Circle shares drop 18% as revised Clarity Act proposal jeopardizes stablecoin incentives.

The most recent iteration of the Clarity Act is exerting pressure on stocks as it would limit stablecoin rewards.

Jeremy Allaire, Co-Founder, Chairman and CEO, Circle Speaks at Hong Kong Fintech Week in 2024 (HK Fintech Week)

Key points:

• Shares of Circle experienced a decline of up to 18%, while Coinbase saw a decrease of approximately 8%, following a draft of the U.S. Clarity Act that introduced the possibility of stringent limits on stablecoin yields.
• The suggested legislation would prohibit rewards on passive stablecoin holdings and ban arrangements that are “economically equivalent to interest,” jeopardizing a crucial incentive that has driven the adoption of USDC.
• This sell-off affected Circle, which had previously enjoyed a 170% increase since early February, coinciding with rival Tether’s efforts to enhance confidence by engaging a Big Four accounting firm for a comprehensive audit of its USDT reserves.

Circle, the issuer of stablecoin (CRCL), saw its shares plunge on Tuesday after a draft version of U.S. stablecoin legislation raised alarms regarding yield limitations.

The stock of the USDC issuer decreased by as much as 18% during the early U.S. trading session, ending a weeks-long rally that had resulted in gains exceeding 100%. Concurrently, the crypto platform Coinbase (COIN), which derives revenue from stablecoin operations, fell by roughly 8%.

The primary driver behind this movement was the latest draft of the Clarity Act, as reported by CoinDesk, which is expected to limit the provision of rewards on stablecoin holdings, analysts noted.

“The Clarity Act could potentially prohibit yield payments for merely holding a stablecoin (e.g., passive balances) and impose restrictions on any method that renders the program in any manner equivalent to a bank deposit,” stated Mizuho analyst Dan Dolev.

Stablecoin yield—whether via onchain lending or platform incentives—has been a significant element of the appeal to investors. Removing this feature complicates the evolution of tokens like USDC beyond simple transactional purposes.

“This undermines a vital aspect of the bullish argument,” remarked Shay Boloor, chief market strategist at Futurum Equities, contending it constrains USDC’s trajectory towards becoming a genuine store-of-value asset.

The stablecoin-oriented GENIUS Act previously prohibited issuers from directly providing yield to users, but they have devised mechanisms to transmit income generated from reserves. Circle earns interest on the backing assets of USDC and allocates it to Coinbase, which subsequently offers rewards to users.

The most recent draft of the Clarity Act aims at that framework by banning anything “economically equivalent to interest,” effectively eliminating a key incentive for holding stablecoins, as noted by Amir Hajian, a digital asset researcher at Keyrock.

“It undermines the pass-through model that has been crucial for stablecoin adoption,” Hajian stated.

Additionally, there was another notable development. Tether, the issuer of the USDT stablecoin and a principal competitor of Circle, announced it has engaged one of the ‘Big Four’ accounting firms to perform a long-anticipated full audit of its reserves. If successful, this audit could enhance USDT’s reputation among institutional clients by showcasing improved risk management and potentially impacting USDC’s market share.

The decline follows a strong performance, with Circle shares having increased by 170% since early February, significantly outpacing other crypto stocks and the broader struggling stock market. This scenario left the stock exposed to a rapid decline in response to any adverse news.

“The actual situation doesn’t seem as severe as the headlines suggest,” commented Owen Lau, an analyst at Clear Street. “It appears to be an overreaction, but the market often reacts impulsively before seeking clarification.”