When TNB Meets Circle: The Institutional Penetration War of the US Dollar Stablecoin

(Written by / Yu Zhe'an (Researcher) (For the full text, please see Yu Zhe'an's Facebook )｜Edited by / ABMedia )

At the intersection of the narratives of "central bank digital currencies" and "dollar stablecoins," what truly deserves attention is: who can touch the Federal Reserve's balance sheet? This article explores two seemingly unrelated yet closely connected events involving TNB (The Narrow Bank) and Circle (the issuer of USDC), revealing how stablecoin issuers silently challenge the current financial order through "institutional options."

TNB Case: A Systemic Conflict Not Documented

TNB was founded by former New York Federal Reserve executive James McAndrews, promoting the idea of "only accepting deposits, not lending, and not taking on credit risk." This narrow bank applied for a Federal Reserve master account starting in 2017, ultimately facing six years of litigation and being officially denied in 2023.

The reasons for the Federal Reserve's rejection are not hard to understand: if TNB is allowed to access reserves and enjoy risk-free returns, it would create a systemic arbitrage opportunity against the traditional banking system. This would attract a large amount of capital from regular banks into "non-lending, zero-risk" TNB, leading to market distortions and financial instability.

This is not a rejection of a bank, but a suppression of a capital model.

Circle operation: seemingly compliant, but in reality a high-level options gamble

Unlike the direct challenge posed by TNB, Circle adopts a strategy of "institutional penetration." They partnered with BlackRock to establish a dedicated government-type money market fund (Reserve Fund), attempting to qualify the fund for the Federal Reserve's overnight reverse repurchase agreement (RRP). Although ultimately rejected, the intentions and institutional values inherent in this operation are thought-provoking.

( The New York Fed changes the RRP counterparty policy, Circle's reverse repo dream shattered )

Circle gains the following three layers of implicit capital dividends through this annual management fee of only 0.17%:

BlackRock's asset management and brand endorsement

Obtain institutional access to the Federal Reserve's reverse repo market

Meet the basic conditions of RRP through SEC Rule 2a-7 to gain access to Federal Reserve policy tools.

The structure of this transaction is similar to a "zero-cost, deep out-of-the-money structured option": failure does not harm the principal, while success opens up the possibility of connecting with the Federal Reserve's balance sheet, further solidifying USDC's position as the leading dollar stablecoin.

Will the valuation basis of stablecoins shift from yields to systems?

The strategy of USDC shows that the competition in the stablecoin market is evolving from "interest rate arbitrage" to "institutional access rights." This is not merely financial innovation, but a game of institutional design surrounding the Federal Reserve's policy tools and capital markets. As Circle and TNB approach the boundaries of the Federal Reserve in different ways, the Federal Reserve's response strategy will also set a paradigmatic reference for global central banks and the stablecoin market.

The stablecoins of the future may no longer just be pegged to the US dollar, but rather be core to valuation based on the distance from the Federal Reserve's "institutional options."

This article When TNB Meets Circle: The Institutional Penetration War of the US Dollar Stablecoin first appeared on Chain News ABMedia.