Original title: Circle's Rate Cut Conundrum
Original author: Jack Inabinet, Bankless
Original translation: Saoirse, Foresight News
Stablecoin issuer Circle garnered a lot of attention in early summer this year. On June 5, Circle's stock opened at a price as high as $69 in the public market, allowing early investors in its already expanded IPO to double their investment.
Throughout June, the CRCL stock price continued to surge, and when the stock price approached $300, it had firmly established itself as a 'standout cryptocurrency concept stock.' Unfortunately, the good times did not last long, and as summer deepened, the stock ultimately could not escape the impact of seasonal sluggishness...
Despite a 7% surge in the stock after Powell's comments on rate cuts last Friday, it has been in a downward trend for most of the past month, and its current share price has fallen nearly 60% from its historical peak.
Today, we will explore the dilemma of stablecoins facing rate cuts and analyze the impact of monetary policy changes on CRCL's future.
The tricky issue related to 'interest'
Circle operates a business model similar to banks: generating profits from interest.
Over $60 billion in bank deposits, overnight loan agreements, and short-term U.S. Treasury bonds support USDC. In the second quarter of 2025, Circle earned $634 million in income from the interest of these stablecoin reserves.
When interest rates rise, each dollar of USDC reserves in the portfolio generates more interest; conversely, when interest rates fall, the income will decrease. While interest rates are driven by market forces, the cost of dollars is also influenced by Federal Reserve policy, especially for the short-term instruments Circle uses to manage reserves.
Last Friday, Federal Reserve Chairman Jerome Powell strongly hinted at the possibility of rate cuts in his speech at Jackson Hole. We have encountered 'false rate cuts' before, but this is the first time Chairman Powell has so clearly leaned toward supporting rate cuts.
Powell attributed the remaining inflation to one-time tariff spikes, emphasized that the labor market is slowing, and defended the potential rate cuts. The market currently expects the Federal Reserve to announce a rate cut at the policy meeting on September 17.
According to data from CME FedWatch and Polymarket, the likelihood of rate cuts significantly increased after Powell's speech, with the major shifts in probabilities actually beginning on August 1. On that day, employment data showed that only 73,000 jobs were added in July, and the data for the previous two months were also significantly revised downward.
Since August 1, both CME FedWatch and Polymarket have consistently predicted a high likelihood of a 25 basis point (0.25%) rate cut. If the Federal Reserve indeed implements rate cuts as expected, Circle's income will decrease overnight.
According to Circle's own financial forecasts, for every 100 basis point (1%) drop in the federal funds rate, the company will lose $618 million in interest income annually, meaning a 'standard' 25 basis point rate cut will result in a loss of $155 million in income.
Fortunately, half of the income loss will be offset by the decrease in distribution costs. This aligns with Circle's agreement with Coinbase, which stipulates that about 50% of USDC reserve interest income will be distributed to Coinbase. However, the fact is that in an environment of continuously declining interest rates, Circle's operations will become increasingly difficult.
Modeling analysis of the impact of interest rate changes on reserve income as well as distribution and transaction costs over the next 12 months Source: Circle
Although Circle reported a net loss of $482 million in the second quarter, far below analyst expectations, this unexpected difference mainly stemmed from a $424 million accounting write-off related to employee stock compensation during the IPO.
Even so, Circle's financial situation highlights the vulnerability of this company that is on the brink of breaking even. At the current level of USDC supply, it cannot withstand the shock of a significant decline in interest rates.
Solution
On the surface, a decline in interest rates may reduce the interest income per dollar of reserves for Circle, harming profitability. However, for CRCL holders, fortunately, changing a simple variable can completely reverse the situation...
Powell and many financial commentators believe that current interest rates are at a 'restrictive' level, and fine-tuning the Federal Reserve's policy rate can address a weak labor market while controlling inflation.
If these experts are correct, rate cuts may trigger an economic rebound, maintaining high employment rates, lowering credit costs, and causing the cryptocurrency market to soar. If this optimistic scenario becomes reality, the demand for crypto-native stablecoins may rise, especially when they can offer decentralized financial native yield opportunities above market levels.
To offset the negative impact of a 100 basis point rate cut (which is the minimum level considered in Circle's sensitivity analysis regarding rate cuts), the circulation of USDC needs to increase by about 25%, which requires injecting $15.3 billion into the crypto economy.
Based on the net profit for 2024, Circle's current price-to-earnings ratio is 192 times, making it a high-growth opportunity. However, while the stock market is optimistic about CRCL's expansion prospects, this stablecoin issuer needs to achieve growth to survive if the Federal Reserve implements rate cuts in the coming weeks.
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 profit level.
In Circle's words, 'any relationship between interest rates and USDC circulation is complex, highly uncertain, and unproven.' Currently, there is no model that can predict USDC user behavior in response to low interest rates, but history shows that once a rate cut cycle begins, its speed is often rapid.
Although Circle may compensate for the losses incurred from falling interest rates through growth in a booming economic scenario, data shows that the company has an inherent conflict with a low interest rate environment.
Source: Circle
Most of the company's revenue comes from reserve income, and fluctuations in interest rates will affect reserve yield, which may change reserve income. However, due to uncertain factors such as user behavior affecting the circulation of USDC, while the impact of interest rates on reserve yield can be predicted, its ultimate effect on reserve income cannot be accurately anticipated.
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