The final report outlines regulatory technical standards regarding own funds requirements and stress testing for issuers of asset-referenced tokens and e-money tokens. These standards aim to harmonize rules and converge supervisory practices while providing flexibility to competent authorities. Issuers are required to conduct stress tests based on plausible financial stress scenarios and adjust their own funds…
This document is the final report of the European Banking Authority (EBA) dated June 2024. It concerns draft regulatory technical standards (RTS) on the adjustment of additional own funds requirements and stress testing of issuers of asset-referenced tokens and e-money tokens subject to these requirements. The scope covers prudential requirements, risk assessment criteria, own funds adjustment procedures, as well as stress testing programs. The regulatory framework is based on Regulation (EU) 2023/1114 (MiCAR). The document comprises 42 pages, of which approximately 35 were provided for analysis.
The report addresses own funds requirements and stress testing programs for issuers of asset-referenced tokens and e-money tokens, pursuant to Regulation (EU) 2023/1114. These issuers must continuously hold own funds at least equal to the highest of: 350,000 EUR, 2 % of the average reserve assets (3 % for significant issuers), or one quarter of the previous year's fixed costs (p. 3-6). Competent authorities may increase these requirements up to 20 % in case of identified increased risk according to specific criteria related to risk management, reserve volatility, holders' rights, investment policy, transaction volume, capitalization, and market importance (p. 6). Furthermore, regular stress tests, including plausible financial scenarios, must be conducted, allowing authorities to require an increase of own funds between 20 % and 40 % depending on results and risk outlook (p. 3-4, 6). The RTS specify the own funds adjustment procedure, including a compliance plan submitted by the issuer within 25 business days, and a maximum 6-month deadline for compliance, with possible adaptation depending on financial situation and systemic impact (p. 16-19). The high risk assessment criteria are threefold: risk of non-compliance with regulatory requirements, risk of non-guaranteed redemption at nominal or market value, and risk of significant deterioration of reserves or financial situation, including risks related to technological infrastructures and third-party providers (p. 18-19). The RTS also impose minimum requirements for stress testing programs: at least one solvency test and one liquidity test, with quarterly frequency for significant issuers and semi-annual for non-significant issuers for solvency, and monthly for liquidity (p. 20-21). Internal governance must ensure management involvement, documentation, cross-communication, and integration into the overall risk management framework (p. 21-22). Data infrastructure quality must allow collection and processing of data necessary for tests (p. 22). The methodology must identify and quantify risks related to tokens, underlying systems, and contracts with third parties, over horizons of 3 years for solvency and 1 year for liquidity (p. 22-23). These RTS aim to harmonize practices within the EU while offering some flexibility to competent authorities, considering the novelty and complexity of the sector (p. 3, 14). Next steps include submission of the RTS to the European Commission, then review by Parliament and Council before official publication (p. 4).
The rapid development of asset-referenced tokens and e-money tokens raises new risks for financial stability, notably in case of issuer failure potentially causing massive withdrawals, forced sales of reserve assets, and systemic disruptions (p. 5-6, 11). Regulation (EU) 2023/1114 establishes minimum own funds requirements and imposes regular stress tests for these issuers. The EBA is mandated to specify modalities for own funds adjustment in case of increased risk, define risk assessment criteria, and set minimum requirements for stress testing programs, considering the size, complexity, and business model of issuers (p. 5-7, 11-12). The document aims to harmonize supervisory rules and practices in the EU, while allowing competent authorities leeway to adapt to issuer specificities, given the absence of a universal risk assessment framework in this emerging sector (p. 3, 14, 25). The mandate excludes authorized credit institutions, which are not subject to these requirements (p. 6, 12).
Own funds requirements:
- Own funds must consist of Common Equity Tier 1 instruments in accordance with Regulation (EU) No 575/2013 (p. 8).
- The minimum amount is the highest of 350,000 EUR, 2 % (or 3 % for significant issuers) of the average reserve assets, and one quarter of the previous year's fixed costs (p. 5-6).
- Authorities may increase this amount up to 20 % in case of increased risk, according to criteria related to risk management, reserve quality, holders' rights, investment policy, transaction volume, capitalization, and market importance (p. 6, 18).
- The adjustment procedure provides for consultation with the issuer, a draft decision with reasons, a 25 business day period for comments, then a detailed compliance plan submitted by the issuer within the following 25 days, including timing measures and own funds composition (p. 16-19).
- The maximum compliance deadline is 6 months, with possibility of shortening if risk is high or related to governance or business model (p. 9-10, 17).
Stress testing:
- Issuers must conduct at least one solvency test and one liquidity test (p. 20).
- The solvency test assesses the impact of macro and microeconomic scenarios on the capacity to absorb losses and meet own funds requirements (p. 20).
- The liquidity test analyses the impact of shocks on reserve liquidity and funding capacity (p. 20).
- Minimum frequency is quarterly for significant issuers and semi-annual for non-significant for solvency, monthly for liquidity (p. 20).
- Internal governance must ensure adoption, implementation, documentation, communication, and integration of stress tests into risk management (p. 21-22).
- Data infrastructure must be adequate, flexible, of quality, and proportionate to issuer size and complexity (p. 22).
- Methodology must identify risks related to tokens, underlying systems, third-party contracts, with well-defined scenarios over 3 years for solvency and 1 year for liquidity (p. 22-23).
Procedure and increased risk assessment criteria:
- Criteria are: probability of non-compliance with regulatory requirements within 12 months, inability to guarantee redemption at nominal or market value under normal or stressed conditions, and increased risk of deterioration of reserves or financial situation, including technological and third-party provider risks (p. 18).
- Assessment is case by case, considering all available historical and current information (p. 14).
- The issuer must present a compliance plan with precise measures and deadlines, updated monthly if the deadline exceeds 3 months (p. 16-19).
- Authorities must closely monitor implementation and may request additional information or corrective measures (p. 10).
Public consultation and adjustments:
- The consultation received 14 responses, with requests to extend deadlines for plan submission (adjusted to 25 business days) and observations on the need for a balanced approach between own funds requirements and corrective measures (p. 29-36).
- Concerns about double counting of risks between increased risk criteria and significant issuer classification were clarified: increases are cumulative but based on different bases (2 % or 3 % of reserves) and apply at distinct times (p. 33-34).
- The EBA maintained flexibility for competent authorities while ensuring minimum harmonization (p. 25-27).
Established facts:
- Issuers of asset-referenced tokens and e-money tokens are subject to minimum own funds requirements and stress testing obligations under Regulation (EU) 2023/1114 (p. 3-6).
- The EBA developed RTS specifying the own funds adjustment procedure, increased risk assessment criteria, and minimum requirements for stress testing programs (p. 3, 12-23).
- The procedure includes dialogue with the issuer, a maximum 6-month compliance deadline, and evaluation criteria based on three main axes (p. 16-19).
- Stress testing programs must include at least one solvency test and one liquidity test, with frequencies adapted to issuer size and significance (p. 20-21).
Assumptions:
- The absence of a universal risk assessment framework in this sector justifies a flexible, case-by-case approach (p. 14, 25).
- The frequency and nature of stress tests are proportional to issuer size and complexity to limit operational burden (p. 25-27).
Interpretations:
- Minimal harmonization of rules and procedures is necessary to ensure consistent supervision levels in the EU and preserve financial stability (p. 3, 25).
- Flexibility granted to competent authorities allows adapting requirements to issuer specificities and avoiding excessive measures (p. 14, 25).
Uncertainties:
- The rapid evolution of the crypto-asset sector and novelty of asset-referenced tokens imply that criteria and procedures will need regular reassessment (p. 3, 25).
- The concrete impact of requirements on financial stability will depend on effective implementation by authorities and issuer practices (p. 24-28).
The EBA concludes that the proposed RTS provide a harmonized and proportionate framework for adjusting own funds requirements and conducting stress tests for issuers of asset-referenced tokens and e-money tokens (p. 29). The own funds adjustment procedure, including dialogue with the issuer and a maximum 6-month deadline, is deemed appropriate to ensure financial stability while considering operational constraints (p. 25, 29-36). The high risk assessment criteria are defined to allow case-by-case evaluation, ensuring some flexibility for competent authorities (p. 18, 25). The minimum stress testing requirements, including solvency and liquidity tests with differentiated frequencies according to significance, are considered a balance between rigor and operational burden (p. 20-21, 29). The EBA recommends maintaining continuous monitoring of these RTS and using the interim report planned for June 2025 to adjust regulation if necessary (p. 31). The report also emphasizes the importance of effective communication between issuers and authorities to ensure rapid and efficient implementation of measures (p. 10, 16-19).
Synthesis note written from the full document by DataSAI Academy. This note comes from the scientific library of the DataSAI Academy, open to all.