Morgan Stanley cut its price target for Circle to $38 from $106 on Aug. 3 and downgraded the stablecoin issuer’s shares to underweight from equalweight, placing renewed attention on a business model in which about 95% of quarterly revenue came from interest earned on reserve assets.
Circle’s second-quarter results, released days after the downgrade, showed total revenue of $701.3 million, up 7% from a year earlier and 1% from the prior quarter. The figure fell short of the $713 million market expectation, despite adjusted earnings per share of $0.18 beating the $0.16 consensus estimate.
The numbers reinforce the tension facing Circle as a public company: USDC has become one of the largest dollar-backed tokens, but Circle’s current earnings remain heavily shaped by two variables outside a conventional software company’s control—short-term US interest rates and the volume of USDC in circulation.
Reserve income accounts for nearly all revenue
Circle reported $668 million in reserve income during the second quarter, compared with $659 million in the first quarter. That revenue represented roughly 95% of the company’s total, up from 94% in the preceding quarter.
Reserve income is generated from the cash and short-term US government securities backing USDC. The arrangement gives Circle a large and profitable pool of interest-bearing assets when rates are elevated, but it also makes earnings sensitive to Federal Reserve policy.
Other revenue declined to $34 million from $42 million in the previous quarter. Its contribution to total revenue dropped from roughly 6% to less than 5%, leaving newer commercial products with little visible influence on the company’s reported revenue mix.
Circle’s RLDC margin—a measure the company uses for revenue less distribution costs—was 41.2%, broadly unchanged from the first quarter. The stable margin suggests Circle maintained its economics despite revenue-sharing obligations, though it did not offset concerns about the limited contribution from its non-reserve businesses.
Morgan Stanley’s target cut arrived before the earnings release, but Circle’s quarterly figures gave fresh detail to the concern embedded in the downgrade. A company valued partly on expectations for payments, settlement infrastructure and blockchain services is still deriving nearly all of its income from the yield earned on USDC reserves.
USDC circulation slipped during the quarter
USDC circulation fell to $73.3 billion during the second quarter of 2026 from $77.0 billion three months earlier, according to the market data cited in the materials. A lower circulation figure reduces the reserve base on which Circle can earn interest, provided that other factors remain unchanged.
That relationship can be direct. Each USDC redeemed removes a dollar from the pool of assets backing the stablecoin, leaving less cash available for investment in Treasury bills and similar instruments. Rising circulation has historically enlarged Circle’s revenue opportunity; declining circulation puts pressure on it.
USDC held 27% of the fiat-backed stablecoin market during the period, according to the supplied market data, down 66 basis points from a year earlier. The decline does not by itself establish a lasting loss of market position, but it adds a competitive dimension to Circle’s dependence on reserve income.
The stablecoin sector has also gained another competitor with OpenUSD’s entrance, increasing pressure around distribution, liquidity and incentives. Market share in stablecoins is often defended through partnerships and revenue-sharing arrangements, which can support token availability and usage while reducing the issuer’s net revenue retained from reserves.
Coinbase agreement preserves a major distribution channel
Jeremy Allaire, Circle’s chief executive officer, said during the earnings call that the company had renewed its agreement with Coinbase on existing terms. The deal keeps USDC available across Coinbase’s product suite and maintains one of Circle’s most consequential distribution relationships.
The renewal offers continuity rather than a visible change in the second-quarter results. Circle did not report a shift in its revenue composition following the agreement, and reserve income continued to dominate earnings.
Distribution costs matter because Circle does not necessarily keep all of the interest earned on USDC backing assets. Revenue-sharing arrangements with large platforms can affect the company’s net take rate—the portion of reserve yield it retains after paying partners. As a result, growth in USDC supply does not automatically translate into a proportional gain in Circle’s profit.
Circle has promoted payments, settlement, network services, Arc and AI-agent payments as newer business lines. The second-quarter figures indicate those products have yet to generate revenue at a scale capable of changing the company’s financial profile.
Rate policy remains central to earnings outlook
The Federal Reserve kept its main policy rate in a 3.5% to 3.75% range at its late-July meeting, according to the information provided. Three members dissented and preferred a 25-basis-point increase.
For Circle, a steady policy rate preserves the current yield environment on its reserve portfolio, while any future reduction in short-term rates would lower the income generated by newly purchased or rolled-over securities. The effect would depend on the composition and maturity schedule of Circle’s reserves, but the overall exposure is clear in the company’s revenue breakdown.
Circle has also obtained a banking license, which the company says enables self-custody and could reduce custody-related expenses. Its second-quarter filings and earnings-call comments did not identify a measurable profitability benefit from the license during the period.
The combination of falling USDC circulation, a slightly reduced market share and a revenue base concentrated in reserve yield helps explain why Circle’s quarterly earnings beat did not resolve concerns surrounding its valuation. The company’s path to a more technology-like earnings profile depends on whether its payments and network products can become material revenue contributors before lower rates or weaker USDC supply reduce the returns generated by its reserves.
Worried about Circle’s rate sensitivity? Learn how stablecoins really work in this stablecoin fundamentals guide for context.
Disclaimer: The content on this page is provided for general informational purposes only and does not represent the views or financial advice of Toobit. We make no guarantees regarding the accuracy or completeness of this information and shall not be held liable for any errors, omissions, or outcomes resulting from its use. Investing in digital assets involves risk; users should independently evaluate their financial situation and the risks involved. For further details, please consult our Terms of Service and Risk Disclosure.
