Response to consultation on RTS further specifying the liquidity requirements of the reserve of assets under MiCAR
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?
We appreciate the intent behind the EBA's approach in setting the liquidity requirements for reserve assets based on recent trends in banking sector outflows related to cryptocurrency activities, paralleling the Money Market Funds Regulation. However, we caution against rigidly fixing these requirements. The cryptocurrency market and banking sector's evolution may necessitate future adjustments to these standards. We suggest the EBA explore more flexible adjustment mechanisms, such as issuing opinions or employing supervisory measures, to adapt more swiftly to market developments.
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?
To the extent that Article 1 and Article 2 encourage the use of “puttable” repo arrangements, there could be excessive stress on the market if or when cash lenders opt to exercise their “put” option. The true spirit of repo as a liquidity management tool for cash borrowers and cash lenders indicates that the more appropriate permissible structure would be overcollateralized bi-lateral or tri-party repo with set final maturities (i.e. 1-7 calendar days).
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?
While we recognize the EBA's efforts to safeguard the nascent crypto-asset market, imposing stringent concentration limits without solid grounding or reference to the tried-and-true UCITS framework might not be the optimal path. The UCITS have balanced risk and operational flexibility over many years. We support a regulatory approach informed by past successful practices while also addressing the unique characteristics of crypto assets to better ensure that innovation and market stability can coexist.
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?
We believe overcollateralized overnight reverse repo, and short term government obligations offer the most direct match of assets and liabilities for currency backed tokens and we are concerned about the unnecessary complexity which may increase market, operational, liquidity, credit, counterparty and other risks.
We are concerned by the minimum required reserves in depository institutions and the concentration limits per bank for both non-significant and significant issuers.
Historically it has been very difficult for even regulated industry participants to find banks willing to open either corporate or customer reserve accounts for industry participants. As a result, it is difficult to imagine that any firm would be able to secure the number of banking relationships proposed.
Even if firms were able to secure the necessary number of banking relationships the operational complexity of reserve management across these firms, likely in different countries, would increase complexity and risk.
Given past experience, such as what we witnessed in the United States in early 2023, even if a single firm is capped as a percent of a depository firm’s deposits, it is likely that the depository, who has engaged with the industry, would have an outsized exposure to industry participants and thus increase, rather than reduce, liquidity, market and systemic risk.
Question 8. Do respondent think that any provision in the draft RTS is confusing and that some clarification would be necessary?
We would like further clarification and explicit acknowledgment that it is permissible for a commodity to be backed solely by a legal claim on reserves that are 100% backed by the underlying commodity and the “highly liquid financial instruments” requirements in MiCAR would not be a bar. In the case of such a fully backed token, any minimum “liquid financial instruments” reserve requirements will add complexity, volatility and a meaningful and significant risk to end-users.
As an example, through our New York State regulated Paxos Trust, we issue a gold backed token (PaxGold). The token is always backed 1:1 with allocated physical gold which permits the buyer to own ‘the commodity in itself’ and settle in gold or dollars. Unlike ETFs, gold indices or other gold references, our tokens represent beneficial ownership of specific amounts of physical gold. The proposed approach undermines both the unique ability of the blockchain to provide a legal and trustless ownership record of a ‘real world asset’ and the direct correlation between the token as an instrument and the referenced asset.
Moreover, please note that maximum maturity requires additional clarification. An asset with a legal final maturity of 1 business day is materially different from an asset that is highly liquid and can be converted to cash within 1 business day.
For example, under SEC rule 2a7 Treasury securities are classified as "daily liquid assets" because of their highly liquid nature and the depth of market that allows holders to sell their securities and receive cash quickly.
The market for truly "overnight" securities is extremely limited. Examples could be overnight GSE discount notes, overnight commercial paper, overnight time deposits, overnight repo and unencumbered cash held in a bank account.
Further, the description provided in the regulatory technical standards does not differentiate between legal final maturity and "liquidity shortening demand features". An example of the latter would be "puttable repo" that has a legal final maturity of up to 12 months but maintains a daily or weekly "put" feature. These types of instruments have "liquid" features but are in practice not true liquidity.