In January, we wrote about Bank Policy Institute concerns that a chunk of the USDC stablecoin reserves could be parked at the Federal Reserve, creating a ‘backdoor CBDC’. The New York Federal Reserve (NY Fed) has removed that possibility by tightening the eligibility criteria for Federal Reserve reverse repos (RRP). But legislation in progress could allow a more direct Fed deposit in the future.
Circle contracted with BlackRock to create a bespoke money market fund, the Circle Reserve Fund, to hold the bulk of the USDC stablecoin’s reserves, consisting of short term Treasuries. The fund currently has more than 82% of the reserves, or $25 billion. Whereas currently the rest of the reserves are in bank deposits, a chunk of that money could be held inside the fund if it used reverse repos.
The net effect of reverse repurchase (reverse repo) agreements is similar to depositing cash at the Fed. A fund sends money to the Federal Reserve to buy Treasuries, which are resold back to the Fed at a future date at a slightly higher price. The price difference is effectively interest.
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