Circle’s USD Coin Eligibility for Federal Reserve’s Money Market Under Threat
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New restrictions implemented by the New York Fed may render Circle, the company behind USD Coin, ineligible for access to the Federal Reserve’s money market. The new rules aim to clarify who is eligible to participate in the Fed’s reverse repurchase agreements, in which the Fed sells securities to approved counterparties with the promise to repurchase them later.
Circle’s Fed payment rail goal could be crushed by NY Fed’s policy change
Updated rules by the New York Fed could deem stablecoin issuer Circle “ineligible” for access to the Fed's money market. pic.twitter.com/v9X5oMQgVt— Mr Legend Crypto (@mrlegendcrypto) April 27, 2023
Counterparties, as well as the New York Federal Reserve’s stance on counterparties for needed processes. These updates ensure compliance with counterparty regulations for other market activities.
The primary objective of these changes is to emphasize that participation in reverse repo activities should not be a counterparty’s main goal but rather a natural extension of a company’s business model.
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The expectations and eligibility criteria for reverse repo counterparties, as well as the New York Federal Reserve’s approach to counterparties for need processes, have been changed.
https://twitter.com/RodneyBlount06/status/1406793404684570627?s=20
Circle’s chances of gaining access to the Fed’s reverse repurchase program have been reduced, as the Circle Reserve Fund is one of the 2a-7 funds that could be deemed ineligible under the Fed’s statement since counterparties should not be established solely for accessing reverse repo operations.
So far, a lot of discussion at the Walz presser about people who were on the cusp of getting eligibility because of age and underlying conditions.
"The expectations is they're still at the front of the line," said Walz. Health providers will continue to make them a priority.
— Catharine Richert (@CatRichert) March 26, 2021
In November 2022, Circle announced a new approach to reduce risk and ensure the redeemability of its coins for holders.
This involved allocating some of its funds to the Circle Reserve Fund, a money market fund managed by BlackRock, a reputable asset management firm. However, this fund is currently only available to Circle and does not meet the requirements for participating in such processes.
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By joining the Fed’s program, Circle would have the opportunity to invest its excess assets in low-risk Treasury securities, earning interest on those funds. This would allow the stablecoin issuer to strengthen USD Coin (USDC) while earning interest. To qualify, funds in this category must have a minimum of 10% of their total assets in daily liquid assets and 30% of their total assets in weekly liquid assets.
Despite enhancing its partnership with BNY Mellon and securing a new banking deal with Cross River, Circle still held 80% of its reserves and treasuries at the time. After losing Silicon Valley Bank on March 10 and experiencing USDC de-pegging, Circle shifted its focus towards establishing new international banking partnerships.
