NY Fed’s new policy change could prevent Circle from accessing the Fed facility

Updated: 26 April 2023

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The Federal Reserve Bank of New York (NY Fed) recently made a move that will have significant consequences on the plans of other entities. The NY Fed has curbed its counterparty criteria for the RRP (Reverse-Repurchase Program) this Wednesday in a way that might prevent Circle — the issuer of the second-largest stablecoin, USDC — from accessing the Fed facility that it sought to enter.

https://twitter.com/CryptonicDaily/status/1651020158830354440

The NY Fed’s new policy change

The NY Fed published a press release earlier today, stating that the funds organized for a single beneficial owner, registered at the SEC as 2a-7 funds, will be deemed ineligible under the new rules. This would affect Circle Reserve Fund, which is managed by BlackRock Advisors, a global investment management giant.

The reverse-repurchase program allows selected counterparties to lend overnight to the Fed at a fixed rate. Typically, entities that can engage with the program involve banks, money market funds, and alike. At the moment, the fixed rate that they lend at is 4.8%.

Initially, the facility was launched to serve as a stabilization tool for the financial system. However, in addition to that, it became a very attractive vehicle for earning high yields with minimal counterparty risk. The program currently contains nearly $2.3 trillion in funds, showing how popular it is with its customers.

Circle’s idea was to join the ranks of accepted entities. With USDC accessing the program, it would create a stablecoin that would technically be backed by the Fed. However, according to the Bank Policy Institute, this might threaten the financial system’s stability.

Big blow for Circle as NY Fed changes policy towards stablecoins! With their USDC reserve fund now ineligible, it'll be harder for Circle to maintain stability & participate in the financial ecosystem. The impact on stablecoin issuers is yet to be fully understood. #crypto #NYFed

— CoinUpz (@CoinUpz) April 26, 2023

Nick Timiraos, the Wall Street Journal’s chief economic correspondent, commented on the matter saying that “The Fed updated the eligibility rules for the ONRRP facility in ways that could deny access to stablecoins.”

Circle’s plans to access the Fed’s program might fail

Circle is the issuer of the crypto industry’s second-largest stablecoin, USDC, which currently acts as the 5th-largest crypto by market cap. Its market capitalization is at $30.6 billion as of April 26th. According to the company behind the stablecoin, around $25 billion of its reserves are kept in short-term US Treasury bills, in a bespoke fund managed by BlackRock, known as the Circle Reserve Fund.

The fund is only available to Circle itself, and according to Circle, it is registered as a 2a-7 government money market fund. The SEC’s filing involving the fund confirms this claim.

In an interview in November 2022, Circle’s CFO, Jeremy Fox-Green, said the company’s goal is for the fund to gain access to the Fed’s RRP. That way, it would open a way for USDC’s remaining cash reserves to reach the fund under a Fed account.

However, apart from US authorities’ general dislike of crypto, USDC experienced a crisis last month, temporarily even depegging from the USD. The incident was not the company’s fault, but rather, it was caused by the collapse of the Silicon Valley Bank — Circle’s major banking partner. Around $3.3 billion of USDC’s cash reserve was with the SVB, and these funds were inaccessible for several days, causing panic among investors until the government stepped in to bail out depositors.

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