Stablecoins Banned from "Paying Interest" - Why Did Circle Plummet 20%?

U.S. Stablecoin Regulation Shifts from “Boundary Definition” to “Structural Constraints”

The latest disclosed draft of the Clarity Act includes a seemingly technical clause that has triggered rapid market re-pricing: it bans users from earning yields solely by holding stablecoins and restricts arrangements that are economically equivalent to deposit interest.

As a result, USDC issuer Circle (CRCL) temporarily dropped about 20% during trading, with Coinbase (COIN) also under pressure.

If you simply interpret this as “regulatory tightening,” you might underestimate the true implications of this clause. More accurately, it represents a targeted restriction on the core mechanism of stablecoin business models.

Restrictions on the “Yield Penetration” Model

For a long time, stablecoins have operated within a relatively ambiguous regulatory space: on one hand, not recognized as bank deposits; on the other, their capital structure closely resembles “quasi-deposits liabilities.”

Within this framework, the industry has gradually developed a compromise mechanism:

• Issuers allocate reserve funds into short-term U.S. Treasuries and other highly liquid assets

• Earn interest income

• Indirectly distribute this income to users via trading platforms or ecosystem partners through “rewards,” “rebates,” and similar schemes

This model essentially constructs a “quasi-interest transmission chain,” avoiding direct interest payment regulatory restrictions while maintaining the appeal of stablecoins for capital.

The revision of the Clarity Act is not primarily about banning “interest payments,” but about: restricting all structural designs that are economically equivalent to interest.

This means the “yield penetration” pathway will face systemic constraints, not just superficial compliance adjustments.

Pressure on Circle

For companies like Circle that rely heavily on interest income from reserve assets, this restriction strikes at the core of their revenue structure.

From a financial perspective, Circle’s business model is highly “interest rate dependent”:

• Total revenue in 2025 is approximately $2.747 billion

• Of which, reserve asset income is about $2.637 billion, nearly 96%

This structure indicates that Circle is essentially a “interest margin company using stablecoins as a vehicle.” Its revenue logic is straightforward: users hold USDC, funds enter reserves, and the issuer earns interest. More importantly, this income does not stay entirely within the system but is distributed outward through channels. On core platforms like Coinbase, reserve income from stablecoins is shared via revenue-sharing mechanisms, with platforms incentivizing users to participate.

This mechanism gives stablecoins an attractiveness close to “deposit-like instruments” in practical use, supporting rapid market expansion.

Once the “yield distribution chain” is restricted, the impact will extend beyond profit margins to demand-side effects.

“Weakening the Scale-Driven Logic”

Stablecoin growth is typically driven by two types of demand:

• Trading demand: used for on-chain settlement, asset pricing, cross-border payments

• Allocation demand: as a low-volatility, yield-earning store of value

Over recent years, the latter has played a significant role in scaling.

Take USDC as an example: its circulation has reached about $75.3 billion, a 72% year-over-year increase; on-chain annual trading volume hit $11.9 trillion, up 247%. A substantial portion of this capital is not high-frequency turnover but is accumulated as “balance deposits.” The premise for this balance accumulation is: low holding costs and implicit yield expectations.

When regulators explicitly cut off the “interest-like” mechanism:

• The allocation attribute of stablecoins will weaken

• Willingness to hold funds may decline

• The pace of circulation scale expansion faces uncertainty

Therefore, the core of this market adjustment is a reassessment of the long-term growth path—whether stablecoins can still rely on “capital accumulation” to expand their scale is being re-priced.

PayFi Strategic Blueprint

Notably, Circle’s business layout already reflects a proactive response to these changes. Circle is working to build a “Web3 PayFi network,” aiming to emulate traditional payment giants like Stripe, trying to diversify services to reduce dependence on reserve income.

Its current strategy can be summarized in three layers:

1. Infrastructure: Arc

As the underlying network for on-chain asset issuance and transfer, Arc has processed over 160 million transactions, supporting cross-chain and liquidity distribution functions.

2. Payment Network: CPN (Circle Payments Network)

Annualized transaction volume is about $5.7 billion, connected to over 50 financial institutions, attempting to build a settlement system similar to traditional payment networks.

3. Application Layer (including AI payments and microtransactions)

Through products like Nanopayments, it supports high-frequency transactions with minimal amounts (as low as one-millionth of a dollar), providing infrastructure for automated payment scenarios such as AI agents.

Additionally, Circle leverages a strong enterprise partnership network, collaborating with giants like Visa, Intuit, Polymarket, J.P. Morgan, and Mastercard to develop USDC-based products and expand its application scenarios.

These strategic initiatives indicate that Circle is not content merely as a “stablecoin issuer” but aims to become the “Stripe” of the Web3 world, generating revenue from transaction infrastructure, payment services, developer tools, and more.

New Opportunities Amid Regulatory Uncertainty

From a policy perspective, the direction of the Clarity Act is straightforward: to detach stablecoins from “quasi-deposit instruments,” preventing them from replacing bank funding sources, while preserving their function as payment and settlement tools.

In other words, regulation is not about banning stablecoins but about reshaping their functional boundaries.

Under this framework, industry differentiation may occur:

• Models relying on interest margins and capital accumulation will face ongoing compression

• Models dependent on transaction, clearing, and network effects will have stronger sustainability

If the restrictions in the Clarity Act are ultimately implemented, their impact will go beyond short-term market volatility, constituting a systemic reshaping of stablecoin business models.

For Circle, this represents both a direct compression of its interest margin model and a passive shift in its strategic path. When “yield capacity” is constrained, what truly determines its long-term value will no longer be interest rates but: its ability to become the infrastructure for global capital flows.