Analysts suggest that the Circle selloff might be excessive as cryptocurrency legislation diminishes Coinbase’s competitive advantage.

The most recent version of the CLARITY Act impacted both companies, but one analyst suggests the legislation could eventually shift negotiating power towards Circle, moving it away from Coinbase.

Circle CEO Jeremy Allaire (Danny Nelson/CoinDesk)

Key points:

• Circle’s stock dropped 20% on Tuesday following the CLARITY Act’s position on stablecoin yield, yet analysts contend that the updated regulations could eventually enhance the company’s economic leverage as a regulated issuer.
• Given that Coinbase currently obtains a significant portion of USDC interest income through its partnership with Circle, restrictions on yield-like incentives could diminish Coinbase’s high-margin stablecoin earnings and bolster Circle’s position in their renegotiation scheduled for 2026.
• Some investors believe the decline in Circle’s stock is excessive, pointing out that demand for stablecoins is primarily driven by their utility in payments and settlements rather than yield, and they anticipate that regulatory measures and market expansion could elevate Circle’s valuation to approximately $75 billion.

Circle (CRCL) experienced a more significant decline than Coinbase (COIN) during Tuesday’s steep selloff attributed to the latest position of the CLARITY Act on stablecoin yield, but one analyst maintains that the regulatory transformation may ultimately benefit the stablecoin issuer.

Both companies are seeing slight recoveries on Wednesday, yet they remain considerably lower since the news broke on Monday evening.

The market may not be recognizing the long-term implications, argued Markus Thielen, founder of 10x Research: in its current state, the bill undermines Coinbase’s distribution-centric model more than Circle’s role in infrastructure.

Thielen noted that Coinbase captures the majority of USDC economics through its collaboration with Circle. For USDC held on Coinbase, the exchange receives nearly all of the related interest income, while off-platform balances are typically divided approximately 50%-50. Thielen estimates that Circle pays Coinbase over $900 million in revenue share annually, which constitutes around half of Circle’s total revenue.

This arrangement has rendered stablecoin revenue a highly profitable business for Coinbase. However, if regulators eliminate yield-like rewards on balances, some of that advantage may diminish, Thielen stated.

"The framework increasingly benefits Circle on a relative scale," Thielen wrote, asserting that the federal guidelines would redirect value towards regulated issuers that possess compliance, scale, and a credible balance sheet.

This could be even more significant in light of the upcoming commercial renegotiation between the two companies in August 2026. Thielen anticipates a greater likelihood that Circle secures more favorable terms under a stricter federal regime.

Circle’s potential valuation could double

Bitwise CIO Matt Hougan, on the other hand, expressed that the downturn in Circle appears "overdone" as the CLARITY Act does not alter the long-term investment narrative.

He stated in a Wednesday note that yield has not been the primary attraction for stablecoins. Most stablecoins do not offer interest, yet adoption has surged due to their ability to facilitate cross-border dollar transfers, settle trades, and access blockchain-based financial systems. In that regard, limiting yield does not impact the fundamental use case.

Hougan highlights forecasts suggesting that the market could expand to $1.9 trillion or even $4 trillion by the decade’s end. Circle, with its robust position in regulated stablecoins, stands to gain if more activities transition towards compliant, domestic players.

He also perceives potential benefits arising from regulation itself. Reducing yield passthrough could lessen the revenue Circle shares with partners such as Coinbase, thereby enhancing margins over time.

Overall, Hougan envisions a path for Circle to achieve a significantly larger valuation — potentially around $75 billion, approximately double its current status.

"If stablecoins develop as many anticipate," Hougan remarked, "one can adopt a fairly conservative stance on most assumptions and still find Circle appealing."