The European Banking Authority (EBA) has released a consultation paper describing the liquidity requirements for stablecoin issuers under the Markets in Crypto-Assets (MiCA) regulation. The EBA specifies reserve requirements for stablecoins and proposes liquidity stress tests to determine an issuer’s risk tolerance.

According to the EBA, issuers of asset-referenced or e-money (stablecoin) tokens should be able to satisfy redemption requests at any time. An issuer needs to revise its risk management policies if the weighted make-up of its reserves is less than the weighted amounts of the assets referenced by the tokens.

How EU Stablecoin Issuers Can Manage Risk

The EBA recommends that issuers use historical data to assign stress factor weights to each asset and its reserves. The issuers can subject these assets to different withdrawal scenarios and then make any necessary adjustments.

Read more: What is a Stablecoin? A Beginner’s Guide

The reserve asset stress factor of a credit-based asset should depend on the risk tolerance of the credit issuer. If the reserve asset is a commodity, the risk factor should be based on how closely the reserve mimics the assets referenced by the tokens.

The stress factor for the stablecoin itself must consider the volatility risks associated with how the asset is distributed. The issuer must also cater for deviations between the token price and its market value during periods of market-wide stress.

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Author: David Thomas

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