How the NY Fed’s Counterparty Standard Restriction Affects Circle’s Loan from the Federal Reserve

On April 26, it was reported that on Wednesday, the Federal Reserve Bank of New York (NY Fed) restricted the counterparty standard of its reverse repurchase program (RRP), which may prevent Circle, the stable currency issuer, from obtaining loans from the Federal Reserve.

The New York Fed’s update of counterparty standards for reverse repos may prevent Circle from obtaining Federal Reserve loans

On April 26, it was reported that the Federal Reserve Bank of New York (NY Fed) restricted the counterparty standard of its reverse repurchase program (RRP), which may prevent Circle, the stable currency issuer, from obtaining loans from the Federal Reserve. This article will explore the impact of the NY Fed’s counterparty standard restriction on Circle’s loan and the potential implications for the stablecoin industry.

What is the NY Fed’s Reverse Repurchase Program?

The NY Fed’s RRP is a monetary policy tool that allows eligible financial institutions to lend money to the Federal Reserve overnight. The NY Fed uses the RRP to drain excess cash from the financial system to maintain its target federal funds rate. The NY Fed sets the counterparty standard for the RRP to ensure the creditworthiness of the borrower.

How Does the NY Fed’s Counterparty Standard Restriction Affect Circle’s Loan?

Circle uses the US dollar coin (USDC), a stablecoin pegged to the US dollar, to facilitate cross-border payments and payments within decentralized finance (DeFi) applications. Circle’s USDC is backed by a reserve of US dollars held in bank accounts. Circle could use the RRP to borrow US dollars from the Federal Reserve against its USDC reserve as collateral.
However, the NY Fed’s counterparty standard restriction means that Circle may not meet the creditworthiness requirements to participate in the RRP. The exact nature of the restriction is unknown, but it could be related to Circle’s relationship with the Chinese-owned crypto exchange Huobi, which was accused of money laundering by the Chinese authorities. Circle has maintained that it has no financial or operational ties with Huobi.

What Are the Potential Implications for the Stablecoin Industry?

The NY Fed’s counterparty standard restriction could have broader implications for the stablecoin industry. Stablecoin issuers may face increased scrutiny from regulators and central banks, as stablecoins have emerged as a new form of money that could compete with fiat currencies. Regulators and central banks may view stablecoins as a potential risk to the financial system, especially if they are used for illicit purposes.
Furthermore, stablecoin issuers may need to diversify their collateral assets to meet the counterparty standard requirements of the RRP and other monetary policy tools. Currently, most stablecoins are backed by US dollars, but stablecoin issuers may need to consider other fiat currencies, commodities, or cryptocurrencies as collateral assets to avoid overreliance on the US dollar.

Conclusion

The NY Fed’s counterparty standard restriction may prevent Circle from obtaining loans from the Federal Reserve through the RRP. The restriction could have implications for the stablecoin industry, as stablecoin issuers may face increased regulatory scrutiny and may need to diversify their collateral assets to meet the creditworthiness requirements of monetary policy tools.

FAQs

1. What is a stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value relative to an asset, such as a fiat currency like the US dollar.
2. What is the RRP?
The RRP is a monetary policy tool used by the NY Fed to lend money to eligible financial institutions overnight.
3. How does the NY Fed set the counterparty standard for the RRP?
The NY Fed sets the counterparty standard to ensure the creditworthiness of the borrower. The exact criteria for the counterparty standard are unknown, but they may include factors such as capital adequacy, credit rating, and market liquidity.