Response to consultation on RTS further specifying the liquidity requirements of the reserve of assets under MiCAR

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Question 1. Do respondents have any comment about the calibration of the percentages of reserve assets with specific maximum maturities as suggested in Article 1 and Article 2 of the draft RTS?

NA

Question 2. Do respondents consider that the requirements in Article 1 and Article 2 related to the 1 and 5 working days maximum maturity could create excessive pressure in the repo market, taking into account the minimum required amount of deposits in credit institutions in the case of tokens referenced to official currencies?

NA

Question 3. Do respondents have any comment on the proposed approach in Article 3 of the draft RTS to not increase the minimum amount of deposits from 30% (or 60% if the token is significant) of the asset referenced in each official currency?

NA

Question 4. Do respondents have any comment with the definition of the requirement of a minimum liquidity soundness and creditworthiness in the deposits with credit institutions as proposed in Article 4 of the draft RTS?

NA

Question 5. Do respondents have any comment about the definition of the requirement of a maximum concentration limit of deposits with credit institutions by counterparty in Article 5 of these draft RTS? And about the definition of the general limit considering, in addition to deposit with a bank, also the covered bonds issued by and unmargined OTC derivatives with the same bank counterparty?

From our perspectives the following consequences would arise:

  • Stablecoin issuers need to have at least 4 banks to manage their minimum deposits of 30%
  • Large banks mostly ignore crypto related business. With a cap of 10% for each stablecoin issuer the business is not attractive to them. If only small banks will do the business, the minimum deposit setup requires 7 banks.
  • If a stablecoin plans a "deposit only" setup (for example to be as stable as possible and guarantee redeemability at any time), it requires a setup with minimum 11 large banks or 21 small banks. Issuers are incentivized to build more risky, less liquid setups with negative consequences for the customers
  • In the described multibank setup, deposits have to be rotated constantly (stablecoin market cap may vary), all banks need to provide tech APIs. That's not the normal.
  • In general, there are not enough crypto friendly banks in Europe to let stablecoin issuers comply with those rules
  • A recent BIS paper (https://www.bis.org/publ/bppdf/bispap141.pdf) states (on page 7) that USD Coin faced an outflow of 14% over the course of one week after SVB breakdown. A bank setup with 10% reserves on each bank is not resistant for such a stress test "to ensure that the reserve assets are sufficient to enable the cryptoassets to be redeemable at all times, including during periods of extreme stress, for the amount to which the cryptoasset is pegged" as also formulated in BIS "Prudential treatment of cryptoasset exposures" (https://www.bis.org/bcbs/publ/d545.pdf).
  • A 2.5% balance sheet cap discriminates small institutes that are more likely to see a business in working with stablecoin issuers. In our case, we're building a special purpose institute focusing on providing stable money and investment options to fit the exact demand of the stablecoin industry. A bank like us is what the market needs.
  • A general 2.5% balance sheet cap does not reflect at all the risk of an underlying target investment. It makes absolutely no sense to equate a highly liquid central bank investment with bonds (including government bonds) and currency deposits. Zero capitalization (RWA) and a 100% liquidity coverage ratio (LCR) should definitely prevent an illiquid situation in the event of a bank run.
  • Banks are able to single large loan exposures to 25% of Tier 1 capital (CRR Article 395). Loans are way more risky that holding money on a ECB account or in other HQLA. Based on this and the previous point, 25% of the total assets of the institution taking the deposits is a more appropriate number.
  • The current guidelines disincentivizes the banking industry to offer well suited products and investment packages that are purely suited to the needs of a growing stablecoin industry.

Our suggestions:

  • We generally understand the motivation for concentration limits but think the numbers are too low. With regard to the USD Coin example (14% liquidity outflow in short time) and the small number of banks entering into the business at least 20% of deposits should be possible to deposit with one bank. To not discriminate small banks, there should be no distinction between small and large banks.
  • Deposits that are held with a central bank account should be excluded from the 2.5% rule as they can be considered as secure and, as explained before, the number should be increased to 25% exposure per stablecoin issuer.
  • Reserves in RWA 0% assets / HQLA should not have any limits

Question 6. Do respondents have any concern about compliance with these concentration limits in Article 5, considering in particular paragraph 14 of the cost/benefit analysis in relation to the potential operational burden and risk of a wrong direction diversification, linked to the minimum required liquidity soundness and creditworthiness of deposits with banks, and taking into account the minimum amount required of deposits with credit institutions by MiCAR for tokens referenced to official currencies?

From our perspectives the following consequences would arise:

  • Stablecoin issuers need to have at least 4 banks to manage their minimum deposits of 30%
  • Large banks mostly ignore crypto related business. With a cap of 10% for each stablecoin issuer the business is not attractive to them. If only small banks will do the business, the minimum deposit setup requires 7 banks.
  • If a stablecoin plans a "deposit only" setup (for example to be as stable as possible and guarantee redeemability at any time), it requires a setup with minimum 11 large banks or 21 small banks. Issuers are incentivized to build more risky, less liquid setups with negative consequences for the customers
  • In the described multibank setup, deposits have to be rotated constantly (stablecoin market cap may vary), all banks need to provide tech APIs. That's not the normal.
  • In general, there are not enough crypto friendly banks in Europe to let stablecoin issuers comply with those rules
  • A recent BIS paper (https://www.bis.org/publ/bppdf/bispap141.pdf) states (on page 7) that USD Coin faced an outflow of 14% over the course of one week after SVB breakdown. A bank setup with 10% reserves on each bank is not resistant for such a stress test "to ensure that the reserve assets are sufficient to enable the cryptoassets to be redeemable at all times, including during periods of extreme stress, for the amount to which the cryptoasset is pegged" as also formulated in BIS "Prudential treatment of cryptoasset exposures" (https://www.bis.org/bcbs/publ/d545.pdf).
  • A 2.5% balance sheet cap discriminates small institutes that are more likely to see a business in working with stablecoin issuers. In our case, we're building a special purpose institute focusing on providing stable money and investment options to fit the exact demand of the stablecoin industry. A bank like us is what the market needs.
  • A general 2.5% balance sheet cap does not reflect at all the risk of an underlying target investment. It makes absolutely no sense to equate a highly liquid central bank investment with bonds (including government bonds) and currency deposits. Zero capitalization (RWA) and a 100% liquidity coverage ratio (LCR) should definitely prevent an illiquid situation in the event of a bank run.
  • Banks are able to single large loan exposures to 25% of Tier 1 capital (CRR Article 395). Loans are way more risky that holding money on a ECB account or in other HQLA. Based on this and the previous point, 25% of the total assets of the institution taking the deposits is a more appropriate number.
  • The current guidelines disincentivizes the banking industry to offer well suited products and investment packages that are purely suited to the needs of a growing stablecoin industry.

Our suggestions:

  • We generally understand the motivation for concentration limits but think the numbers are too low. With regard to the USD Coin example (14% liquidity outflow in short time) and the small number of banks entering into the business at least 20% of deposits should be possible to deposit with one bank. To not discriminate small banks, there should be no distinction between small and large banks.
  • Deposits that are held with a central bank account should be excluded from the 2.5% rule as they can be considered as secure and, as explained before, the number should be increased to 25% exposure per stablecoin issuer.
  • Reserves in RWA 0% assets / HQLA should not have any limits

Question 7. Do respondents have any comment about the definition of the mandatory over-collateralisation in Article 6 of these draft RTS and the rationale for it? Do respondents find it challenging from an operational perspective, in particular with respect to envisaging 5 days windows rather than 1 day windows for observation periods of the market value of the assets referenced versus the reserve of assets and over the previous 5 years? Please elaborate your response with detailed reasoning.

NA

Question 8. Do respondent think that any provision in the draft RTS is confusing and that some clarification would be necessary?

NA

Name of the organization

Unstoppable Finance GmbH