In a recent blog post, the Banking Policy Institute explained how fintech Circle is shifting many of the assets backing its USDC stablecoin from direct holdings of Treasury securities to a government-only money market mutual fund created by BlackRock for Circle’s sole use, known as the Circle Reserve Fund.
With the shift, 80% of the assets backing USDC will be investments in the money fund. The remaining 20% will stay as bank deposits for the time being. More significantly, BlackRock in turn plans to apply for the fund to access the Fed’s overnight RRP facility. If access is granted, Circle plans to shift the remaining 20% into the fund, with the fund investing that cash into the ON RRP facility.
The ramifications here are difficult to overstate. In essence, anyone in the world wishing to hold the equivalent of reserves at the Federal Reserve will be able to do so by purchasing USDC. Especially in times of crisis, this asset would be highly desirable as a back-door CBDC or account at the Federal Reserve.
As such, it is a breathtaking example of regulatory arbitrage. It takes the fact that the Fed’s balance sheet is so large that it can no longer be funded with currency or bank reserves and combines it with a structure that avoids all federal oversight of Circle or limits on potential holders of the coins.