Wall Street bank Citi says the proposed limits on stablecoin rewards in the latest draft of US market structure legislation would be a blow to Circle K (CRCL), but would pose no fundamental threat in terms of investment.
“We view this development as potentially (but not necessarily) a massive setback, but not a thesis killer,” analysts led by Peter Christiansen wrote in a Tuesday report.
Analysts said the draft bill allows narrowly defined reward programs, as long as they do not resemble bank deposit interest. The blanket ban on third-party rewards will not directly impact Circle’s net revenue, as the company already gives away most of its reserved earnings to distribution partners like Coinbase (COIN).
Still, analysts expect the weakened incentives to hold USDC, which they characterize as a payment instrument rather than a security, could temporarily reduce circulation and secondary-market liquidity. “We still stand by the view that stablecoin volume is the leading indicator of adoption, not circulation.”
Citi has a High Risk rating on Circle stock with a $243 price target. Shares were trading around $100 at the time of publication.
Circle shares fell nearly 20% on Tuesday after a draft of the US Clarity Act raised the possibility of banning yields on passive stablecoin balances, raising concerns about the attractiveness of yield-bearing crypto products.
The move was sparked by widespread investor concern over how the regulations could impact stablecoin-related revenues and incentives, as well as fresh competitive pressure after Tether signaled plans for a full Big Four audit and potential US expansion.
The Circle selloff on Tuesday resulted from the market misreading the draft Clarity Act, according to Wall Street broker Bernstein.
Investors are mixing up who earns yields and who distributes them, the broker said in a Wednesday report. Circle earns reserve income from USDC-backed assets, while platforms like Coinbase (COIN) pass a portion of that yield on to users, which is the real goal of the proposed regulations.
The draft would ban yields on passive stablecoin balances but allow activity-based rewards tied to trading or payments. Bernstein analysts led by Gautam Chugani said this pressure on Coinbase’s ~3.5% USDC yield product could force a restructuring. The circle model remains unaffected. The firm does not pay yield to holders and will generate $2.64 billion in reserved earnings in fiscal 2025.
The report notes that USDC’s growth, from ~$30 billion to $80 billion in two years, has been driven by trading, payments, and collateral demand, not yield.
Bernstein has an Outperform rating on Circle shares with a $190 price target.
According to people familiar with the matter, Coinbase is moving cautiously in negotiations on the Clarity Act, privately signaling to Senate staff that it is dissatisfied with the latest agreement, while stopping short of publicly opposing the bill.
Read more: Circle Selloff Could Be Higher as Crypto Bill Weakens Coinbase Edge, Analysts Say