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

Author: Mario Stefanidis, Head of Research at Artemis Analytics; Source: Artemis; Translated by Shaw Golden Finance

CRCL plummeted 20% on Tuesday (local time in the U.S.), marking the largest intraday decline since its listing, with a single-day market value evaporation of $5 billion. The trading volume reached 56.4 million shares, close to four times its 90-day average trading volume. Coinbase fell 11% under the collateral impact.

The entire stablecoin sector faced a valuation reassessment within hours. The trigger was a new draft of the CLARITY Act, which would effectively stifle passive income from stablecoins.

However, the impact of the event is far more complicated than just a one-day drop. A regulatory game, the inherent fragility of business models, combined with a wallet freezing incident, added fuel to the already declining stock prices.

CLARITY Act Bombshell

On March 20, Senator Thom Tillis (Republican, North Carolina) and Angela Alsobrooks (Democrat, Maryland) announced a principled agreement on stablecoin yield issues with support from the White House. On Monday, the full text of the bill was reviewed by leaders in the crypto industry during a closed-door meeting on Capitol Hill.

Core Provision: Prohibiting passive income from stablecoins obtained solely through holding tokens pegged to the dollar. Exchanges, brokers, and their affiliates cannot directly or indirectly provide yields on stablecoin balances, nor offer yields in any “economically equivalent to interest” manner.

Activity-based rewards linked to payments, transfers, or platform usage will still be allowed. The SEC, CFTC, and Treasury will jointly define the scope of compliant rewards and anti-avoidance rules within a year. Notably, the SEC and CFTC recently signed a landmark inter-agency memorandum, ending years of internal conflict and disagreement.

Congress has formally delineated the boundaries that the banking lobby has insisted on for two years: Stablecoins can be used as payment instruments but must never become substitutes for deposits.

An internal stakeholder email obtained by reporter Eleanor Terrett revealed that an industry leader involved in the closed-door meeting stated that the bill’s text “contradicts” previous communications with the White House. This individual warned that the “economic equivalency” standard was deliberately set to be vague, potentially allowing regulators to adopt extremely strict interpretations in the future.

The Impact on Circle is Far Greater than Any Other Institution

Circle currently derives 95.5% of its revenue from interest income generated by USDC reserves, which explains the reason behind the sell-off.

Circle issues USDC and invests the reserves in short-term government bonds and overnight repurchase agreements to earn interest differentials. By the fourth quarter of 2025, its reserve income reached $711 million, a year-over-year increase of 60%, mainly due to a 97% increase in the average circulation of USDC. The total revenue for the fiscal year 2025 is projected to be $2.7 billion, a year-over-year increase of 64%.

The CLARITY Act does not directly target Circle’s reserve income (Circle itself earns this income), but it directly undermines its demand growth engine. Currently, platforms like Coinbase transfer stablecoin earnings to users as an incentive for holding USDC. Coinbase’s stablecoin-related revenue is expected to reach $1.35 billion in 2025, up from $910 million in 2024. If exchanges can no longer provide yields on USDC balances, the motivation for users to hold USDC rather than traditional bank deposits will significantly diminish.

Reduced revenue share means a decline in USDC adoption, which in turn leads to a shrinkage of reserves, ultimately reducing Circle’s interest income.

The timing exacerbates the situation. As the Fed cuts interest rates, the yield on reserves has dropped from 4.49% in the fourth quarter of 2024 to 3.81% in the fourth quarter of 2025. Although the market is currently no longer factoring in expectations for rate cuts this year, Circle’s interest income was already under pressure before the introduction of this bill.

USDC Fundamentals Have Never Been This Strong

On the same day as the stock price crash, key metrics for USDC were at historical highs:

• Circulation: As of late March, $81 billion, higher than $76 billion at the end of 2025;

• On-chain transaction volume: Reached $6.8 trillion (adjusted) in just the fourth quarter of 2025, more than double year-over-year;

• Market share relative to USDT: Since August 2025, USDC’s transaction volume has surpassed USDT every month, currently accounting for over 80% in 2026;

• Fourth-quarter performance exceeded expectations: Revenue of $770 million, expected to be $745 million; earnings per share of $0.43, exceeding market expectations by 23%.

Circle also announced its entry into the African market through a partnership with Sasai Fintech and completed a significant integration with Intuit.

Wallet Freezing Incident Adds Fuel to the Fire

On Monday evening, Circle froze the USDC balances of 16 enterprise hot wallets, causing disruptions to several exchanges, casinos, and forex platforms, including FxPro, Pepperstone, AMarkets, and HeroFX.

Reports indicate that this freeze stems from a civil case in the U.S., with specific details yet to be disclosed. On-chain analyst @zachxbt raised sharp questions, pointing out that anyone with foundational on-chain analysis tools could identify these as operational business wallets handling thousands of transactions. He warned that the opaque freezing based on undisclosed civil litigation could turn USDC into a “politicized access control tool.”

The smart contract code for USDC explicitly includes permissions for blacklisting and even clearing frozen address assets. Given that the market already harbors doubts about the risks of centralized stablecoins, the perception of this incident is extremely poor on a day like this.

Still Existing Bullish Logic

This round of sell-off has already priced in the most pessimistic expectations of the CLARITY Act. From an optimistic perspective, there are still several points worth noting:

Activity-based rewards are unaffected. The bill clearly distinguishes between passive income (prohibited) and transaction-based incentives (allowed). Platforms like Coinbase are already exploring responses: marketing incentives, behavior-based payments, and issuer collaborations to blur the lines between interest and rewards. The “economic equivalency” standard itself has vague space, which means there will be significant legal battles in the future.

Coinbase’s profit and loss may not see significant changes. Coinbase essentially just transfers stablecoin earnings to users, so related income is usually offset by expenditures. Analysts believe the direct impact on its profitability is limited. The bigger question is whether the related restrictions will slow down the long-term adoption of USDC.

The bill has not yet officially come into effect. The committee’s review is expected to occur in late April after the Easter recess. The industry still has time for lobbying, submitting amendments, and negotiating. Although Coinbase CEO Brian Armstrong has not publicly commented on the latest draft, his past stance indicates that Coinbase will strongly contest the “economic equivalency” terms.

Non-reserve business revenue is growing rapidly. Non-reserve related revenues from platform services, transaction processing, and others grew over 15 times year-over-year in the fourth quarter, reaching $37 million, with total other revenues for the year reaching $110 million. Although still small compared to interest income, the logic of revenue diversification has begun to emerge.

Future Situation

Before this round of sharp declines, the CRCL stock price had increased by 170% from the lows in February. Driven by strong earnings reports, USDC trading volume surpassing USDT, and the collaboration with Intuit, the stock price rose from $50 to $127. However, prior valuations had fully priced in perfect development expectations for interest income, AI-driven payments, and asset tokenization businesses, leaving no buffer for regulatory headwinds.

The current stock price is around $101, with a CRCL price-to-earnings ratio of about 9 times annualized revenue. The core debate in the market currently revolves around: Will the CLARITY Act stifle USDC’s growth engine, or will it force a transformation? If, driven by payments, cross-border settlements, and institutional demand, the adoption of stablecoins continues to rise (on-chain data remains positive), then even if Coinbase cannot provide yields for idle balances, Circle’s reserve income engine will keep running.