The US-based Bank Policy Institute (BPI) is raising concerns that a sizeable proportion of Circle’s USDC stablecoin reserves could be parked at the Federal Reserve, despite Circle not having a central bank account. Since November, BlackRock has been managing about two-thirds of the reserve assets in a bespoke money market fund, the Circle Reserve Fund (CRF) , which invests mostly in U.S. short-dated Treasuries. The BPI claims that Blackrock has applied for the fund to access the Fed’s overnight reverse repo (ON RRP) facility, which provides money funds and government-sponsored enterprises a standing option to invest overnight with the Fed at a fixed rate, currently 4.3%. This involves the fund buying Treasuries from the Fed, which are resold to the Fed at a future date at a slightly higher price. The net effect of the cash flows, with the transfer of money to the Fed, is not dissimilar to depositing the USDC reserve cash at the Federal Reserve. The use of the ON RRP by the CRF could effectively transform USDC into a “backdoor” synthetic central bank digital currency (CBDC) if all of the assets are parked there. [Read more at the BPI]
However, Ledger Insights points out there are some frictions and applications to the application process that might trip up BlackRock’s purported ON RRP application on behalf of the CRF. First off, applicants must have been operating for at least one year, and the CRF was launched in November 2022 so the earliest it could apply would be in November 2023. Also, the application form asks about the proportion of shareholders in high risk sectors from an anti-money laundering (AML) perspective. Given Circle is the sole shareholder and its involvement in the cryptocurrency and DeFi sectors, that would be 100%. Nevertheless, the BPI fears that if and when the CRF gets Fed ON RRP access, USDC would become equivalent to an account at the Fed and a “breathtaking example of regulatory arbitrage… and introduce the potential for systemic contagion from the crypto markets into the traditional financial system.” However, IMF and New York Fed staff have written rather positively about the possibility of stablecoins backed directly by central bank deposits, although the Fed has been reluctant to give Master Account access to non-depository institutions, and even banks, like Wyoming-chartered Custodia Bank.
FTX fun and games
For those interested in following the FTX trials, tribulations and repercussions, I’m still collecting them on my Diigo social bookmarking page. But if you’re interested in more detail, I highly recommend you follow Amy Castor and David Gerard, who play tag team with their FTX coverage. For your weekend reading list, here are some recent updates from the team:
- Crypto collapse: Gemini vs DCG, New York charges Mashinsky in Celsius, Voyager sale troubles, Silvergate troubles, Wintermute
- FTX Bahamas vs. John Jay Ray, Bankman-Fried pleads not guilty, DoJ seizes FTX assets
- Which historical bubble is most like the crypto bubble?
- Return to Nothingness: Big Crypto’s struggles with basic accounting and economics
And just a reminder that you can get the Daily #Fintech Digests emailed directly to your inbox by signing up here.
The International Telecommunication Union (ITU) will hold (virtually) the second edition of its DC3 Conference – From Cryptocurrencies to Central Bank Digital Currencies (CBDCs) from January 24 to 27 2023. On January 27 I will be moderating two panels on offline central bank digital currency (CBDC). Also, on January 24, Jacques Francouer and I will be providing an update to our ITU Digital Currency Global Initiative digital currency ontology work. [For more event detail go to the ITU DC3 conference site]
Kiffmeister’s global central bank digital currency monthly monitor
Just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So for any of you out there who work for a central bank, ministry of finance or international financial institution who would like to receive it by email on the first business day of every month, please DM me on LinkedIn or email me at email@example.com.
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