On Wednesday, the Federal Reserve Bank of New York (NY Fed) has restrained its counterparty criteria for its reverse-repurchase program (RRP) in a way that could shut out the issuer of stablecoin Circle from retrieving the prized Fed facility.
As per the press release by the New York Fed, funds “organized for a single beneficial owner,” registered as “2a-7 funds” at the Securities and Exchange Commission (SEC), “generally will be deemed ineligible” under the new rules. The Circle Reserve Fund, managed by global investment management giant BlackRock Advisors, seems to fall under this category.
The RRP allows selected equivalents such as – money market funds, banks – lend overnight to the Fed at a fixed rate of currently 4.8%. While the provision was initially built as a tool of balance for the financial system, it has become a highly alluring vehicle to obtain high yield with least counterparty risk. Currently, funds in the program reach almost $2.3 trillion.
In January the Bank Policy Institute, an important advocacy group for U.S. banks, said that the access of Circle USDC to the RRP would create “a stablecoin constructively backed by the Fed” could lead to destabilization of the financial system. As tweeted
by the Nick Timiraos the chief economic correspondent of The Wall Street Journal “The Fed reconditioned the eligibility rules for the ON RRP facility in ways that could turn down access to stablecoins,”
Circle is an issuer of the $31 billion USDC stable coin and keeps some $25 billion of the reserves in short-term U.S. Treasury bills in a bespoke BlackRock-managed fund called the Circle Reserve Fund. This Fund is only available to Circle and was registered as a “2a-7” government money market fund, according to Circle’s earlier press release and an SEC filing about the fund.
The chief financial officer of Circle Jeremy Fox-Geen said in an interview with CoinDesk said in November 2022 that the target set by Circle for the fund was to attain access via BlackRock to the Fed’s RRP. He further added that this access would pave the way to move USDC’s remaining cash reserves from partner banks to the fund under a Fed account.
In the previous month, USDC survived a crisis and temporarily depegged when it endured agony from the sudden collapse of its banking partner Silicon Valley Bank. Some $3.3 billion of USDC’s cash reserve held at SVB remained out of reach for days, sending shockwaves throughout the stablecoin market.
Soon after the government bailed out depositors in excess of the Federal Deposit Insurance Corporation’s deposit insurance limit. The firm informed that Circle also took steps “to reduce risk from the banking system” and currently its cash reserves are held primarily at BNY Mellon, an American Banking giant.