- Funds structured as Circle’s BlackRock-managed USDC reserve fund will be disqualified.
- Circle has curbed risk from the banking system and has its cash reserves at BNY Mellon.
- Registered as a “2a-7” government money market fund, the Circle Reserve Fund is reserved for Circle.
The Federal Reserve Bank of New York has reduced its counterpart standard for its reverse-repurchase program in a way to refrain Circle, the stablecoin issuer, from accessing the prized Fed facility, Investor Bites reported.
— Investor Bites (@InvestorBites) April 26, 2023
According to a NY Fed press release, funds “organized for one beneficial owner,” registered as “2a-7 funds” at the SEC will be considered disqualified in accordance with the new rules. Supervised by BlackRock Advisors, the global investment management company, the Circle Reserve Fund seems to belong to this category.
The RRP allows specific counterparties to lend overnight to the Fed at a fixed rate, which is 4.8% as of now. Initially, the facility was formed to be a stabilization tool for the financial system. However, now it has turned into a significantly alluring way to reap high yields with the least counterparty risk. At the moment, funds in the program total over $2.3 trillion.
The USDC gaining access to the RRP of Circle would lead to a stablecoin supported by the Fed and could impair the Bank Policy Institute, a major advocacy group for U.S. banks.
The chief economic correspondent of The Wall Street Journal, Nick Timiraos, tweeted that the Fed upgraded the qualification norms for the ONRRP facility in ways that could dismiss access to stablecoins.
Circle keeps over $25 billion of the reserves in the short-term U.S. Treasury bills in the Circle Reserve Fund, a BlackRock-managed fund. According to the earlier press release by Circle as well as a SEC filing, the Circle Reserve Fund is exclusively for Circle and was registered as a “2a-7” government money market fund.
In November, Circle chief financial officer Jeremy Fox-Geen said that Circle intended to get access through BlackRock to the Fed’s RRP. The access would lead to the transfer of the remaining cash reserves of USDC from associated banks to the fund under a Fed account.
In March, USDC weathered a setback and temporarily depegged when it fell victim to the unexpected crash of Silicon Valley Bank, its banking partner. For days, USDC’s cash reserves worth $3.3 billion held at Silicon Valley Bank were unreachable.
Circle adopted steps to curb risks from the banking system and currently holds its cash reserves at BNY Mellon.
The disaster led to $10 billion plus in outflows from USDC and displayed how exposed fiat-based stablecoins are when it comes to risks in the traditional banking system.