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 see this development potentially (but not necessarily) as a scaling setback, but not a thesis killer,” analysts led by Peter Christiansen wrote in the Tuesday report.
The bill allows narrowly defined rewards programs as long as they don’t resemble bank deposit rates, the analysts said. A broader ban on third-party rewards would not directly affect Circle’s net revenue, as the firm already transfers most of its reserve revenue to distribution partners like Coinbase (COIN).
Still, the analysts expect that weaker incentives to hold USDC, which they characterize as a payment instrument rather than a security, may temporarily reduce circulation and liquidity in the secondary market. “We still maintain the view that stablecoin volume is the key indicator of adoption, not circulation.”
Citi has a high risk rating on Circle stock with a price target of $243. Shares were trading around $100 at the time of publication.
Circle shares fell around 20% on Tuesday after a draft of the US Clarity Act raised the prospect of banning returns on passive stablecoin balances, sparking concerns about the appeal of yield-bearing crypto products.
The move was fueled by broader investor anxiety about how the rules could affect stablecoin-related revenues and incentives, along with new competitive pressures after Tether signaled plans for a full Big Four overhaul and potential expansion in the US.
The Circle selloff on Tuesday reflected a market misreading of the draft Clarity Act, according to Wall Street brokerage Bernstein.
Investors are confusing who earns returns with who distributes it, the broker said in a Wednesday report. Circle earns reserve income from USDC-backed assets, while platforms like Coinbase (COIN) pass some of that yield on to users, the actual target of the proposed rules.
The draft would prohibit returns on passive stablecoin balances, but allow activity-based rewards tied to trading or payments. Bernstein analysts led by Gautam Chhugani said this pressure on Coinbase’s ~3.5% USDC yield product is likely to force a restructuring. Circle’s model remains unaffected. The firm does not pay dividends to holders and generated $2.64 billion in reserve revenue in FY2025.
The report noted that USDC growth, from ~$30 billion to $80 billion in two years, is driven by trade, payments and demand for collateral, not returns.
Bernstein has an outperform rating on Circle stock with a price target of $190.
Coinbase is treading carefully in Clarity Act negotiations, privately signaling to Senate staff that it is unhappy with the latest compromise while stopping short of publicly opposing the bill, according to people familiar with the matter.
Read more: Circle selling may be exaggerated as crypto bill weakens Coinbase edge, analysts say
