Response to consultation on the adjustment of own funds requirements and design of stress testing programmes for issuers under MiCAR
Question 1. Is the procedure clear and the timelines for the issuer to provide views on the assessment and submit the plan reasonable?
While the procedure is clear, we believe the timelines should incorporate a specific time for a ‘consultation period’ between notification from the Competent Authority and the time that the issuer is required to create and submit its plan to increase its own funds. We recommend that there be specific procedures directing the Competent Authority, during this period, to consider all potential impacts on token holders as well as on the stability of the issuer and on the broader market.
Question 2. Are the timeframes for issuers to adjust to higher own funds requirements feasible?
Although the issuer response timeframe and the promulgation of a plan to increase own funds are reasonable, the time limits imposed for the increase in own funds do not take into account the temporal realities that can affect new capital raises by issuers of different sizes and structures. We would suggest that there not be a prescriptive limit and that, instead, limits should be defined by agreement based upon the plan provided to the competent authority and the potential specific circumstances that may impact holders, issuer stability, the overall market for related tokens and the broader financial system.
Question 3. During the period when own funds need to be increased by the issuer, should there be more restrictions on the issuer to ensure timely implementation of the additional own funds requirements, for example banning the issuance of further tokens?
No. Such restrictions could meaningfully impact operational and liquidity risk to issuers and counterparties, result in market volatility, and exacerbate run-risks.
Question 4. Do you agree with the criteria to identify if an issuer has a higher degree of risk?
When a Competent Authority approves a product or program of an issuer, it necessarily considers risk posed by third party relationships and technologies. If the Competent Authority recognizes an increased risk that is not directly related to, or in the control of the issuer, then they should be directed to consider whether there are alternative mechanisms to mitigate heightened exogenous risks prior to ascribing the heightened risk to the issuer and requiring an increase in owned funds.
While consideration of a higher degree of risk is a fair basis for the Competent Authority to direct the issuer to take remedial actions, the criteria used for identification of a higher degree of risk is subjective and may vary from Competent Authority to Competent Authority. We are concerned that the criteria can lead to a 3% own funds requirement for firms unlikely to pose risks to token holders or the financial system. We would strongly recommend a more nuanced approach that targets only larger firms posing systemic risks or firms whose increased risks pose direct risks to their holders. This could ensure that regulatory measures are proportionate and focus on entities where the potential impact is most significant, rather than applying a blanket requirement to all firms.
Question 5. Do you agree with the procedure to assess whether an issuer has a higher degree of risk?
To ensure equitable treatment across national jurisdictions and issuers, we believe there should be a specified period and process through which issuers can engage with Competent Authorities and be heard and considered as to why the higher degree of risk is not material to the issuer, holders or the broader market.
Over-reliance on liquidity stress testing ignores significant mitigating and aggravating factors. As an example, the assumption that depository counterparties, even if they are strictly limited to a small percent of their deposits from a single issuer, will be able to meet their obligations ignores the risk that some depositories will be exposed to industry concentration risk that could support broader runs against multiple issuers' tokens. As a result, the liquidity risk is not measurable by the issuer. As an example, the failure of Silicon Valley Bank, a previously well-regarded counterparty, maintained highly concentrated deposit exposure and was therefore unable to meet liquidity demands from a single issuer, resulting in a de-peg of the issuer’s stablecoin and a forced halt of customer redemptions. On the mitigating side, the operational capabilities, reserve management capabilities, flexibility in choice of highly liquid financial assets and the internal controls of an issuer have a significant impact on their ability to manage large volumes of redemptions. We strongly believe this must be taken into account rather than reliance on merely reserve and liquidity factors. As an example, in 2023, Paxos announced the wind-down of Binance USD (BUSD). Over a period of a little under a month, we were able to redeem $8 billion of tokens without adversely impacting either the 1:1 peg or timeliness of customer redemptions. This included successfully managing redemptions of $3.3 billion in a single day which was achievable through the active management of our counterparty credit risk and our intraday and overnight liquidity positions.
Further, the diversified composition of asset reserves across a mix of highly liquid products like unencumbered cash, overnight repo and U.S. Treasury Bills provided us with maximum flexibility to accommodate both expected and unexpected redemption activity. It is critical to note that this orderly wind-down of assets was in no way disruptive to (1) our banking partners, (2) the U.S. Treasury Bill market or (3) the secured funding markets. Finally, had 30% of our reserve assets been in cash deposits spread across at least 6 different banking institutions, our ability to complete this orderly wind down would have been compromised due to significant operational constraints, time restrictions and broader market contagion across bank counterparties.
Question 7. Do you agree with the need for a solvency and liquidity stress-test and the requirements of the stress-test?
While we support the position that EBA’s proposed stress-testing requirements should consider key factors such as the nature, size, complexity, holder’s redemption rights as well as the complexity of, composition of, and concentration of reserve assets, we believe that the EBA should prescribe clearer guidance on the proportionality assessment so that it is applied evenly and equitably across national competent authorities and issuers.
Question 8. Do you agree with the frequency and time horizon of the solvency and liquidity stress-test? Should there be more differentiation between significant and not-significant issuers? Should the stress testing be more frequent for issuers of asset-referenced tokens referenced to official currencies?
Given the diverse asset classes required to be held in reserve, there may be some operational issues implementing and running these scenarios on the proposed time frames, at least initially. Furthermore, we believe the EBA should be clear that solvency stress-testing requirements should be semi-annually for non-significant issuers and quarterly for significant issuers.
Question 9. Should a reverse stress testing requirements/methodology be introduced? Please provide your reasoning.
No. Introducing a reverse stress testing requirement could impose unnecessary burdens, particularly on smaller issuers, without any real enhancement to risk management or financial stability.
Question 10. Do you have any other comments in relation to the stress-testing part in these RTS?
The criteria used for 'significant' are a departure from the core basis of consideration in other areas of financial regulation and oversight. Financial stability, systemic risk and other similar prudential concerns are not adequately considered in a decision to designate an issuer/issuance as significant. In these proposals, the benchmark of heightened or increased risk which drives the demand for a proscriptive 50% increase in own funds undermines the ability of Competent Authorities to make proportional adjustments to the requirements of the firms they oversee without transferring authority to the EBA and increases of own funds that may have no relationship to broader risks.