Double Squeeze: Circle's Growth Logic Is Being "Dismantled" by Legislation and Competitors Simultaneously

Author: Sanqing, Foresight News

On March 24 (Eastern Time), stablecoin issuer Circle (CRCL) closed at $101.17 on the NYSE, down more than 20% in a single day, marking its largest single-day decline since listing. Its major distribution partner Coinbase (COIN) also fell nearly 10%, closing at $181.04 on Nasdaq.

The trigger for the sell-off was the leak of details from the latest draft of the Clarity Act, which proposes to ban digital asset service providers from “directly or indirectly” paying yields on stablecoin balances, and also prohibits any structures “economically or functionally equivalent to interest.”

Image source: Tweet by Eleanor Terrett, host of Crypto in America and former Fox Business reporter

On the same day, its competitor Tether announced it had hired one of the Big Four accounting firms to conduct its first full financial audit (including USDT reserves).

“Directly or indirectly”—who does this clause target?

The draft was submitted for review by crypto industry representatives in a closed-door meeting on March 24, with banking representatives following up the next day. Reporter Eleanor Terrett revealed details of the draft in a tweet quoting an email from a relevant party.

USDC itself has never paid interest, and Circle, as the issuer, has never paid any yields to holders. So, what does the ban on issuers paying interest have to do with Circle?

The scope of the draft goes beyond issuers. The entity actually paying yields to users is Coinbase.

According to the disclosure in Circle’s IPO prospectus, the reserve interest on USDC held on Coinbase’s platform is 100% owned by Coinbase; USDC circulating outside the platform earns a reserve interest split of 50% to Coinbase.

Coinbase distributes most of the reserve income earned within the platform to users through “USDC Rewards.” According to analysis by Columbia Law School, Coinbase’s profit margin on USDC Rewards is extremely thin, only about 20 to 25 basis points.

The clauses “directly or indirectly” and “economically or functionally equivalent to interest” in the Clarity Act draft are specifically designed to close this loophole.

This ban may have limited financial impact on Coinbase, and could even be positive. Coinbase is both a shareholder of Circle and receives a pure profit share from 50% of the platform’s outside reserve income, so its commercial motivation to promote USDC remains intact.

However, USDC’s competitors are not only USDT but also the US dollar itself.

USDC Rewards has effectively turned USDC into a “high-yield digital savings account.” This is one of the reasons USDC has outpaced USDT in growth for two consecutive years. If this channel is closed, yields for USDC holders will drop to zero, weakening the willingness to hold.

The demand contraction will likely impact Circle. Retail holding incentives weaken, USDC’s total circulation growth slows, and the reserve pool’s growth rate declines. The revenue growth story based on scale expansion begins to loosen.

The draft also retains an exemption for “activity-based rewards,” which are still allowed if tied to payments, transfers, or platform usage. But these are entirely different products from the current “hold-to-earn” model.

Additionally, the vague wording of “economically or functionally equivalent to interest” leaves significant room for future regulatory interpretation, and activity-based rewards could also face tightening restrictions.

Another pressure on the same day

If the Clarity Act draft is dismantling Circle’s growth engine, then Tether’s announcement of an audit on the same day points to another of Circle’s competitive advantages.

USDC’s long-standing differentiation narrative has largely been built on compliance.

Circle regularly undergoes reserve attestations from top accounting firms. During years of regulatory uncertainty suppressing Tether, “we are the transparent and compliant one” was a highly effective card for attracting institutional clients and compliance-sensitive exchanges.

Tether, on the other hand, relies on quarterly attestations rather than a full audit, and S&P Global once rated USDT’s credit as “Weak,” warning of collateral insufficiency if Bitcoin prices further decline.

Moreover, the GENIUS Act requires large stablecoin issuers to conduct annual independent audits. Tether’s hiring of the Big Four appears to be a response to this legal obligation. Regardless of motivation, the timing of this signal could add to market negative sentiment.

Over the past two years, USDC has outpaced USDT with higher growth rates. A compliant and transparent narrative has been a key driver of this growth. Tether’s upcoming audit, if completed successfully, will likely compress the compliance premium that has supported Circle’s growth advantage.

Image source: DeFiLlama - Stablecoins

Payment tool, not a savings account

Circle’s value proposition relies on a growth model where yield incentives drive users to hold USDC, expanding the reserve pool and increasing income from reserve interest. This model works only if stablecoins are permitted to serve as interest-bearing assets or savings deposits.

The draft of the Clarity Act is explicitly negating this premise at the legislative level.

Losing yield incentives means USDC’s growth must rely on natural penetration into real payment scenarios. This path is feasible but much slower and less certain than yield-driven growth.

While compliance secures Circle’s license, it does not guarantee its growth model. Bankers’ clear answer is that stablecoins can exist but cannot generate interest.