Written by: Jack Inabinet, Bankless

Translated by: Saoirse, Foresight News

Stablecoin issuer Circle captured significant attention earlier this summer. On June 5, Circle's stock opened at a price as high as $69 in the public market, allowing early investors who participated in its already expanded initial public offering to double their funds directly.

Throughout June, the CRCL stock price continued to soar, and as the stock price approached $300, it firmly established itself as a "standout cryptocurrency concept stock." Unfortunately, the good times did not last long, as the stock ultimately could not escape the effects of seasonal downturns as summer progressed…

Despite a brief 7% increase in the stock after Powell's comments on interest rate cuts last Friday, it has been in a downward trend for most of the past month, with the current stock price down nearly 60% from its historical peak.

Today, we will explore the interest rate cut dilemma facing stablecoins and analyze the impact of monetary policy changes on the future of CRCL.

The Tricky Issue Related to "Interest"

Circle operates a business model similar to that of banks: it profits from interest.

With over $60 billion in bank deposits, overnight loan agreements, and short-term U.S. Treasury securities backing USDC, Circle generated $634 million in revenue from the interest on these stablecoin reserves in the second quarter of 2025.

When interest rates rise, each $1 of USDC reserves in this portfolio generates more interest; conversely, when interest rates fall, the earnings decrease. Although interest rates are driven by market forces, the cost of the dollar is also influenced by Federal Reserve policy, especially concerning the short-term instruments Circle uses to manage its reserves.

Last Friday, Federal Reserve Chairman Jerome Powell strongly hinted at the possibility of interest rate cuts in his speech at Jackson Hole. We have encountered "false rate cuts" before, but this is the first time Chairman Powell has so clearly leaned towards supporting a rate cut.

Powell attributed the remaining inflation to a one-time surge in tariffs, emphasized that the labor market is slowing, and defended the potential for interest rate cuts. The market currently expects the Federal Reserve to announce a rate cut at its policy meeting on September 17.

According to data from CME FedWatch and Polymarket, the likelihood of a rate cut significantly increased after Powell's speech, and the substantial change in probability actually began on August 1. On that day, employment data showed that only 73,000 jobs were added in July, and the data for the previous two months was also significantly revised down.

Since August 1, both CME FedWatch and Polymarket have consistently predicted a high likelihood of a 25 basis point (0.25%) rate cut. If the Federal Reserve does implement a rate cut as expected, Circle's revenue will decrease overnight.

According to Circle's own financial forecasts, for every 100 basis point (1%) decrease in the federal funds rate, the company will lose $618 million in interest income annually, meaning a "standard" 25 basis point rate cut would result in a loss of $155 million in revenue.

Fortunately, half of the revenue loss will be offset by a decrease in distribution costs. This aligns with Circle's agreement with Coinbase, which stipulates that about 50% of the USDC reserve interest income will be distributed to Coinbase. However, the reality is that in an environment of continuously declining interest rates, Circle's operations will become increasingly challenging.

Modeling analysis of the impact of interest rate changes on reserve income, distribution, and transaction costs over the next 12 months

Source: Circle

Despite Circle reporting a net loss of $482 million in the second quarter, which was far below analyst expectations, this unexpected difference primarily stemmed from a $424 million accounting write-off related to employee stock compensation during the IPO.

Even so, Circle's financial situation still highlights the vulnerability of this company, which is on the brink of breaking even. At the current level of USDC supply, it cannot withstand the shock of a significant decline in interest rates.

The Solution

On the surface, a decrease in interest rates may reduce Circle's interest income per dollar of reserves, harming profitability. However, for CRCL holders, the fortunate news is that changing a simple variable could completely reverse the situation…

Powell and many financial commentators believe that current interest rates are at "restrictive" levels, and a slight adjustment to the Federal Reserve's policy rate could address the weak labor market while controlling inflation.

If these experts are correct, a rate cut could trigger an economic rebound, maintaining high employment rates, lowering credit costs, and causing the cryptocurrency market to surge. If this optimistic scenario materializes, the demand for crypto-native stablecoins may rise, especially when they can offer decentralized finance-native yield opportunities above market levels.

To offset the negative impact of a 100 basis point rate cut (the minimum level considered in Circle's aforementioned rate cut sensitivity analysis), the circulation of USDC would need to increase by approximately 25%, which would require injecting $15.3 billion into the crypto economy.

Based on 2024's net profit, Circle's current price-to-earnings ratio is 192 times, making it a high-growth opportunity. However, despite the stock market's optimistic outlook on CRCL's expansion prospects, if the Federal Reserve implements a rate cut in the coming weeks, this stablecoin issuer will need to achieve growth to survive.

Assuming the Federal Reserve cuts rates by at least 25 basis points, Circle would need to increase the supply of USDC by approximately $3.8 billion to maintain its current profit levels.

As Circle aptly puts it: "Any relationship between interest rates and USDC circulation is complex, highly uncertain, and unproven." Currently, there is no model that can predict how USDC user behavior will respond to low interest rates, but history shows that once a rate cut cycle begins, it often accelerates quickly.

Although Circle may be able to offset losses from declining interest rates through growth in a prosperous economic scenario, data indicates that the company has an inherent conflict with a low interest rate environment.

Most of the company's revenue comes from reserve earnings, and interest rate fluctuations can affect reserve yields, potentially altering reserve income. However, due to uncertainties such as user behavior affecting the circulating USDC, while the impact of interest rates on reserve yields can be predicted, the ultimate effect on reserve income cannot be accurately anticipated.

Source: Circle

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