Circle is turning into a repo machine

The stablecoin issuer's latest filings show that roughly 54 percent of all depositor cash in Circle's Reserve Fund is invested in repo.

Circle was supposed to be the well-behaved alternative to Tether. A stablecoin issuer that embraced regulation, parked customer funds in the banking system, and dutifully followed the rules governing money transmitters. But the collapse of Silicon Valley Bank in 2023 — which briefly knocked USDC off its peg, compromising $3.3bn of reserves — forced an uncomfortable realization. Banks bear counterparty risk.

That raised an obvious question for many stablecoin users: What exactly is the point of a crypto-based stablecoin if, in a crisis, it ends up being just as exposed to the fragilities of the traditional financial system it claims to bypass?

Circle has effectively swapped direct exposure to the banking system for exposure to the asset-management complex.

Circle’s latest 10-K, released Monday, suggests the company has spent the past two years quietly reengineering its model to address that question, mostly by reducing its reliance on the banking system, while still remaining compliant. The outcome is a capital-market-oriented structure that has enabled the group to become a major force in the U.S. government debt repo markets.