Final report on draft RTS on the procedure and timeframe to adjust own funds

General Information

This document is the final report of the European Banking Authority (EBA) published in June 2024. It presents draft regulatory technical standards (RTS) aiming to specify the procedure and deadlines for adjusting own funds requirements of issuers of tokens backed by significant assets or e-money tokens subject to these requirements. The scope covers issuers of asset-backed tokens and e-money, significant or not, under Regulation (EU) 2023/1114 (MiCAR), with a focus on the post-classification period of tokens as significant.

Executive Summary

The EBA final report responds to the mandate of Article 45(7)(c) of Regulation (EU) 2023/1114 (MiCAR) which requires issuers of significant asset-backed tokens to hold own funds equivalent to 3% of the average reserve assets, versus 2% for non-significant issuers. These requirements also apply to e-money institutions issuing significant tokens or, by decision of competent authorities, non-significant tokens. The document details the procedure and deadline for issuers to adjust their own funds following the classification of their tokens as significant. The procedure requires prior dialogue between the competent authority and the issuer, followed by notification of the adjustment deadline (maximum 6 months) and submission of a detailed plan by the issuer within 25 working days. The authority monitors implementation and may request additional information. The report highlights the need for European harmonization to avoid regulatory divergences that could harm financial stability and competition levels. Flexibility is left to authorities to adapt the deadline according to issuer specificities, while maintaining a prescriptive framework for the procedure. Next steps include submitting the RTS to the European Commission, then review by Parliament and Council before official publication.

Context and Objectives

The document responds to the regulatory obligation arising from Regulation (EU) 2023/1114 (MiCAR) which establishes own funds requirements for issuers of asset-backed tokens and e-money. Issuers of significant tokens must hold a higher level of own funds (3% of the average reserve assets). The EBA was mandated to precisely define the procedure and deadlines for adjusting these own funds. The objective is to ensure harmonization of rules and convergence of supervisory practices in the European Union, considering the novelty and complexity of the crypto-asset sector. The scope includes both significant tokens and, by authority decision, non-significant tokens. The document specifies practical modalities to ensure issuers comply within a reasonable timeframe, while considering entity specificities and risks to financial stability.

Summary of Key Points by Theme

1. Own funds requirements:

- Issuers of asset-backed tokens must hold at least the highest among EUR 350,000, 2% of the average reserve assets, or one quarter of the previous year's fixed costs.

- For significant tokens, this threshold is raised to 3% (p. 3-4).

2. Adjustment procedure:

- After classification of a token as significant, the competent authority notifies the issuer within 25 working days of the deadline to adjust own funds.

- The issuer must submit within 25 working days a detailed plan with timelines to reach the required threshold, using exclusively eligible own funds instruments (Common Equity Tier 1) (p. 5-8).

- The authority monitors implementation, may request additional information, and agree on alternative actions in case of delay.

- The maximum adjustment period granted is 6 months (p. 5-8).

3. Flexibility and harmonization:

- The procedure is prescriptive to ensure harmonized implementation.

- The deadline is flexible, left to the discretion of competent authorities according to issuer specificities and systemic risks, but cannot exceed 6 months (p. 11-12).

4. Public consultation and feedback:

- The consultation lasted 3 months, with 7 responses including 4 public.

- Respondents expressed concerns about the speed of deadlines, suggesting extending the plan submission deadline to 25 days (instead of 20) and the adjustment period up to 6 or 12 months.

- The EBA retained 25 days for plan submission and a maximum 6 months adjustment period.

- Respondents requested that issuers not be subject to commercial restrictions (e.g., issuance ban) during the adjustment period, which the EBA confirmed (p. 12-18).

5. Limits and scope:

- These RTS do not apply to credit institutions issuing tokens, exempt from own funds requirements (p. 5).

- Concerns related to significant cliff effects and regulatory interdependencies are acknowledged but fall under MiCAR level 1, outside the scope of these RTS (p. 14-15).

Main Findings and Lessons Learned

Findings:

- Issuers of significant tokens must adjust their own funds to 3% of the average reserve assets.

- The adjustment procedure is framed by mandatory dialogue, deadline notification, adjustment plan submitted within 25 days, and a maximum 6 months compliance period (p. 3-8).

- The public consultation confirmed the clarity of the procedure but emphasized the need for longer deadlines for plan submission and implementation (p. 12-18).

Assumptions:

- Flexibility in the adjustment deadline allows consideration of issuer specificities and financial stability risks.

- Absence of commercial restrictions during the adjustment period is preferable to avoid panic or excessive volatility risks.

Interpretations:

- The combined approach, prescriptive on procedure and flexible on deadline, aims to reconcile harmonization and adaptation to field realities.

- Meeting deadlines is crucial for financial stability and market confidence.

Uncertainties:

- The concrete impact of increased requirements on issuers' business models remains to be observed, notably in case restructuring is necessary.

- Future developments of the MiCAR regulatory framework could modify these requirements (p. 14-15).

Conclusions and Recommendations

The EBA concludes that the proposed RTS establish a clear and harmonized framework for the procedure and deadline to adjust own funds of significant token issuers. The procedure requires prior dialogue, formal notification, submission of a plan within 25 working days, and a maximum 6 months compliance period. The EBA recommends maintaining this combination of procedural rigor and temporal flexibility to allow competent authorities to adapt requirements to issuer specificities while ensuring financial stability. It is also recommended not to impose commercial restrictions on issuers during the adjustment period to avoid risks of panic or volatility. Finally, the EBA invites stakeholders to use the period until June 2025, date of the Commission's interim report on MiCAR application, to raise any concerns or improvement proposals.