How NY Fed’s Policy Change Could Crush Circle’s Ambitious Fed Payment Rail Goal

Updated New York Fed Rules Could Impact Circle’s Access to Fed’s Money Market

The New York Federal Reserve has updated its rules, which could impact stablecoin issuer Circle’s access to the Fed’s money market. According to the Fed’s updated guidelines, accessing the system “should be a natural extension of an existing business model, and the counterparty should not be organized for the purpose of accessing RRP operations.” This could potentially make Circle “ineligible” for the reverse repurchase program, which is a process where the Fed sells securities to eligible counterparties with an agreement to repurchase them at the maturity date.

The Circle Reserve Fund, which is a money market fund managed by BlackRock, could be “deemed ineligible” under the Fed’s statement, as it is only available to Circle. The regulations governing 2a-7 government money market funds aim to ensure that these funds can meet potential redemptions by investors in a timely manner. Funds under this category must hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets.

Circle’s Ambitious Goals

Approval into the Fed’s program would enable Circle to invest in low-risk Treasury securities and earn interest on excess funds, which could help maintain the stability of its stablecoin, USD Coin (USDC). Circle has expressed interest in keeping all its cash with the Fed and using its payment rails to move away from its reliance on traditional finance partners.

In November, Circle announced that it had started investing part of its funds into the Circle Reserve Fund as a measure to mitigate risks and uphold the redeemability of its coins for holders. In March, Raagulan Pathy, Circle’s Asia-Pacific vice president, stated that Circle would like to have more banking partnerships on a global basis to mitigate risks following the depeg of USDC after the collapse of Silicon Valley Bank on March 10. Despite Circle’s expanded ties with BNY Mellon and its new banking partnership with Cross River, Circle still held 80% of its reserves and treasuries.

Conclusion

The New York Fed’s updated guidelines could potentially hinder Circle’s chances of gaining access to the Fed’s reverse-repurchase program, impacting its ambitious goals of investing in low-risk Treasury securities and using the Fed’s payment rails. Circle has expressed interest in having more banking partnerships globally to mitigate risks and maintain the stability of its stablecoin, USD Coin (USDC).

Key Takeaways

• The New York Federal Reserve has updated its guidelines, which could impact Circle’s access to the Fed’s reverse-repurchase program.
• The Circle Reserve Fund could be “deemed ineligible” under the Fed’s statement, as it is only available to Circle.
• Circle has expressed interest in keeping all its cash with the Fed and using its payment rails to move away from its reliance on traditional finance partners.
• Despite its expanded ties with BNY Mellon and its new banking partnership with Cross River, Circle still held 80% of its reserves and treasuries.
• Circle has turned its focus to having more banking partnerships globally to mitigate risks and maintain the stability of its stablecoin, USD Coin (USDC).