Circle's darkest day in history: Will regulatory changes affect its business model?

Author: Mario Stefanidis, Head of Research, Artemis Analytics; Source: Artemis; Compiled by: Shaw & Jinse Finance

CRCL plunged 20% on Tuesday (US local time), marking its biggest intraday drop since its IPO, wiping out $5 billion in market value in a single day.

Trading volume reached 56.4 million shares, nearly four times its 90-day average. Coinbase was affected, falling 11%. The entire stablecoin sector experienced a valuation reassessment within hours. The trigger was a new draft of the CLARITY Act, which would essentially kill passive returns on stablecoins. However, the impact of the event went far beyond a single-day drop. A regulatory battle, the inherent fragility of the business model, and a wallet freeze further exacerbated the already declining stock prices.

The CLARITY Bill: A Bombshell

On March 20, Senators Thom Tillis (Republican, North Carolina) and Angela Alsobrooks (Democrat, Maryland) announced that they had reached an agreement in principle on stablecoin yields with the support of the White House. On Monday, the full text of the bill was submitted to crypto industry leaders for review in a closed-door meeting on Capitol Hill.

Key provisions: **Prohibit passive yields on stablecoins solely through holding dollar-pegged tokens.** Exchanges, brokers, and their affiliates may not directly or indirectly provide yields to stablecoin balances, nor may they provide yields in any way that is “economically equivalent to interest.”

Activity-based rewards linked to payments, transfers, or platform usage will still be permitted. The U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Treasury Department will jointly define the scope of compliant rewards and anti-circumvention rules within one year.

It's worth noting that the SEC and CFTC recently signed a landmark interagency memorandum, ending years of infighting and disagreement. Congress has now formally defined in writing the boundaries that banking lobbying groups have been insisting on for two years: stablecoins can be used as payment instruments, but they must never be a substitute for deposits. According to an internal stakeholder email obtained by journalist Eleanor Terrett, an industry leader who participated in a closed-door meeting stated that the bill's text "contradicts" previous communications with the White House. This person warned that the "economic equivalence" standard is deliberately vague and could be interpreted very strictly by regulators in the future. The impact on Circle is far greater than on any other institution. Currently, 95.5% of Circle's revenue comes from interest income generated from USDC reserves, which explains the current sell-off. Circle issues USDC, investing its reserves in short-term Treasury bonds and overnight repurchase agreements to earn interest rate spreads. In the fourth quarter of 2025, its reserve income reached $711 million, a 60% year-over-year increase, primarily driven by a 97% increase in the average circulating supply of USDC. Full-year revenue for fiscal year 2025 was $2.7 billion, a 64% year-over-year increase. The CLARITY Act did not directly impact Circle's reserve income (Circle itself earns this income), but rather directly impacted its demand growth engine. Currently, platforms like Coinbase distribute stablecoin yields to users as an incentive to hold USDC. Coinbase's stablecoin-related revenue reached $1.35 billion in 2025, up from $910 million in 2024. If exchanges can no longer provide yields for USDC balances, users' incentive to hold USDC instead of traditional bank deposits will significantly weaken. A reduced yield share means lower USDC adoption, leading to a shrinking reserve size and ultimately reducing Circle's interest income. The timing is further complicated. With the Federal Reserve cutting interest rates, reserve yields have fallen from 4.49% in the fourth quarter of 2024 to 3.81% in the fourth quarter of 2025. Although the market is no longer pricing in rate cuts this year, Circle's interest income was already under pressure before the bill was enacted. USDC fundamentals have never been stronger. On the same day the stock price plummeted, USDC's core metrics were at all-time highs: Circulating supply: $81 billion as of late March, up from $76 billion at the end of 2025; On-chain transaction volume: $6.8 trillion (adjusted) in Q4 2025 alone, more than doubling year-over-year; Market share relative to USDT: Since August 2025, USDC's transaction volume has surpassed USDT's every month, reaching a new high in 2026. The current share of revenue has exceeded 80%; Fourth-quarter results exceeded expectations: revenue of $770 million, compared to an expected $745 million; earnings per share of $0.43, exceeding market consensus by 23%. Circle also announced its entry into the African market through a partnership with Sasai Fintech and completed a significant integration with Intuit. The wallet freeze adds fuel to the fire. Circle froze the USDC balances of 16 enterprise hot wallets on Monday evening, causing disruptions to the operations of several exchanges, casinos, and forex platforms, including FxPro, Pepperstone, AMarkets, and HeroFX. The freeze reportedly stemmed from a US civil case, details of which have not yet been disclosed. On-chain analyst @zachxbt raised sharp questions, pointing out that anyone with basic on-chain analytics tools could identify these as operational commercial wallets handling thousands of transactions. He warned that an opaque freeze based on an undisclosed civil lawsuit could turn USDC into a "politicized access control tool." The USDC smart contract code explicitly includes the authority to blacklist and even empty the assets of frozen addresses. On a day when the market already harbored doubts about the risks of centralized stablecoins, the perception of this event was extremely negative. The bullish logic still exists. This round of selling has already priced in the most pessimistic expectations of the CLARITY Act into the stock price. From an optimistic perspective, several points are still worth noting: Activity-based rewards are unaffected. The Act clearly distinguishes between passive income (prohibited) and transaction-based incentives (permitted). Platforms like Coinbase are already exploring solutions: marketing incentives, behavior-based payments, and issuer partnerships, to blur the line between interest and rewards. The "economic equivalence" standard itself has ambiguity, meaning there will be a lot of legal maneuvering going on. Coinbase's profit and loss may not change significantly. Coinbase essentially just transfers stablecoin yields to users, so related revenue is usually offset by expenses. Analysts believe the direct impact on its profitability will be limited. The bigger question is whether the restrictions will slow the long-term adoption of USDC. The bill has not yet officially taken effect. Committee deliberations are expected to take place in late April after the Easter recess. The industry still has time to lobby, submit amendments, and negotiate. While Coinbase CEO Brian Armstrong has not publicly commented on the latest draft, his past stance indicates that Coinbase will strongly advocate for the "economic equivalence" clause. Non-reserve revenue is growing rapidly. Platform services, transaction processing, and other non-reserve-related revenue increased more than 15 times year-on-year in the fourth quarter, reaching $37 million, with other revenue reaching $110 million for the full year. Although still small compared to interest income, the logic of revenue diversification is beginning to emerge.

Subsequent Developments

Before this sharp decline, CRCL's stock price had risen 170% from its February low. Driven by strong financial reports, USDC trading volume surpassing USDT, and the partnership with Intuit, the stock price surged from $50 to $127. However, the previous valuation had already fully priced in interest income and the perfect development expectations for AI-driven payments and asset tokenization, leaving no room for negative regulatory impacts.

Currently, the stock price is around $101, and CRCL's price-to-earnings ratio is approximately 9 times annualized revenue. The core debate in the market now revolves around whether the **CLARITY Act** will stifle USDC's growth flywheel or force it to transform and evolve.

If stablecoin adoption continues to increase, driven by demand from payments, cross-border settlements, and institutions (and on-chain data remains positive), then Circle's reserve income engine will continue to operate even if Coinbase cannot provide returns for idle balances.