Three major challenges behind Circle, the first compliant stablecoin

Circle’s listing has sparked market attention to stablecoins, making it the first compliant stablecoin. However, there are hidden dangers behind the glamour.

After reading Circle's IPO prospectus, we can actually find that Circle has three fatal problems:

First, the income is single, 99% of which comes from reserve funds and only 1% from other income;

Second, costs are high, with 60% of revenue going to Coinbase and a net profit margin of only 9%;

Third, profits fluctuate and are unstable. In 2022, the company suffered a net loss of US$770 million, made a profit of US$270 million in 2023, and then fell back to US$160 million in 2024.

Let’s take a look at the causes behind these three issues and what Circle is doing to address them.

1. Single income

99% of its revenue comes from reserve funds, which means Circle has no other profit points. This is a very obvious "valuation ceiling" for a company.

Let’s first look at this core business model:

USDC issued by Circle is a stablecoin anchored 1:1 to the US dollar and backed by low-risk assets such as the US dollar and short-term government bonds.

When users hold USDC, Circle will invest these funds in assets such as US Treasury bonds to earn interest income, but USDC holders will not receive any interest.

This model is essentially a form of "interest-free financing". Circle invests user funds without paying any costs. It is similar to the model of banks lending money after absorbing deposits, but with lower risks (because it invests in government bonds rather than loans).

Circle’s business model can be seen as bond arbitrage for digital dollars.

Circle's profitability, then, depends on two variables:

First, the circulation of USDC. The larger the circulation, the larger the reserve assets, and the higher the interest income.

The second is the interest rate environment. The U.S. Treasury yield directly determines reserve income, and a high interest rate environment is extremely favorable to Circle.

Although Circle has already occupied the ecological niche of "leading compliant stablecoins" and can get a bigger piece of the pie as the track becomes bigger, the Federal Reserve has now entered a cycle of interest rate cuts, and U.S. Treasury yields may fall to 2% or lower, and Circle's profits will be cut in half.

In addition, with more and more traditional financial institutions entering the market, and competitors (some emerging stablecoins) starting to pay interest to holders, Circle's "interest-free financing" model will face challenges and may further lose market share in compliant stablecoins.

At this time, Circle only has reserve fund income as a profit point, so Circle cannot support a higher market value.

The solution provided by Circle is:

Accelerate the promotion of Circle Payments Network: Circle launched the Circle Payments Network in May 2025, aiming to use USDC to provide instant, low-cost cross-border payment services, connecting banks, digital wallets and payment service providers.

Develop value-added services: Develop USDC custody and asset management tools, and charge management fees to institutional clients (such as crypto funds and banks).

Exploring non-USD stablecoins and emerging markets: Circle has issued EURC (euro-pegged stablecoin) and plans to promote USDC and EURC in Asia and Latin America. The growth in these new markets is still very effective.

2. High costs

60% of Circle's revenue goes to Coinbase, mainly as distribution fees and promotional expenses.

Among them, this profit sharing ratio is a heavy burden for Circle.

Why does Circle give 60% of its revenue to Coinbase?

This is related to the development history of USDC. Circle and Coinbase are the co-founders of USDC.

Circle is responsible for the issuance and reserve asset management of USDC, while Coinbase provides distribution channels, technical support and marketing. The two parties share USDC reserve income (mainly US Treasury bond interest) based on the agreement.

When USDC was first launched in 2018, Circle's brand and distribution capabilities were relatively weak, and it relied on Coinbase's exchange status and user network to rapidly expand USDC's market share. Therefore, Coinbase occupied a dominant position in the cooperation.

Coinbase is the leading compliant exchange in the United States and has strong bargaining power.

Moreover, for a long time, USDC's circulation and trading volume have been highly dependent on Coinbase's infrastructure, and it will be difficult for Circle to break away from it in the short term.

For example, in 2024, based on the total circulation of 32 billion, Coinbase contributed about 50%-60% of the circulation of USDC, which is approximately US$16 billion to US$19.2 billion.

There is actually an interesting clause in the cooperation agreement between Circle and Coinbase:

If Circle cannot distribute the dividend to Coinbase under certain circumstances, or if there are some regulatory issues, Coinbase has the right to become the issuer of USDC itself, so it can actually take USDC and let Coinbase itself become the issuer.

Although USDC is now fully issued and operated by Circle, Coinbase still plays a relatively important role.

Circle also realized the long-term risks of high commissions, so it took some measures, such as renegotiating the commission-sharing agreement and building its own distribution channels.

For the former, renegotiating the profit-sharing agreement is still difficult, as Circle is bound by legal agreements and it is difficult to break free from these restrictions.

As for the latter, building one's own distribution channels can still effectively alleviate the profit pressure of high commissions.

3. Profit fluctuations

We have to admit that the market capitalization of stablecoins is strongly correlated with the cyclical changes in the cryptocurrency industry.

The alternating bull and bear cycles in the cryptocurrency market directly affect the size of the overall stablecoin market.

Circle’s net loss of $768.8 million in 2022 was due to the crypto bear market;

The profit of $267.6 million in 2023 is due to cost control and rising interest rates;

It then falls back to $155.7 million in 2024 due to a surge in distribution costs.

Let’s review again. There are probably several key nodes in the changes in USDC issuance:

The first node is the DeFi summer of 2020, when the issuance of USDC reached 55 billion US dollars;

The second node is the collapse of UST in 2022. A large amount of funds poured into USDC, causing its market value to remain at a high point for a long time during the bear market in the crypto industry;

The third node is the strong rise of Solana in early 2023, which has led to a good growth of USDC compared to USDT;

The fourth node was the collapse of Silicon Valley Bank in March 2023. Coupled with the unfavorable regulatory policies of the US SEC, the issuance volume of USDC fell by about 30%. By the end of 2023, it had fallen by about 50%.

The fifth node is that Trump won the election, and stablecoins began to increase in volume again. USDC has grown to its current scale of more than 60 billion US dollars, with an overall increase of 80%.

Therefore, we can see that the bull and bear cycles in the cryptocurrency market are extremely important to the growth of stablecoins. Another is that the impact of policies on stablecoins with compliance as their main selling point is extremely important, especially compliant stablecoins such as USDC.

In order to slow down profit fluctuations, what Circle needs to do is actually related to the first and second questions. On the one hand, it is to diversify revenue to reduce interest rate dependence, and on the other hand, it is to optimize costs to stabilize profit margins.

More importantly, Circle can use its compliance advantages to consolidate its market position and cope with fluctuations in the crypto market.

To sum up

Stablecoins can be said to be a revolution in the traditional financial system.

Stablecoins are a critical infrastructure that replaces SWIFT, bank clearing and settlement, and foreign exchange systems.

Circle’s vision goes far beyond issuing stablecoins. Circle wants to build a new financial system, and USDC is the core of this new financial system.

However, Circle also has many problems, especially the three fatal problems mentioned above, which Circle needs to solve.

Regardless of the outcome, Circle's listing has set a benchmark for the crypto industry and is inspiring more people to pay attention to stablecoins. We can continue to pay attention to this transformation of the financial system.