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Circle Internet Financial, the issuer of the $30 billion USD Coin (USDC), is taking steps to rebalance its reserves in anticipation of the potential risk of a U.S. government debt default.

The Circle Reserve Fund, managed by the global investment management giant BlackRock, has bolstered its portfolio with $8.7 billion through overnight repurchase (repo) agreements, as stated on the fund's website as of May 16. These tri-party repo agreements involve prominent banking institutions such as BNP Paribas, Goldman Sachs, Barclays, and the Royal Bank of Canada.

Overnight repo transactions serve as short-term collateralized loans, where the borrower sells a security, such as U.S. Treasuries, in exchange for cash. The borrower agrees to repurchase the collateral the following day at a slightly higher price. However, the underlying dynamics involve prominent institutional investors with excess cash entrusting it to Wall Street dealers in need of funding.

“While this plan has been underway for many months, the inclusion of these highly liquid assets also provides additional protection for the USDC reserve in the unlikely event of a U.S. debt default,” a Circle spokesperson emailed in a note.

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

 

Circle is undertaking these actions amidst ongoing discussions between U.S. lawmakers and President Joe Biden's administration regarding the potential increase in the government's capacity to issue new debt, commonly referred to as the debt ceiling. Treasury Secretary Janet Yellen has warned that the Treasury Department could exhaust its cash reserves by early June unless the debt limit is raised.

As a part of their preparations, Circle's fund has made the decision to divest from Treasuries that have maturity dates beyond the end of this month, effective May 10. The fund's spokesperson mentioned that the assets have been reallocated into cash or government repo transactions instead. It is important to note that the collateral for these repo transactions does not include securities that are maturing within three days, as clarified by the spokesperson.

“We don’t want to carry exposure through a potential breach of the ability of the U.S. government to pay its debts,” Jeremy Allaire, chief executive officer of Circle, said last week in an interview with Politico.

Source Coindesk