Double Whammy: Circle's Growth Logic is Being "Dismantled" by Both Legislation and Rivals
- Core Viewpoint: The draft U.S. "Clarity Act" proposes to prohibit paying any form of yield on stablecoin balances. This directly impacts Circle's growth model, which relies on its partner Coinbase offering users "hold-to-earn" reward incentives to drive USDC's scale expansion. It may also weaken its competitive narrative advantage over Tether regarding compliance.
- Key Elements:
- The leaked draft of the "Clarity Act" proposes to prohibit digital asset service providers from paying yield on stablecoins "directly or indirectly," aiming to block the existing model where Coinbase distributes reserve interest to users via "USDC Rewards."
- USDC's growth partly relies on yield incentives. If this channel is closed, user willingness to hold may decrease, subsequently affecting its circulation growth rate and Circle's revenue expectations based on scale expansion.
- The draft's provisions (e.g., "functionally equivalent to interest") are vaguely worded, leaving room for regulatory interpretation. Even if "activity-based rewards" are allowed, they would be fundamentally different from the current model.
- On the same day, competitor Tether announced it has hired a Big Four accounting firm for its first-ever full audit. If successful, this could weaken the differentiated competitive advantage of "greater transparency and compliance" that USDC has long relied on.
- The core intent of the draft bill is to define stablecoins as payment tools rather than interest-bearing savings accounts, fundamentally altering the growth logic for issuers like Circle. Compliance cannot substitute for growth momentum.
Original Author: Sanqing, Foresight News
On March 24th (Eastern Time), stablecoin issuer Circle (CRCL) closed at $101.17 on the New York Stock Exchange, marking a single-day drop of over 20% and setting a record for its largest single-day decline since its listing. Its largest distribution partner, Coinbase (COIN), also fell nearly 10% in sync, closing at $181.04 on the Nasdaq.
The trigger for the sell-off was the leaked details of the latest draft text of the Clarity Act. The draft proposes to prohibit digital asset service providers from paying yields "directly or indirectly" on stablecoin balances and also bans any structural arrangements that are "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 that it had hired one of the Big Four accounting firms to conduct its first comprehensive financial audit (including USDT reserves).
"Directly or Indirectly": Who Do These Five Words Block?
The draft text was submitted to crypto industry representatives for review in a closed-door meeting on March 24th, with banking representatives scheduled to review it the following day. Reporter Eleanor Terrett disclosed the draft details on X, citing a related party email.
USDC itself has never paid interest, and Circle, as the issuer, has never paid any yield to token holders. So, if the draft bans issuers from paying interest, what does it have to do with Circle?
The draft's "scope" extends beyond the issuer. The entity actually paying yields to users is Coinbase.
According to the revenue-sharing structure disclosed in Circle's prospectus, 100% of the reserve interest from USDC held by users on the Coinbase platform belongs to Coinbase; for USDC circulating outside the platform, 50% of the reserve interest goes to Coinbase.
Coinbase passes on the vast majority of the reserve earnings obtained from on-platform holdings to users in the form of "USDC Rewards." According to an analysis by Columbia Law School, Coinbase's profit margin on USDC Rewards is extremely thin, retaining only about 20 to 25 basis points.
The "directly or indirectly" and "economically or functionally equivalent to interest" clauses in the Clarity Act draft are precisely designed to close this loophole.
The financial impact of this ban on Coinbase may be limited, or even potentially positive. As a shareholder in Circle and entitled to a 50% pure profit share of reserve earnings from off-platform holdings, Coinbase's commercial incentive to promote USDC will not disappear because of this.
However, USDC's competitors are not just USDT, but also the US dollar itself.
USDC Rewards have allowed USDC to play the de facto role of a "digital high-yield savings account." This has also been one of the drivers behind USDC's growth rate outpacing USDT's for two consecutive years. Once this channel is closed, users holding USDC would see their yield drop to zero, weakening their incentive to hold it.
The transmission path of contracting demand points to Circle. With reduced retail holding motivation, the growth rate of USDC's total circulating supply slows, subsequently reducing the rate at which the reserve pool thickens. The revenue growth story built on expectations of scale expansion for Circle then begins to unravel.
The draft simultaneously retains an exemption for "activity-based rewards," allowing rewards tied to payments, transfers, or platform usage. However, this is a completely different product from the current "hold-to-earn" model.
Furthermore, the standard phrasing "economically or functionally equivalent to interest" is overly vague, leaving significant room for future interpretation by regulators. The boundaries of activity-based rewards also face the risk of being tightened.
Another Pressure Point on the Same Day
If the Clarity Act draft is dismantling Circle's growth flywheel, then the audit announcement made by Tether on the same day targets another of Circle's competitive advantages.
USDC's long-term differentiated narrative has been largely built on compliance.
Circle regularly undergoes reserve attestations by top-tier accounting firms. During the years when regulatory uncertainty weighed on Tether, "We are the transparent and compliant one" was an extremely effective card to play for institutional clients and compliance-sensitive exchanges.
Tether, on the other hand, has relied on quarterly attestations rather than full audits to address external scrutiny. S&P Global once assigned USDT a "weak" credit rating in 2025, warning of under-collateralization risks if Bitcoin prices fell further.
Additionally, the GENIUS Act requires large stablecoin issuers to undergo annual independent audits. Tether's hiring of a Big Four firm this time seems more like a response to this legal obligation. Regardless of the motive, the timing of this signal was sufficient to compound the market's negative sentiment.
USDC has consistently outpaced USDT in growth rate over the past two years. The narrative of compliance and transparency has been one of the most important drivers of this growth round. Tether's hiring of a Big Four auditor has not yet commenced, and the outcome is far from certain. But if the audit is successfully completed, it is evident that the compliance premium Circle relies on to maintain its growth advantage will be compressed.
Image Source: DeFiLlama - Stablecoins
A Payment Tool, Not a Savings Account
Circle's value benefits from its growth model: yield incentives drive users to hold USDC, scale expansion leads to a thickening reserve pool, and reserve interest supports revenue growth. For this model to work, the prerequisite is that stablecoins are allowed to play the role of an interest-bearing asset or savings deposit.
The Clarity Act draft is negating this premise at the legislative level.
Without yield incentives, USDC's scale growth must instead rely on natural penetration through real payment use cases. This path is not impassable, but it is much slower and more uncertain than growth driven by yields.
Compliance secures Circle's license, but it cannot secure its growth model. The answer from the bankers is clear: stablecoins can exist, but they cannot bear interest.
