New York Fed Changes Policy Will Stop Circle From Taking Loans

Key Points:

• The New York Fed has restricted its reverse repurchase program (RRP) partner standards, which could prevent stablecoin issuer Circle from obtaining a Fed loan.
• Circle is said to have placed about $25 billion in short-term US Treasury reserves in a separate fund managed by BlackRock called the Circle Reserve fund.
• The RRP allows selected partners to lend to the Fed overnight at a fixed rate (currently 4.8%).

On Wednesday, the New York Federal Reserve Bank restricted its reverse repurchase program (RRP) partner standards, which could prevent stablecoin issuer Circle from taking loans from the Fed.

According to a press release from the Federal Reserve Bank of New York, the funds are “organized for a single beneficial owner” and registered as a “2a-7 fund” with the US Securities and Exchange Commission (SEC) “will generally be considered ineligible.” Because the Circle Reserve Fund seems to fall into this category.

Circle is said to have placed about $25 billion in short-term US Treasury reserves in a separate fund managed by BlackRock called the Circle Reserve fund. According to an earlier press release from Circle and the SEC filing with the fund, the Circle Reserve Fund is only used by Circle and is registered as a “2a-7” government money market fund.

RRP allows selected partners (e.g. money market funds, banks) to lend to the Fed overnight at a fixed rate (currently 4.8%). While the instrument was originally created as a stabilizing tool for the financial system, it has since become an attractive means of obtaining high returns with minimal counterparty risk. Currently, the funding for the program is nearly $2.3 trillion.

In January, the Banking Policy Institute, a key advocacy group for US banks, said Circle’s USDC with access to the RRP would create “a stable currency effectively backed by the Fed.” and potentially destabilize the financial system. Fox-Geen added that this access would pave the way to move USDC’s remaining cash reserves from partner banks to funds under Fed accounts.

When its financial partner Silicon Valley Bank abruptly failed last month, USDC faced a problem and briefly lost its peg. Until the government bailed out depositors who had more deposits above the deposit insurance limit of the Federal Deposit Insurance Corporation, almost $3.3 billion of USDC’s cash reserve stored at SVB remains unreachable for days and sent shockwaves across the stablecoin market.

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