Circle's (CRCL +6.54%) stock sank 20% on March 24 after a complete ban on stablecoin yields was proposed in the Senate's latest draft of the U.S. Clarity Act. Let's see why that update spooked Circle's investors and how much that possible ban could impact its long-term growth.
Why do stablecoin yields matter to Circle?
Circle issues USD Coin (USDC 0.01%), a stablecoin pegged to the U.S. dollar and backed by its cash and U.S. Treasuries held by regulated custodians. It's the world's second-most-valuable stablecoin after Tether.
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Stablecoins can be used to settle cross-border transactions at faster and cheaper rates than conventional interbank transfers. Companies like Visa and Intuit have already been integrating USD Coin into their platforms to accelerate their financial transactions. Stablecoins are also an easy way for people to preserve their savings in countries with hyperinflation and currency devaluation issues without buying actual U.S. dollars.
Stablecoins can be staked (locked up) on centralized exchanges and decentralized finance (DeFi) protocols to earn yields higher than those of dollar-based savings accounts. Those strengths make stablecoins a threat to the U.S. dollar and traditional banks.
NYSE: CRCL
Key Data Points
Circle generates most of its profits from reserve interest income, or the interest it earns on bank deposits and short-term Treasuries held in its own reserves (to back USD Coin). To keep growing, Circle needs the market's demand for USD Coin to keep rising.
To meet that demand, Circle will increase its reserves to mint more USD Coins, thereby boosting its reserve interest income. But if that demand sputters out, its revenue and profit will decline. If the U.S. government bans all stablecoin yields -- presumably to protect conventional banks and consumers from unscrupulous exchanges and DeFi pools -- they'll become a lot less appealing than U.S. dollars. Cryptocurrency investors seeking higher yields could also pivot toward Ether and other tokens with staking features.
What should Circle investors do right now?
A complete ban on stablecoin yields would certainly throttle Circle's growth, but the U.S. Clarity Act is still being drafted and probably won't be passed until later this year. Therefore, we shouldn't jump to conclusions and assume all stablecoin yields will be banned.
Even without stablecoin yields, Circle can continue generating additional interest income from its current reserves while generating more revenue from transaction and subscription fees across its expanding ecosystem of APIs, digital wallets, and other applications.
Circle's stock trades at eight times this year's sales, which is reasonable relative to analysts' expectations for a 24% CAGR from 2025 to 2028. While the latest draft of the Clarity Act raises red flags, investors should wait for more information before heading for the exits.
