at all times. This reserve is intended to guarantee immediate payment capacity to token holders upon redemption requests, either in cash or by physical delivery of the referenced assets (p. 3).
The EBA sets minimum percentages of the asset reserve that must mature within a maximum of one business day (1 day) and five business days (5 days), differentiated according to whether the token is significant or not, and whether it is referenced to an official currency or other assets. For tokens referenced to official currencies, the reserve must include at least 30% of deposits with credit institutions (60% if the token is significant), with short maturities (1 or 5 days) to ensure the liquidity necessary for redemptions (p. 3-7).
The overall liquidity management techniques are specified, including:
- The requirement of minimum solvency and liquidity of custodian banks to reduce default or liquidity risks (p. 8-9).
- Deposit concentration limits per banking institution, with thresholds differentiated according to the size and systemic importance of banks (p. 9-10).
- The introduction of a mandatory minimum over-collateralization, calibrated according to the size, complexity, and nature of tokens and the asset reserve, to cover asset volatility risks and prevent de-pegging (p. 10).
The report presents draft regulatory technical standards (RTS) that will be submitted to the European Commission, then to the Parliament and Council, before official publication (p. 3, 11-18).
The EBA conducted an in-depth cost-benefit analysis, comparing several calibration options for maturity percentages, counterparty quality requirements, concentration limits, and over-collateralization modalities. It retained pragmatic options based on empirical data from banking crises related to crypto-assets and on comparable frameworks such as money market fund regulation (p. 19-38).
A public consultation collected 10 responses, of which 7 were published, with general support but concerns about calibration of concentration limits and over-collateralization. The EBA adjusted certain provisions to facilitate compliance and clarify procedures in case of non-compliance (p. 39-41).
In conclusion, these RTS specify robust and adapted liquidity requirements to the nature of tokens and their reserves, aiming to protect token holders and financial stability, while considering specific risks linked to the interconnection between crypto-assets and the banking system.
- The MiCAR regulation requires issuers of asset-referenced tokens (ARTs) and electronic money institutions (EMTs) to establish an asset reserve guaranteeing the liquidity necessary for token redemptions at any time (p. 3-4).
- Article 36(4) of MiCAR mandates the EBA to define regulatory technical standards specifying liquidity requirements of this reserve, notably minimum percentages of assets maturing within short deadlines (1 and 5 business days) and overall liquidity management techniques (p. 4).
- The objective is to ensure that the asset reserve is always sufficient and liquid to meet redemption requests, considering the size, complexity, and nature of tokens and their reserves, as well as concentration and volatility risks (p. 4-5).
- The scope covers significant and non-significant ARTs, significant EMTs, and non-significant EMTs if requested by the competent authority (p. 3-4).
- Limits concern assets referenced to official currencies and other assets (commodities, financial instruments, crypto-assets), with specific requirements for bank deposits (p. 5-7).
- The EBA relies on international standards (Basel III, UCITS, LCR) and recent crisis experiences related to crypto-assets to calibrate the requirements (p. 4).
- The document aims to provide a clear and harmonized regulatory framework for asset reserve liquidity, ensuring holder protection and financial system stability (p. 4).
Definition and composition of the asset reserve:
- The asset reserve includes assets received upon token issuance (bank deposits, commodities, etc.) and highly liquid financial instruments (Level 1 according to LCR) (p. 5).
- For tokens referenced to official currencies, a minimum of 30% (non-significant) or 60% (significant) of the reserve must be held in deposits with credit institutions (p. 5-6).
Asset maturity requirements:
- At least 20% (non-significant) or 40% (significant) of the reserve must mature within one business day, and 30% (non-significant) or 60% (significant) within five business days (p. 14).
- These requirements also apply to reverse repos and liquidity withdrawable with equivalent notice (p. 14-15).
- For tokens not referenced to official currencies, similar requirements apply to deposits or reverse repos held in the reserve (p. 15).
Overall liquidity management:
- Requirement of minimum solvency and good liquidity of custodian banks, assessed over a 365-day horizon for demand deposits (p. 8-9, 15).
- Deposit concentration limits per bank, differentiated according to size and systemic importance: 25% for G-SII/O-SII, 15% for large banks, 5% for others, with a cap of 1.5% of the bank's total assets (p. 9-10, 16).
- These limits take into account overall exposures to the bank, including securities and derivatives (p. 16).
Mandatory over-collateralization:
- The asset reserve must always cover the value of the referenced assets, with minimum over-collateralization to cover volatility risks and prevent de-pegging (p. 10).
- Two calibration options were studied: a 5-year historical approach (HLBA) and a fixed calibration (p. 29-38).
- The EBA favors the HLBA approach with a one-day observation window, considering historical volatility of referenced assets and the reserve (p. 38).
- Simulations show over-collateralization needs ranging from 0.2% to over 20% depending on token type and reserve composition (p. 31-36).
Cost-benefit analysis and policy options:
- The EBA compared options for maturity calibration, deposit management, concentration, and over-collateralization (p. 19-38).
- It retained pragmatic options based on empirical data and comparable frameworks (money market funds, banking crises) (p. 20-28).
- Requirements are differentiated according to token significance and nature of referenced assets (p. 6-7, 22).
Public consultation and adjustments:
- The consultation revealed general support but concerns about feasibility of concentration limits and over-collateralization calibration (p. 39-41).
- The EBA adjusted requirements to facilitate deposit diversification and clarify procedures in case of non-compliance (p. 39-41).
Regulatory process:
- The RTS will be submitted to the European Commission, then to Parliament and Council, before publication in the Official Journal (p. 3, 11-18).
- Established facts:
- The asset reserve must contain liquid assets with short maturities (1 and 5 days) to ensure liquidity necessary for redemptions (p. 3-7, 14-15).
- Bank deposits must represent at least 30% (non-significant) or 60% (significant) of assets referenced in official currencies (p. 6-7, 14-16).
- Precise deposit concentration limits per bank are set to limit systemic risks (p. 9-10, 16).
- Mandatory over-collateralization is necessary to cover volatility and de-pegging risks, calibrated using a 5-year historical method (p. 29-38).
- Assumptions:
- Historical volatility of referenced assets and the asset reserve is representative of future risks (p. 30-38).
- Data from banking crises related to crypto-assets and money market fund regulation are relevant for calibrating requirements (p. 19-22).
- Interpretations:
- Differentiating requirements according to token significance and nature of referenced assets allows a proportionate and risk-adapted approach (p. 6-7, 22).
- Deposit concentration must be limited to avoid contagion effects between the banking sector and crypto-assets (p. 9-10, 27-29).
- Over-collateralization protects against volatility and de-pegging risks, reinforcing confidence in tokens (p. 10, 29-38).
- Uncertainties:
- The evolution of crypto-asset markets and underlying assets may change risk profiles (p. 38).
- The operational impact of requirements on issuers, notably regarding deposit management and over-collateralization calculations, remains to be monitored (p. 39-41).
- Banks' reactions to accepting deposits from token issuers could limit diversification (p. 39-41).
- The EBA proposes RTS specifying robust liquidity requirements for the asset reserve of issuers of asset-referenced tokens and electronic money tokens, in line with the MiCAR mandate (p. 3, 11-18).
- These RTS impose minimum percentages of assets maturing within 1 and 5 business days, differentiated according to token significance and nature of referenced assets (p. 14-16).
- They define overall liquidity management techniques, notably minimum solvency and liquidity requirements for custodian banks, deposit concentration limits, and mandatory over-collateralization calibrated using a historical approach (p. 8-10, 16-17, 29-38).
- In case of non-compliance, issuers must submit a detailed plan to the competent authority within five business days (p. 17).
- The EBA recommends continuous monitoring and regular review of requirements, notably via liquidity stress tests provided by MiCAR (p. 21, 38, 41).
- These measures aim to guarantee issuers' capacity to honor redemptions at any time, limit contagion risks between crypto-assets and the banking system, and strengthen overall financial stability (p. 3, 8-10, 39).
- The report emphasizes the importance of ongoing dialogue between regulators, issuers, and sector actors to adjust requirements according to evolving risks and practices (p. 41).
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