On Wednesday, the Federal Reserve Bank of New York (NY Fed) updated its counterparty criteria for its reverse-repurchase program (RRP), which may exclude stablecoin issuer Circle from accessing the facility. The NY Fed stated that funds “organised for a single beneficial owner” registered as “2a-7 funds” with the SEC would be considered ineligible under the new rules.
The RRP enables selected counterparties, such as banks and money market funds, to lend to the Fed overnight at a fixed rate, presently 4.8%. Though the facility was initially created as a financial system stabilisation tool, it has become a popular method for earning high returns with low counterparty risk.
In January, the Bank Policy Institute stated that Circle’s USDC gaining access to the RRP could result in “a stablecoin effectively backed by the Fed,” potentially destabilising the financial system. According to Nick Timiraos, The Wall Street Journal’s chief economic correspondent, “The Fed updated the eligibility rules for the ONRRP facility in ways that could deny access to stablecoins.”
The Fed updated the eligibility rules for the ONRRP facility in ways that could deny access to stablecoins
• RRP access should be “a natural extension of an existing business model”
• SEC registered 2a-7 funds organized for a “single beneficial owner” won’t be eligible pic.twitter.com/pUXeNyKqEE
— Nick Timiraos (@NickTimiraos) April 25, 2023
Circle, which issues the $31 billion USDC stablecoin, keeps approximately $25 billion of its reserves in a BlackRock-managed Circle Reserve Fund. Circle’s goal was to gain access to the Fed’s RRP via BlackRock so that the USDC’s remaining cash reserves can be moved from partner banks to the fund under a Fed account.
In February, USDC encountered a crisis when it temporarily depegged after its banking partner Silicon Valley Bank suddenly collapsed. For several days, roughly $3.3 billion of USDC’s cash reserves at SVB were unavailable, causing panic in the stablecoin market until the government bailed out depositors over the Federal Deposit Insurance Corporation’s deposit insurance limit.
Circle took measures to “reduce risk from the banking system” and now holds its cash reserves primarily at BNY Mellon, a global systemically important bank. As a result of the catastrophe, more than $10 billion flowed out of USDC, illustrating the degree to which fiat-backed stablecoins are susceptible to traditional banking system hazards.
