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 plunged 20% on Tuesday (local time in the U.S.), marking its largest intraday drop since listing, with a single-day market capitalization evaporating by $5 billion. Trading volume reached 56.4 million shares, nearly four times its 90-day average trading volume. Coinbase fell 11% under the ripple effect.

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

However, the impact of the event is far more complex than just a single-day drop. A regulatory tug-of-war, the inherent fragility of the business model itself, coupled with a wallet freezing incident, has compounded the already declining stock prices.

The Bombshell of the CLARITY Act

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

Core provision: Prohibit passive income from stablecoins obtained solely through holding tokens pegged to the dollar. Exchanges, brokers, and their affiliates are prohibited from directly or indirectly providing returns on stablecoin balances, nor can they provide returns in any manner “economically equivalent to interest.”

Activity-based rewards linked to payments, transfers, or platform usage will still be allowed. The U.S. Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Treasury will jointly define the scope of compliant rewards and anti-evasion rules within a year. Notably, the SEC and CFTC recently signed a landmark inter-agency memorandum, ending years of infighting and divergence between the two.

Congress has formally defined the boundaries that the banking lobby has insisted on for the past two years: Stablecoins can be used as payment tools but must never serve as substitutes for deposits.

An internal email obtained by journalist Eleanor Terrett reveals that an industry leader participating in the closed-door meeting stated that the bill’s text was “at odds” with previous communications with the White House. The individual warned that the “economic equivalence” standard was intentionally set ambiguously, allowing for extremely strict interpretations by future regulators.

The Impact on Circle Far Exceeds Any Other Institution

Currently, 95.5% of Circle’s revenue comes from interest income generated by USDC reserves, which explains the reason for the sell-off.

Circle issues USDC and invests reserves into short-term government bonds and overnight repurchase agreements to earn interest spread. By the fourth quarter of 2025, its reserve income reached $711 million, a 60% increase year-over-year, largely due to a 97% increase in the average circulating supply of USDC. Revenue for the fiscal year 2025 is projected to be $2.7 billion, up 64% year-over-year.

The CLARITY Act does not directly target Circle’s reserve income (Circle itself earns this income) but directly hits its demand growth engine. Currently, platforms like Coinbase transfer stablecoin income 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 returns on USDC balances, the incentive for users to hold USDC instead of traditional bank deposits will significantly diminish.

Reduced income sharing means a decline in USDC adoption, which in turn leads to a shrinkage of reserve size, ultimately reducing Circle’s interest income.

The timing adds to the trouble. With the Federal Reserve cutting interest rates, the yield on reserves has fallen from 4.49% in the fourth quarter of 2024 to 3.81% in the fourth quarter of 2025. Although the market is currently not factoring in expectations for interest rate cuts this year, Circle’s interest income was already under pressure before the introduction of the bill.

USDC Fundamentals Have Never Been Stronger

On the same day the stock price plummeted, key metrics for USDC were at all-time highs:

• Circulating Supply: As of late March, $81 billion, up from $76 billion at the end of 2025;

• On-chain Transaction Volume: In the fourth quarter of 2025 alone, it reached $6.8 trillion (adjusted), more than doubling year-over-year;

• Relative Market Share Against USDT: Since August 2025, USDC’s transaction volume has surpassed USDT every month, with its current share exceeding 80% in 2026;

• Fourth Quarter Performance Exceeds Expectations: Revenue of $770 million, against an expectation of $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.

The Wallet Freezing Incident Adds Fuel to the Fire

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

Reports indicate that the 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 basic on-chain analysis tools could identify these as operational business wallets handling thousands of transactions. He warned that an opaque freeze based on undisclosed civil litigation could turn USDC into a “politicized access control tool.”

The smart contract code of USDC explicitly includes the authority for blacklisting control and even emptying frozen address assets. On a day when the market was already wary of the risks associated with centralized stablecoins, the perception of this event was extremely poor.

There Remains a Bullish Logic

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

Activity-based rewards remain unaffected. The bill clearly distinguishes between passive income (prohibited) and transaction-based incentives (allowed). Platforms like Coinbase are already exploring countermeasures: marketing incentives, behavior-based payments, partnerships with issuers, etc., to blur the line between interest and rewards. The “economic equivalence” standard itself contains ambiguous space, meaning there will be extensive legal battles ahead.

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

The bill has not yet formally taken effect. Committee reviews are expected to take place in late April after the Easter recess. The industry still has time for lobbying, submitting amendments, and negotiations. Although Coinbase CEO Brian Armstrong has not publicly commented on the latest draft, his past positions indicate that Coinbase will strongly advocate regarding the “economic equivalence” clause.

Non-reserve business income is growing rapidly. Platform services, transaction processing, and other non-reserve-related income grew over 15 times year-over-year in the fourth quarter, reaching $37 million, with total other income for the year reaching $110 million. Although the scale is still small compared to interest income, the logic of income diversification is beginning to show.

Future Developments

Before this round of sharp declines, the CRCL stock price had risen 170% from its February low. Driven by impressive earnings reports, USDC transaction volumes surpassing USDT, and partnerships with Intuit, the stock price climbed from $50 to $127. However, prior valuations had fully accounted for perfect development expectations of interest income, AI-driven payments, and asset tokenization, leaving no buffer for negative regulatory impacts.

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 now revolves around: Will the CLARITY Act stifle the growth engine of USDC, or will it force a transformative evolution? If stablecoin adoption continues to rise under the push of payments, cross-border settlements, and institutional demand (on-chain data remains positive), even if Coinbase cannot provide returns on idle balances, Circle’s reserve income engine will continue to operate.