NY Fed Updates RRP Criteria, Impacting Stablecoin Issuer Circle

New RRP Criteria Announced

The Federal Reserve Bank of New York (NY Fed) has revised its counterparty criteria for the reverse-repurchase program (RRP), potentially preventing Circle, a stablecoin issuer, from accessing the program. This change targets funds registered as "2a-7 funds" with the SEC that are organized for a single beneficial owner, such as the Circle Reserve Fund managed by BlackRock.

Impact on Circle

Circle holds $25 billion of USDC's reserves in a BlackRock-managed fund, aiming to access the Fed’s RRP. The new criteria could hinder Circle's ability to transfer its cash reserves under a Fed account, affecting its business strategy. This comes after a recent crisis where Circle faced significant challenges due to the collapse of its banking partner, Silicon Valley Bank, which led to $3.3 billion of inaccessible reserves and over $10 billion in USDC outflows.

RRP Program Overview

The RRP offers a low-risk, high-yield opportunity for lending to the Fed, with a fixed rate of 4.8%. Originally designed to stabilize the financial system, the program's funds have grown to nearly $2.3 trillion. The new rules emphasize that RRP access should be a natural extension of existing business models, excluding funds like Circle's that are organized for a single owner.

Financial Stability Concerns

The Bank Policy Institute had previously warned that if Circle's USDC gained RRP access, it could create a stablecoin effectively backed by the Fed, posing potential risks to financial stability. The updated eligibility criteria aim to prevent such scenarios, reinforcing the program’s role in maintaining economic equilibrium.

Stablecoin Market Implications

This policy shift highlights the ongoing challenges faced by fiat-backed stablecoins within the traditional banking system. With the NY Fed’s decision, Circle and similar entities must navigate a complex regulatory landscape to maintain stability and growth in the digital currency market.