Circle’s Fed payment rail target may not be achieved due to a policy change by the New york Fed

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By Degen Lipsa

If the New York Fed ‘s standards are updated, stablecoin issuer Circle may be “ineligible” to access the Fed’s money market.

The plans of stablecoin issuer Circle to use the Fed’s services are questionable as a result of the New York Federal Reserve’s publication of new requirements for counterparties wishing to use its money market balancer.

The New York Fed announced modifications to its rules governing who is qualified to take part in its reverse repurchase agreements (RRP) in a statement on April 25.

The revised regulations might make it more difficult for Circle to participate in the Fed’s reverse-repurchase programme, which involves the Fed selling securities to qualified counterparties with an agreement to buy them back at maturity.

The New York Fed asserts that access to such a system “should be a natural extension of an existing business model, and the counterparty should not be organised for the purpose of accessing RPP operations.”

“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.”

One such 2a-7 vehicle that is solely accessible to Circle is the Circle Reserve vehicle, a money market fund managed by investment management company BlackRock. As a result, the Circle Reserve Fund might be “deemed ineligible” in accordance with the Fed’s announcement.

The rules governing 2a-7 government money market funds are designed to make sure that these funds can promptly satisfy any prospective investor redemption requests.

A minimum of 10% of the total assets of the funds in this category must be held in daily liquid assets, and a minimum of 30% of the total assets must be held in weekly liquid assets.

By investing surplus funds in low-risk Treasury securities, Circle would be able to earn income and contribute to the stability of its stablecoin, USD Coin, if the Fed’s programme were approved.

Circle’s vice president for Asia-Pacific, Raagulan Pathy, stated to Cointelegraph in March that the company “would ultimately like to keep” all of its funds at the Fed and “use the payment rails to the Fed because that moves us away from our reliance on TradFi partners.”

At the time, it was observed that Circle still maintained 80% of its deposits and treasuries, despite its closer ties to BNY Mellon and its new financial alliance with Cross River.

Since the depeg of USDC followed the failure of Silicon Valley Bank on March 10, Circle has recently shifted its attention to having “more banking partnerships on a global basis,” according to Pathy.

Only in November did Circle make the announcement that it has started putting some of its money into the Circle Reserve Fund in order to reduce risks and maintain the holders’ capacity to redeem their tokens.

Read original on CoinTelegraph

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