Original Article Title: Circle's Rate Cut Conundrum
Original Article Author: Jack Inabinet, Bankless
Original Article Translation: Saoirse, Foresight News
Stablecoin issuer Circle has captured significant attention this summer. On June 5, Circle's stock opened for trading on the public market at a high of $69, allowing early investors in its already expanded initial public offering to double their money.
Throughout June, the price of CRCL continued to soar, and as the price approached $300, this stock had already solidified its position as a "high-flying cryptocurrency concept stock." However, the good times did not last long, and as the summer deepened, this stock ultimately could not escape the impact of seasonal downturn...
Despite a 7% surge at one point last Friday following Powell's rate cut remarks, for the majority of the past month, the stock has been on a downward trend, currently down nearly 60% from its all-time high.
Today, we will delve into the interest rate cut dilemma facing stablecoins and analyze the impact of monetary policy changes on the future of CRCL.
Circle operates a banking-like business model: it profits from interest.
Over $600 billion in bank deposits, overnight repo agreements, and short-term U.S. treasuries underpin USDC. In the second quarter of 2025, Circle generated $634 million in revenue from interest on these stablecoin reserves.
When interest rates rise, each $1 in USDC reserves in this portfolio earns more interest; conversely, when rates fall, the returns diminish. While rates are market-driven, the cost of the dollar is also influenced by the Fed's policy, especially for the short-term instruments Circle uses to manage reserves.
Last Friday, Federal Reserve Chair Jerome Powell strongly hinted at a potential rate cut in his speech at Jackson Hole. While we have seen "fakeouts" before, this was the first time Chairman Powell himself appeared so unequivocally in favor of a rate cut.
Powell attributed the remaining inflation to a one-off surge in tariffs, emphasized the slowing labor market, and defended the possibility of a rate cut. The market currently anticipates the Fed will announce a rate cut at the policy meeting on September 17.
According to CME FedWatch and Polymarket data, after Powell's speech, the likelihood of a rate cut has significantly increased, with a notable shift in probability actually starting on August 1. The employment data released on that day showed only 73,000 new jobs added in July, with significant downward revisions to the previous two months' data as well.
Since August 1, both CME FedWatch and Polymarket have consistently predicted a higher chance of a 25 basis point (0.25%) rate cut. If the Fed does indeed cut rates as expected, Circle's revenue will decrease overnight.
Based on Circle's own financial projections, for every 100 basis point (1%) drop in the federal funds rate, the company would lose $618 million in interest income annually. This means that a "standard" 25 basis point rate cut would result in a $155 million revenue loss.
Fortunately, half of the revenue loss will be offset by a decrease in distribution costs. This aligns with Circle's agreement with Coinbase, stipulating that approximately 50% of USDC reserve interest income will be distributed to Coinbase. However, in an environment of continuous rate cuts, Circle's operations will become increasingly challenging.
Forecast analysis of the impact of rate changes on reserve income, distribution, and transaction costs over the next 12 months Source: Circle
Although Circle reported a second-quarter net loss of $482 million, significantly lower than analysts' expectations, this unexpected variance was largely due to a $424 million accounting write-off related to stock-based compensation at the time of the initial public offering.
Nevertheless, Circle's financial situation still highlights the vulnerability of this nearly breakeven company. At the current level of USDC supply, it cannot withstand the impact of a substantial rate decrease.
Superficially, a rate cut may reduce Circle's interest income per dollar of reserve, damaging its profitability. However, fortunately for CRCL holders, a simple change in one variable can completely reverse the situation...
Both Powell and many financial commentators believe that the current rates are at a "restrictive" level, and a minor adjustment to the Fed's policy rate can address the soft labor market while controlling inflation.
If these experts' assessments are correct, a rate cut could trigger an economic upturn, leading to sustained high employment rates, reduced credit costs, and a surge in the cryptocurrency market. If this optimistic scenario materializes, the demand for native stablecoins may increase, especially when they can offer decentralized finance-native yield opportunities above market levels.
To counteract the adverse effects of a 100 basis point rate cut (the minimum level considered in Circle's rate cut sensitivity analysis above), the circulation of USDC would need to increase by approximately 25%, requiring an injection of $15.3 billion into the crypto economy.
Based on projected net earnings in 2024, Circle currently has a price-to-earnings ratio of 192 times, making it a high-growth opportunity. However, despite the stock market's optimism about CRCL's expansion prospects, if the Federal Reserve implements a rate cut in the coming weeks, this stablecoin issuer will need to achieve growth to survive.
Assuming the Federal Reserve cuts rates by at least 25 basis points, Circle would need to increase the supply of USDC by approximately $3.8 billion to maintain its current profitability.
In Circle's own words, "Any relationships between rates and USDC circulation are complex, highly uncertain, and unverified." Currently, no model can predict how USDC users will respond to low rates, but history shows that once a rate cut cycle is initiated, the pace is often rapid.
While in an economic boom scenario, Circle may be able to offset the loss from rate cuts through growth, the data suggests that the company has an inherent conflict with a low-rate environment.
Source: Circle
Most of the company's revenue comes from reserve income, and rate fluctuations can affect the reserve yield, which could alter reserve income. However, as the circulation of USDC is influenced by user behavior and other uncertainties, while it is possible to predict the impact of rates on reserve yield, it is challenging to accurately anticipate their ultimate effect on reserve income.
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