Wall Street bank Citi says proposed limits on stablecoin rewards in the latest draft of US market structure legislation would be a setback for Circle (CRCL), but not a fundamental threat to the investment case.
“We view this development as potentially (but not necessarily) a scale reversal, but not a deal breaker,” analysts led by Peter Christiansen wrote in Tuesday’s report.
The bill allows narrowly defined rewards programs as long as they do not resemble interest on bank deposits, analysts said. A broader ban on third-party rewards would not directly impact Circle’s net revenue, as the company already passes most of its reserve revenue to distribution partners like Coinbase (COIN).
Still, analysts expect that weaker incentives to hold USDC, which they characterize as a payment instrument rather than a security, could temporarily reduce secondary market circulation and liquidity. “We continue to hold the view that stablecoin volume is the key indicator of adoption, not circulation.”
Citi has a high risk rating on Circle shares with a price target of $243. Shares were trading around $100 at the time of this publication.
Circle shares fell about 20% on Tuesday, after a draft of the US Clarity Act raised the possibility of banning yield on passive stablecoin balances, raising concerns about the attractiveness of yield-generating crypto products.
The move was compounded by broader investor anxiety about how the rules could affect revenue and incentives related to stablecoins, along with new competitive pressure after Tether signaled plans for a full audit of the Big Four and a possible expansion into the United States.
Circle’s selloff on Tuesday reflected the market’s misinterpretation of the Clarity Bill, according to Wall Street trader Bernstein.
Investors are confusing who gets returns with who distributes them, the brokerage said in a Wednesday report. Circle earns reserve income from the assets backing USDC, while platforms like Coinbase (COIN) pass some of that return on to users, the real goal of the proposed rules.
The draft would prohibit the yield of passive stablecoin balances, but allow rewards based on activities linked to trading or payments. Bernstein analysts, led by Gautam Chhugani, said this pressure on Coinbase’s ~3.5% USDC yield product will likely force a restructuring. Circle’s model is not affected. The company pays no yield to holders and generated $2.64 billion in reserve income in fiscal 2025.
The report noted that USDC’s growth, from ~$30 billion to $80 billion in two years, is driven by trading, payments, and collateral demand, not performance.
Bernstein has an Outperform rating on Circle shares with a $190 price target.
Coinbase is moving cautiously in negotiations over the Clarity Act, privately indicating to Senate staff that it is not satisfied with the latest compromise, although stopping short of publicly opposing the bill, according to people familiar with the matter.
Read more: Circle Liquidation May Be Overblown as Crypto Bill Weakens Coinbase Advantage, Analysts Say
