By George Ward
The New York Federal Reserve recently released new rules for entities looking to explore its monetary sector to reposition their money market. However, the move has cast doubt over the intention of the USD Coin (USDC) stablecoin issuer, Circle, to continue utilizing the Fed’s money market policies.
New York Fed Adjusts Monetary Guidelines
The New York Fed’s update comprised a revamp of its guidelines to determine the eligibility of counterparties to participate in the Reverse Repurchase Agreements (RRP). Furthermore, the updated rules might hinder the stablecoin issuer from accessing the Fed’s RRP.
It is worth noting that the RRP is a process where the financial regulator sells securities to qualified entities with an agreement to repurchase the assets at their maturity period. According to the New York financial watchdog, evaluating such a system is an extension of an existing business structure.
Moreover, the counterparty is not designed for the sole purpose of participating in the RRP. On Circle’s Reserve Fund, the New York Fed noted that it is a money market under the custody of the asset management firm BlackRock.
In addition, the regulator stated that the Circle Reserve Fund is one of the 2a-7 funds open to Circle and is ineligible under its guidelines. Meanwhile, the 2a-7 money market regulations aim to ensure that the funds are readily available for investors to access at any time.
Apart from this, funds under this category must have at least 10% of their total assets in daily liquid funds and 30% in weekly liquid assets. Additionally, approval of the Fed’s RRP program will allow the stablecoin creator to gain interest on excess funds, which it can invest in low-risk Treasury securities.
According to Raagulan Pathy, Circle’s vice president for the Asia-pacific region, the stablecoin issuer would like to keep its cash reserves with the Fed and leverage the Fed’s payment rail. Pathy revealed in an interview in March that this will allow Circle to stop depending on its traditional finance (TradFi) partners.
Circle Eyes More Banking Partnership
Over the past few weeks, Circle has shifted its focus to getting into strategic partnerships with banks as part of its global move to ensure stability for its asset. Last month, Pathy explained that the move became necessary after USDC’s value depegged from $1 following the collapse of Silicon Valley Bank (SVB), one of the banks where Circle keeps its cash reserves.
March 2023 saw stablecoins face massive uncertainty after the bank crisis involving three crypto-friendly banks and the subsequent order by the US Securities and Exchange Commission (SEC) to Paxos to stop minting its BUSD coins. However, even before the recent regulatory action against Paxos, data between September 2022 and February 2023 showed a massive redemption of stablecoins.
Observers believe that the increasing withdrawals of stablecoins led to the bank runs that affected Signature Bank, Silvegate Bank, and Silicon Valley Bank (SVB). According to the blockchain analytic platform Whale Alert, stablecoins have declined in market capitalization since November 2022.
Meanwhile, Circle began injecting funds into its Reserve Fund initiative last November as part of its plan to mitigate the risks of its asset to holders.