Following the recent disclosure of Circle’s goal to get approved for the Fed program, the New York Fed has now updated its rules crushing the stablecoin issuer’s plan. Though the rule is not directed solely to hinder Circle’s goal, however, it has cast uncertainty over the company’s intention to implement Federal payment rail.

According to an announcement published on April 25, the New York Federal Reserve has made changes to its eligibility criteria for parties looking to participate in its reverse repurchase agreements (RRP).

Policy Change Sabotages Circle’s Plan

In a Federal Reserve Reverse Repurchase Agreement (RRP), the Fed sells securities to eligible counterparties with an agreement to buy them back at the maturity date. This has been seen by companies such as Circle as a way to earn interest, therefore, making the company want to implement the system.  

However, the latest update of the New York Federal Reserve Policy appears to sabotage that specific Circle plan. Circle maintains a Reserve Fund that is managed by investment management firm BlackRock. 

The fund is classified as a 2a-7 fund and is exclusively available to Circle. However, the Federal Reserve’s statement suggests that this classification under which the Circle reserve fund is labeled may disqualify Circle from participating in the upcoming Federal program.

The New York Fed stated:

SEC-registered 2a-7 funds that, in the sole judgment of the New York Fed, are organized for a single beneficial owner, or exhibit sufficient similarities to a fund so organized, generally will be deemed ineligible to access reverse repo operations.

A 2a-7 fund is a type of money market fund that is regulated by the Securities and Exchange Commission (SEC) under Rule 2a-7 of the Investment Company Act of 1940. These funds are designed to be low-risk, highly liquid investments that provide a stable value and yield to investors.

The primary goal of this government money market funds is to ensure that funds under it can promptly fulfill investor redemptions. Particularly, funds falling under this category must hold a minimum of 10% of their total assets in daily liquid assets and at least 30% of their total assets in weekly liquid assets.

Fed Payment System Imposes Potential Risk On Circle

Circle’s approval into the Federal Reserve’s program would enable the stablecoin issuer to earn interest on excess funds by investing in low-risk Treasury securities, and therefore, help maintain the stability of its stablecoin, USDC Coin, while also generating interest income.

However, In January, the Bank Policy Institute, a prominent advocacy group for US banks, argued otherwise and warned that in the event that Circle’s USDC is granted access to the RRP, it could potentially create a stablecoin that is effectively backed by the Federal Reserve. This poses a risk to the stability of the financial system.

Despite this, in March, Raagulan Pathy, the Asia-Pacific vice president of Circle, said that the company’s ultimate goal remains to keep all of its cash with the Federal Reserve and utilize the payment rails to the Fed. This approach would decrease Circle’s reliance on traditional financial (TradFi) partners, according to Pathy.

Meanwhile, the USDC market cap value has been moving in a downtrend in the past week. Over the past 24 hours, the USDC market cap has declined by 0.1% with the total value sitting at $3.6 billion.

Featured image from Unsplash, Chart from TradingView