Fed hold leaves Circle’s key profit question unanswered

Circle Internet Group (CRCL) issues USDC, a digital token backed by cash and short-term government securities and designed to maintain a value of $1.

The company earns interest on the assets held behind USDC.

Investors are watching whether Circle can retain more of that income as distribution costs rise and new stablecoins compete for financial partners.

The Federal Reserve kept its benchmark interest-rate range at 3.5% to 3.75% on July 29.

The decision passed by a 9-3 vote. Three policymakers favored raising the range by a quarter percentage point as inflation remained above the Fed’s 2% goal.

Circle shares closed down 4.6% at $61.36 on July 29 following the decision.

Keeping rates unchanged preserved the yield Circle can earn on the short-term assets backing USDC.

Circle’s profit also depends on how much USDC is in circulation and how much reserve income remains after payments to distribution partners.

Fed hold preserves Circle’s reserve yield

Circle invests the assets backing USDC in cash and the Circle Reserve Fund, which primarily holds short-term U.S. government securities.

The company said reserve income depends mainly on the average amount of USDC in circulation and the return earned on those reserves.

Circle’s first-quarter regulatory filing shows how heavily its business relies on that income.

Circle’s rate exposure in numbers

$652.5 million: Reserve income in the first quarter.
94%: The portion of total revenue generated by reserve income.
$75.2 billion: Average USDC circulation during the quarter.
3.5%: The reserve return rate during the quarter.

Circle generated $694.1 million in total revenue and reserve income during the period.

The company also estimated how a larger rate move could affect its results.

A one-percentage-point increase in rates would add an estimated $773 million to reserve income over 12 months, assuming USDC circulation and the reserve mix remained unchanged.

The same increase would add an estimated $384 million to distribution and transaction costs.

A higher interest rate therefore does not flow entirely to Circle’s bottom line.

Cap Head of Growth Dave Liebowitz said in comments shared with TheStreet that the decision maintained the earnings environment Circle had already been operating in.

“Today’s decision preserves the current balance rather than materially changing it,” Liebowitz said.

Reserve assets can continue producing attractive yields in the near term, he said.

Future USDC growth, however, will depend on payments, lending, and activity across digital asset markets.

Techdollar CEO and co-founder Terence McMenamin said in separate comments shared with TheStreet that the Fed left Circle’s more important financial variables unchanged.

A hold changes nothing structural. Circle’s problem is the split, not the rate.

Circle ended the first quarter with $77.05 billion of USDC in circulation.

That amount had declined to $72.3 billion as of July 27, according to Circle’s USDC page.

The decline was about $4.75 billion, or 6.2%, from March 31.

Each USDC requires Circle to maintain corresponding reserve assets.

USDC circulation has fallen since March

Fewer tokens in circulation give Circle a smaller pool of assets on which to earn interest, assuming the reserve return rate remains unchanged.

The July 27 figure represents the amount of USDC circulating in a single day.

Circle calculates quarterly reserve income using average circulation, so that figure alone does not reveal what the company earned during the second quarter.

McMenamin said the effect operates “through the float, not the rate.”

Float refers to the amount of USDC circulating among customers, exchanges, and other financial platforms.

A higher return on a smaller reserve base can produce less income than investors expect from looking at interest rates alone.

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Coinbase payments shape how much Circle keeps

Circle shares part of its USDC reserve income with companies that help distribute the stablecoin.

Distribution and transaction costs totaled $405.4 million in the first quarter, an increase of 16.7% from a year earlier.

Circle incurred $330.6 million of those costs through its agreements with Coinbase Global (COIN).

Coinbase-related costs accounted for about 82% of Circle’s total distribution and transaction costs during the quarter.

Under the agreement, Coinbase receives payments tied principally to USDC reserve income.

More Fed:

The amount depends partly on how much USDC is held on Coinbase and how much circulates elsewhere.

Coinbase also receives half of certain reserve income generated by USDC held outside the two companies’ platforms after payments to approved third-party partners, according to Circle’s annual report.

The agreement began in August 2023 with an initial three-year term.

Coinbase’s annual filing says the companies are expected to discuss possible changes before the term ends, but it does not say formal negotiations have begun.

If they do not agree on changes, the agreement automatically renews for another three years as long as both companies continue meeting its conditions.

The retention rate is the portion of reserve income Circle keeps after payments to Coinbase and other distribution partners.

McMenamin said investors should watch that figure because it determines how much income generated by USDC reaches Circle shareholders.

“Three numbers, in order: USDC float, retention rate, distribution cost,” he said. “Reserve yield is fourth, and it’s the one everyone reports on.”

Open USD could pressure Circle’s share of reserve income

A competing stablecoin could make it more expensive for Circle to secure distribution.

Open Standard announced Open USD in June with a network of more than 140 financial, technology, and crypto companies.

Open USD is expected to become available later in 2026.

The project plans to distribute earnings from its reserves to participating companies after deducting a small management fee.

Businesses will also be able to mint and redeem the token without fees or artificial volume limits, according to Open Standard.

That structure gives payment companies, exchanges, and other financial platforms a direct incentive to distribute Open USD.

A competitor willing to pass more reserve income to partners could pressure the share Circle retains.

“Higher for longer makes the pie bigger,” McMenamin said. “It does not tell you who eats it.”

Liebowitz said elevated rates can support Circle’s current revenue and still weigh on its valuation.

That could happen if tighter financial conditions slow investment, crypto market activity, and broader stablecoin adoption, he said.

TheStreet reported that Circle shares fell sharply when Open USD was announced on June 30.

Open USD does not yet have circulation, transaction volume, or reserve income that can be compared directly with USDC.

Coinbase is listed as an Open Standard participant.

The project’s announcement does not say Coinbase plans to reduce its support for USDC.

The risk for Circle is that competing issuers give financial platforms another benchmark for deciding how much reserve income they should receive.

Circle’s next earnings will test the model

Circle is scheduled to report second-quarter results on Aug. 5.

Investors should watch:

Average USDC circulation: The reserve base Circle had throughout the quarter.
USDC circulation at quarter-end: The direction of demand entering the third quarter.
Reserve return rate: The yield earned on the assets backing Circle’s stablecoins.
Distribution and transaction costs: The amount paid to Coinbase and other partners.
Revenue less distribution costs: The income Circle retained before operating expenses.

Any comments about the Coinbase agreement could provide more information about Circle’s expected costs after its initial three-year term.

The clearest comparison on Aug. 5 will be whether average USDC circulation and revenue less distribution costs improved from the first quarter.