Citigroup states that limitations on stablecoin rewards may hinder, but not entirely prevent, Circle’s USDC growth.

USDC adoption relies on volume, not circulation, according to the bank

Jeremy Allaire, Co-Founder, Chairman and CEO. (HK Fintech Week)

Key points:

• Citi indicated that restrictions on stablecoin rewards might limit USDC circulation in the short term, but will not impact Circle’s primary revenue stream.
• The bank emphasized that the use of stablecoins (volume), rather than their supply, serves as the main indicator of adoption.
• The selloff of Circle shares was viewed as a misinterpretation of the draft Clarity Act by broker Bernstein.

Citi, a Wall Street bank, asserts that the proposed restrictions on stablecoin rewards in the recent draft of U.S. market structure legislation would pose a challenge for Circle (CRCL) but would not fundamentally undermine the investment rationale.

"We consider this development as potentially (but not necessarily) a scaling challenge, rather than a thesis disruptor," stated analysts led by Peter Christiansen in a report released on Tuesday.

The draft legislation permits narrowly defined rewards programs as long as they do not mimic bank deposit interest, according to the analysts. A wide-ranging ban on third-party rewards would not directly impact Circle’s net revenue, as the company already allocates most of its reserve income to distribution partners like Coinbase (COIN).

Nonetheless, the analysts foresee that diminished incentives to hold USDC, which they classify as a payment tool rather than a security, could temporarily decrease circulation and secondary-market liquidity. “We continue to believe that stablecoin volume is the critical measure of adoption, not circulation.”

Citi assigns a high-risk rating to Circle stock with a target price of $243. The shares were trading at approximately $100 at the time of this report.

Circle shares experienced a decline of about 20% on Tuesday, following the release of the draft of the U.S. Clarity Act, which raised concerns regarding the potential prohibition of yield on passive stablecoin balances, thereby affecting the appeal of yield-generating crypto products.

This decline was further exacerbated by broader investor apprehension regarding how regulations might influence stablecoin-related revenues and incentives, along with fresh competitive pressures after Tether announced intentions for a comprehensive Big Four audit and possible U.S. expansion.

The selloff of Circle shares on Tuesday was attributed to a market misinterpretation of the draft Clarity Act, as per Wall Street broker Bernstein.

Investors are confusing those who earn yield with those who distribute it, the broker noted in a report on Wednesday. Circle generates reserve income from assets backing USDC, while platforms like Coinbase (COIN) share some of that yield with users, who are the actual targets of the proposed regulations.

The draft legislation would restrict yield on passive stablecoin balances while allowing rewards tied to trading or payment activities. Bernstein analysts led by Gautam Chhugani indicated this may exert pressure on Coinbase’s ~3.5% USDC yield product, likely necessitating a restructure. Circle’s model remains unaffected, as the firm does not pay yield to holders and recorded $2.64 billion in reserve income for FY2025.

The report highlighted that the growth of USDC, from approximately $30 billion to $80 billion in two years, is driven by trading, payments, and collateral demand, not yield.

Bernstein maintains an outperform rating on Circle shares with a target price of $190.

Coinbase is proceeding cautiously in discussions regarding the Clarity Act, privately indicating to Senate staff that it is unsatisfied with the latest compromise while refraining from publicly opposing the bill, according to sources familiar with the situation.

Read more: Circle selloff may be overdone as crypto bill weakens Coinbase edge, say analysts