Circle Faces $618M Revenue Drop if Fed Cuts Rates 100 Bps

Circle, the issuer of the USD Coin (USDC) stablecoin, could face a significant revenue hit if the U.S. Federal Reserve cuts interest rates by 100 basis points (bps). According to Haseeb Qureshi, an investor at venture capital firm Dragonfly, such a rate cut could slash the company’s annualized revenue by $618 million—equivalent to a 23% decline—and reduce its gross profit by $303 million, a 30% drop [1]. Additionally, the company’s gross margin would shrink by 3.3 percentage points [2].

The impact stems from the way Circle generates income—largely through interest earned on the reserves that back the USDC. As interest rates fall, the income from these reserves is expected to diminish, directly affecting the company’s earnings [2]. The valuation of Circle, however, would paradoxically appear to rise, even as profits fall. The firm’s valuation multiple is projected to increase from 42x to 60.4x its annualized gross profit, reflecting a nearly 50% jump [1]. This is because the base for valuation metrics would shrink alongside the drop in profit.

To offset the potential revenue loss, USDC would need to increase its supply by $28 billion, which would represent a 44% rise from its current circulation of $64 billion [2]. However, achieving such a large-scale adoption is far from guaranteed, especially with growing regulatory scrutiny and competition in the stablecoin space.

In anticipation of these macroeconomic challenges, Circle has taken proactive steps to diversify its income. The company recently executed a $1.5 billion share sale, likely aimed at strengthening its balance sheet and funding new initiatives [2]. Additionally, Circle is shifting focus toward transaction-based monetization, seeking to reduce dependence on interest income.

Initiatives such as the Circle Programmatic Network (CPN) and the proprietary blockchain platform, Circle Chain, are designed to generate revenue from transaction fees and ecosystem services. These efforts signal a broader strategy to align the company’s long-term sustainability with active crypto usage, rather than relying solely on yield-based income [2].

Circle is also advancing its Arc platform, an open-layer blockchain solution intended to expand stablecoin finance into enterprise payments, foreign exchange, and capital markets [2]. These developments reflect a similar approach to fintech firms like PayPal, which diversified into merchant services and consumer credit to counter cyclical economic pressures.

The broader stablecoin market is also feeling the strain of declining interest rates. In 2023, Tether reported record profits due to high U.S. interest rates, and a similar cut in yields would likely affect other stablecoins. However, Circle’s anticipated public listing has made its financial performance a particular focal point in the sector [2].

Sources:

[1] Bitget (https://www.bitget.com/news/detail/12560604911661)

[2] Altcoin (https://www.altcoinbuzz.io/cryptocurrency-news/circle-could-lose-618m-if-fed-rates-drop-100-basis-points/)