Citigroup: Stablecoin Rewards Limits May Slow USDC Growth

TLDR

• Citigroup said proposed limits on stablecoin rewards may slow USDC growth but not harm Circle’s core business model.
• The draft Clarity Act would restrict yield on passive stablecoin balances while allowing activity-based rewards.
• Analysts stated that Circle earns reserve income from USDC backing assets and does not directly pay yield to holders.
• Circle generated $2.64 billion in reserve income in fiscal year 2025.
• USDC supply increased from about $30 billion to $80 billion over the past two years.

Citigroup said proposed U.S. limits on stablecoin rewards may slow Circle’s expansion but not derail its investment case. The bank stated that draft market structure rules could restrict certain incentives tied to stablecoin balances. However, analysts maintained that Circle’s core revenue model tied to reserve income remains intact.

Stablecoin Rewards and USDC Face Draft Rule Changes

Citigroup analysts, led by Peter Christiansen, addressed the draft Clarity Act in a Tuesday report. They wrote, “We view this development potentially as a scaling setback, but not a thesis killer.” The draft permits narrow rewards programs if they do not resemble bank deposit interest.

However, the proposal would restrict yield on passive stablecoin balances. Analysts said Circle already transfers most reserve income to distribution partners such as Coinbase. Therefore, a broader ban on third-party rewards would not directly reduce Circle’s net revenue.

Still, the bank expects weaker incentives to hold USDC in the short term. Analysts described USDC as a payment instrument rather than a security. They added that stablecoin volume, not circulation, remains the main indicator of adoption.

Citigroup assigned Circle shares a high risk rating with a $243 price target. The stock traded near $100 when the report was published. Shares fell about 20% on Tuesday after the draft bill circulated.

Coinbase Yield Product and Circle Reserve Income

The draft Clarity Act triggered concern about banning yield on passive balances. That concern pressured shares of Circle and partners tied to USDC distribution. Market participants questioned how limits on stablecoin rewards could affect related revenues.

Brokerage firm Bernstein addressed the selloff in a Wednesday report. Analysts led by Gautam Chhugani said investors are confused about who earns yield and who distributes it. They stated that Circle earns reserve income from USDC backing assets, while platforms distribute part of that income to users.

The draft would prohibit yield on passive balances but allow activity-based rewards tied to trading or payments. Bernstein said this rule would pressure Coinbase’s roughly 3.5% USDC yield product. The firm expects Coinbase may need to restructure that offering.

Bernstein maintained that Circle’s model remains unchanged under the draft language. The firm reported that Circle generated $2.64 billion in reserve income in fiscal year 2025. Analysts also highlighted that USDC supply grew from about $30 billion to $80 billion over two years.

They attributed that growth to trading, payments, and collateral demand rather than yield. Bernstein placed an outperform rating on Circle shares with a $190 price target. Meanwhile, Coinbase has signaled dissatisfaction with the latest compromise in private talks with Senate staff.

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