Morgan Stanley downgrades Circle: is USDC losing the bruising from Morgan Stanley on August 3, after the bank cut its price target from $106 to $38 and downgraded the stock to underweight, arguing that USDC’s economics are getting squeezed from multiple sides.
- USDC growth is slowing
- Tokenized funds are pulling in yield seekers
- Distribution partners want a bigger cut
- Circle’s new products are still tiny
This is not just a stock-call spat. It is a challenge to the whole idea that a stablecoin issuer can sit on a giant pile of reserves, clip the Treasury yield, and call that a business model forever with a straight face.
Morgan Stanley Hits Circle With Drastic New Price Target argued that Circle’s reserve-income engine is under structural pressure. The bank cut its USDC supply forecasts by 33% for 2027 and 44% for 2028, and said its GAAP EPS estimates sit about 3% below Wall Street consensus for 2027 and 20% below consensus for 2028.
That matters because Circle’s core business is still mostly reserve income, the yield earned on the cash and Treasury reserves backing USDC. When rates are high, that model looks beautiful. When rates fall, or when the economics get shared out with partners, the shine comes off fast.
The numbers already show some strain. USDC circulating supply fell from nearly $80 billion in March to roughly $73 billion by August, while the broader stablecoin market has contracted by $10 billion since May. Circle slides after Morgan Stanley downgrade, cut in price has also given back a chunk of its earlier gains after a sharp spring run.
That is the part investors hate. The market spent months pricing Circle like a turbocharged fintech tollbooth, and then reality showed up with a clipboard.
The margin problem is getting harder to ignore
Morgan Stanley’s bearish case is not simply that USDC growth slowed. It is that the entire stablecoin rent model is getting crowded out by competition from tokenized money market funds, cash-like products put on chain that can pay yield.
A plain stablecoin like USDC gives users a dollar peg, but no yield. A tokenized money market fund still lives on-chain and tracks the dollar, but it also pays interest. For anyone parking serious cash, that is a meaningful difference. Yield is a hell of a drug.
BlackRock is helping make that point louder. On August 3, it added two products, BSTBL and BRSRV, to its tokenized cash push. Its BUIDL fund has grown to roughly $2.5 billion in assets, which is still tiny compared with traditional money markets, but large enough to matter in crypto terms.
BlackRock Fires ‘Starting Gun for a New Financial Era
BlackRock’s Martin Small said the company wants to be “the reserve manager of choice.”
What are tokenized money market funds? shows exactly where this is headed. The competition is no longer just stablecoin issuer versus stablecoin issuer. It is also stablecoin issuers versus heavyweight asset managers who want the same on-chain dollar flows and do not mind taking a chunk of the economics for themselves.
The broader tokenization market is growing too. According to rwa.xyz, the tokenized real-world asset market has expanded more than 200% over the past year to over $30 billion. Citi has gone further, projecting tokenized securities could reach $5.5 trillion by 2030.
Those are forecasts, not guarantees. But the direction is clear: on-chain dollars are becoming a contested market, not a free lunch.
Hyperliquid shows how distribution turns into a knife fight
JPMorgan added another layer of pressure in July, warning that Circle’s revised arrangement with Hyperliquid could worsen margin pressure. Hyperliquid is a major decentralized perpetual futures exchange, and it has become an important USDC distribution channel.
The scale is hard to wave away. Hyperliquid processed more than $150 billion in trading volume in July alone, and its volume relative to Binance climbed to 11.5%. It also holds about $6 billion of USDC, roughly 8% of circulating supply.
Under the revised setup, Coinbase classifies USDC on Hyperliquid as “on-platform” and pays 90% of reserve income to Hyperliquid. JPMorgan Warns Hyperliquid's Rise Threatens Circle's USDC called the dynamic a “prisoner’s dilemma.”
In plain English: Circle and Coinbase both need venues like Hyperliquid for distribution, but every new deal can push more economics away from them. They need the flow, but the flow knows it has leverage. That is not a bug. It is how markets squeeze people who thought network effects meant they got to keep the whole pie.
This is where the “stablecoins are free money” narrative starts to crack. Distribution is not free. Liquidity is not free. And if a major venue can demand most of the rent, the issuer looks less like a landlord and more like a tenant with a fancy chart.
Circle’s newer bets are still too small to matter much
Circle has tried to expand beyond reserve income with payments products, including so-called agentic payments aimed at autonomous or AI-driven transaction use cases. The idea makes sense. The numbers, at least from the material provided, do not scream breakout.
Agentic payments volume is running at about $41, 900 per day, with average transaction size around 24 cents. If those figures hold, this is still tiny. Useful as a pilot. Not remotely enough to replace reserve income.
Circle Moves 4.4B USDC to Coinbase in Record HyperEVM has also pushed USDC into more places. It brought USDC to the XRP Ledger in June 2025, and Coinbase launched a USDC-powered payments product on Shopify in June 2025. Those are real distribution wins. They just do not automatically become meaningful profit engines.
That is the harsh truth for Circle: payments is the right long-term direction, but it is slow, competitive, and operationally messy. Reserve income is much easier. Which is exactly why the market is worried about the reserve-income model getting thinner.
The bank charter helps, but it is not salvation
Circle did receive final approval from the U.S. Office of the Comptroller of the Currency to create First National Digital Currency Bank. That is meaningful. A federal banking charter gives Circle more regulatory optionality and a better bridge into the traditional financial system.
But a charter is a tool, not a magic wand. Building a regulated banking operation is slow, capital-intensive, and heavily supervised. It may help Circle expand over time, but it does not erase the pressure on USDC’s economics today.
That is why investors should resist the usual crypto habit of treating every regulatory approval like a cheat code. Sometimes it is just a better permit.
Circle’s biggest problem is really a market-structure problem
The deeper shift is bigger than Circle. Stablecoins may be moving away from a simple, high-margin reserve-rent model toward a more competitive setup where on-chain dollars are treated like a commodity and the economics get split among issuers, exchanges, funds, and reserve managers.
That is good for users in some ways. More competition can mean better products, better yields, and less deadweight extraction. It is also bad news for the companies that got comfortable collecting easy spread income while pretending the party would never end.
Tether is still the giant in the room. USDT has more than $140 billion in circulation, and in emerging markets the source material says USDT dominance exceeds 90% in most corridors. Circle’s USDC is better positioned for institutions and regulated finance, but it is not the undisputed king of anything.
Circle’s EURC Wins in Europe as USDC Faces New Stablecoin also matters. USDC’s European market share has declined since MiCA implementation, which is a reminder that regulatory regimes can reshape distribution just as fast as product innovation can. Stablecoins are not floating above politics. They are stuck in it like everybody else.
And then there is interest rates. The source notes that when the Federal Reserve held rates above 5%, every $1 billion of USDC generated roughly $50 million in annual reserve income. If the Fed cuts by 150 to 200 basis points over the next 18 months, that income stream gets smaller. Fast.
That is the dirty secret of stablecoin issuance: the model can look like effortless yield when rates are high, then suddenly resemble a very expensive toaster when they are not.
What Morgan Stanley is really saying
The downgrade is not just about valuation. It is a claim that Circle’s business is facing structural pressure.
Morgan Stanley is saying USDC supply growth is slowing, tokenized money market funds are siphoning off demand for on-chain dollar exposure, and Circle’s newer revenue streams are not big enough to offset the squeeze. JPMorgan’s Hyperliquid analysis adds the next layer: even when Circle wins distribution, it may have to pay heavily for the privilege.
That does not mean Circle is broken. It does mean investors need to stop treating stablecoins like infinite-margin vending machines. They are infrastructure businesses now, and infrastructure gets competed down.
The stock trading around $42 after the downgrade shows the market is starting to price that in. The easy story was always that stablecoins are just tollbooths on crypto liquidity. The harder truth is that tollbooths attract traffic, but they also attract competitors, regulators, and venues that know exactly how much leverage they have.
Powering global finance. Issued by Circle.
Circle Plans Post-Quantum USDC Security as Quantum Threat is not just a marketing line. It is a reminder that Circle still has to defend the rail itself while the business model underneath it gets squeezed.
Key questions and takeaways
-
Why did Morgan Stanley downgrade Circle?
The bank said USDC supply growth is slowing, tokenized money market funds are taking demand, and Circle’s newer products are not yet meaningful enough to offset the pressure. -
Is USDC still a major stablecoin?
Yes. USDC still has roughly $73 billion in circulation, but the growth trend has softened and the market is getting tougher. -
Why are tokenized money market funds a threat?
They keep dollars on-chain and pay yield, which makes them more attractive than a zero-yield stablecoin for many users. -
What is the Hyperliquid problem?
Hyperliquid is a major distribution channel for USDC, but the revised economics shift a large share of reserve income away from Circle and Coinbase. -
Does Circle’s bank charter fix the business?
No. It improves Circle’s strategic position and regulatory optionality, but it does not automatically replace shrinking reserve income. -
Can stablecoins keep earning easy rent forever?
Not if competition keeps tightening and rates keep falling. The market is moving toward thinner margins and tougher bargaining power.
Circle still matters. USDC remains a core settlement rail in crypto, and that is not trivial. But the phase where stablecoin issuers could simply collect spread and call it innovation is getting squeezed by yield-bearing competitors, tougher venue economics, and a more mature market.
The stablecoin wars are no longer about who can print a dollar token fastest. They are about who can defend yield, distribution, and relevance without giving away the farm.
