Circle’s access to NY Fed’s reserve repurchase program at risk due to new rules

The Federal Reserve Bank of New York (NY Fed) has recently made changes to its counterparty criteria for its reverse repurchase program (RRP), which could potentially prevent Circle, a stablecoin issuer, from accessing the sought-after facility.

Reverse repurchase program’s attraction and potential risks

Initially established as a financial system stabilization tool, the RRP permits selected counterparties like banks and money market funds to lend to the Fed overnight at a fixed rate, which is currently 4.8%. The program has evolved into an attractive option for earning high yields with minimal counterparty risk, with nearly $2.3 trillion in funds currently held in the program.

In January, the Bank Policy Institute, a prominent advocacy group for US banks, cautioned that if Circle’s USDC were to gain access to the RRP, it could create a stablecoin effectively backed by the Fed, posing a potential risk to the stability of the financial system.

Circle’s USDC reserve fund and future plans

Circle, which is responsible for issuing the $31 billion USDC stablecoin, maintains around $25 billion of its reserves in short-term US Treasury bills in the exclusive Circle Reserve Fund, managed by BlackRock. The fund is registered as a “2a-7” government money market fund. Circle’s objective for the fund was to secure access to the Fed’s RRP through BlackRock, allowing the company to move USDC’s remaining cash reserves from partner banks to the fund under a Fed account.

With the NY Fed’s updated eligibility rules, Circle’s access to the reverse repurchase program may be denied, potentially impacting the company’s plans for its USDC reserve fund.