Circle Adjusts Reserves for USDC Amid U.S. Debt Default Risk

Stablecoin issuer Circle Internet Financial has taken proactive measures to rebalance the reserves backing its USD Coin (USDC) stablecoin, worth $30 billion, as it prepares for the risk of a U.S. government debt default.

In a move aimed at bolstering the stability of the USDC, the Circle Reserve Fund, managed by global investment management giant BlackRock, has added $8.7 billion in overnight repurchase (repo) agreements to its portfolio.

The tri-party repo agreements, which involve major banking institutions including BNP Paribas, Goldman Sachs, Barclays, and Royal Bank of Canada, are short-term collateralized loans. Under these agreements, borrowers sell U.S. Treasurys for immediate cash and agree to repurchase the collateral the following day at a slightly higher price. This arrangement allows institutional investors with available cash to provide funding to Wall Street dealers in need.

Assets in the Circle Reserve Fund as of May 16 (BlackRock)

While Circle had been implementing this strategy for several months, the recent inclusion of highly liquid assets in the Circle Reserve Fund provides an added layer of protection in the event of a U.S. debt default, according to a spokesperson from Circle.

The move comes as U.S. lawmakers are engaged in discussions with President Joe Biden’s administration regarding the debt ceiling—the limit on the government’s ability to issue new debt. Treasury Secretary Janet Yellen has warned that the Treasury Department is projected to run out of cash by early June if the debt limit is not raised.

To prepare for potential uncertainties, Circle’s fund divested itself of Treasurys maturing beyond the end of this month as of May 10. Instead, the assets were rotated into cash or government repo transactions. Notably, the collateral for these repo transactions does not include securities maturing within three days.

Circle CEO Jeremy Allaire recently expressed the company’s cautious approach, emphasizing the desire to minimize exposure in the event of a breach of the U.S. government’s ability to meet its debt obligations during an interview with Politico.

The rebalancing of reserves and entry into repo agreements highlight Circle Internet Financial’s commitment to maintaining the stability and reliability of the USDC stablecoin. By proactively adjusting its portfolio in response to the risk of a U.S. government debt default, Circle aims to mitigate potential disruptions and reassure users of the USDC’s robustness even in uncertain economic times.

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