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NY Fed Blocks Circle's Access Preventing Backdoor CBDC

Apr 26, 2023

Circle's USDC Stablecoin Denied Access to Fed's Reverse Repo Program, But Remains Reliable

The New York Federal Reserve has recently announced that reverse repurchase agreements (RRPs) would not be available for money market funds, which are organised for a single beneficial owner, thereby preventing stablecoin issuer Circle from accessing the facility. The Circle Reserve Fund was expected to apply for access to the reverse repo program and move some of its bank deposits into the fund. The fund is managed by BlackRock and currently holds more than 82% of the reserves of the USDC stablecoin, equivalent to $25 billion. Circle has planned to use reverse repos in the future, and legislation is underway to allow stablecoin providers to deposit funds directly at the central bank. However, this might take time, as the Stablecoin Bill is still in progress.


This announcement by the NY Fed comes after concerns raised by the Bank Policy Institute that a portion of the USDC stablecoin reserves could be parked at the Federal Reserve, thereby creating a "backdoor CBDC." If Circle had gained access to the RRP facility, it would have effectively created a stablecoin that was backed by the Fed, which could potentially destabilize the financial system, as per the Bank Policy Institute.


Circle's goal was to gain access via BlackRock to the Fed's RRP to move the USDC's remaining cash reserves from partner banks to the Circle Reserve Fund. Circle had experienced the collapse of Silicon Valley Bank, holding $3.3 billion of its deposits in March, and therefore, had moved most of its cash to BNY Mellon.


Despite the setback of not being able to access the RRP facility, owning USDC is still a reliable option for investors due to its strong backing by short-term Treasuries held in the Circle Reserve Fund. The legislation that allows stablecoin providers to deposit funds directly at the central bank would bring about greater regulatory clarity in the market of 450 million consumers in the EU, but it may take some time before this bill is passed. Nonetheless, investing in USDC remains a good option for those seeking stability and reliability in the world of cryptocurrency.


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