Circle CRCL Valuation Framework: Interest Spread Model in a High-Interest Rate Cycle and the Reshaping of Stablecoin Competition with the GENIUS Act

In March 2026, Circle Internet Group officially listed on the New York Stock Exchange under the ticker CRCL, becoming the world's first publicly traded stablecoin infrastructure company, with a valuation of approximately $23 billion at IPO. However, the market's valuation of this company has never reached a consensus—on the day of earnings release, CRCL's intraday volatility exceeded 20%, jumping from $105 to $126 and then falling back to around $115, ultimately closing near $130. For a company with a nearly $30 billion market cap, such fluctuations have already exceeded the typical range of conventional financial stocks.

Circle's business model is straightforward: issuing USD stablecoin USDC, investing the user-deposited reserves into short-term U.S. Treasury securities to earn interest spread. As described in Harvard Business School case studies, this is a "profit model built through investing customer reserves." According to this logic, Circle is essentially a financial infrastructure company highly sensitive to interest rates and stablecoin balances, with profits primarily driven by reserve income rather than diversified platform monetization.

However, since the first quarter of 2026, this seemingly clear chain of logic has been challenged by multiple variables. Uncertainty in the Federal Reserve's interest rate path, the influx of competitors under the GENIUS Act regulatory framework, and Circle's strategic shift from a single-interest spread business to a multi-faceted payment infrastructure have collectively reshaped the valuation logic of CRCL. This article will explore Circle’s valuation framework from three dimensions: the essence of its business model, changes in its competitive moat under regulation, and the linkage mechanism between stock price and interest rates.

The Essence of the Business Model: 94% of Revenue from Reserve Interest, a "Natural Beneficiary" in High-Interest Cycles

Q1 2026 Financials: The Core Financial Language of the Interest Spread Model

Circle’s Q1 2026 financial report clearly presents the core logic of its business model. Total revenue and reserve income for the quarter reached $694.1 million, up 20% year-over-year, surpassing Wall Street’s consensus estimate of $677 million. Diluted earnings per share were $0.21, 40% higher than the Zacks consensus.

The most critical structural data lies in the revenue composition. Reserve income amounted to $652.5 million, accounting for 94.0% of total revenue and reserve income, up 17% year-over-year. Other income—including subscription and services, and trading revenue—totaled $41.6 million, doubling year-over-year but still only representing 6% of total revenue. In other words, for every $100 earned, $94 comes from interest income generated by USDC reserves invested in the Treasury market.

The growth of reserve income is jointly determined by two variables: the average circulating USDC and the reserve yield. The quarter’s average USDC circulation was $75.2 billion, up 39% year-over-year; at quarter-end, USDC circulation was $77 billion, up 28%. Meanwhile, the reserve return rate declined from 4.16% a year ago to 3.5%, a drop of 66 basis points, directly reflecting the downward trend of SOFR (Secured Overnight Financing Rate).

Dual Leverage of the Revenue Engine

Expressed as a simplified formula:

Reserve Income = Average USDC Circulation × Reserve Yield

When market demand for USDC increases, leverage goes up; similarly, when interest rates stay high, leverage also increases. The combination of these two factors results in a compounded growth effect. Q1 2026 exemplifies this mechanism—despite a decline in reserve yield month-over-month, the substantial 39% increase in USDC circulation still supported a 17% year-over-year growth in reserve income.

From an adjusted EBITDA perspective, this model’s profitability is more intuitive. The quarter’s adjusted EBITDA was $151 million, up 24% year-over-year, with a profit margin of 53%. The profit margin of revenue less distribution costs was 41.4%, up 1.5 percentage points year-over-year, mainly due to an increased platform retention ratio—Circle’s retained USDC share increased by 1 percentage point to 18%, meaning a lower share of revenue was paid out externally, and more interest income was retained.

High-Interest Rate Cycle: Circle’s Tailwind Environment

Understanding the above formula helps explain why Circle benefits naturally when interest rates remain high. As of the end of Q1 2026, the Federal Reserve’s policy rate was in the 3.50%-3.75% range. The OCC and FDIC are advancing the implementation details of the GENIUS Act, but there are no signals of significant rate cuts at the monetary policy level—the median of the dot plot only hints at one rate cut in 2026.

This constitutes a fundamental advantage for Circle: even if interest rates stay at current levels, as long as USDC circulation continues to grow (28% from Q1 2025 to Q1 2026), reserve income can be driven by dual factors. If interest rates rise, it will be a pure positive shock to Circle’s revenue structure.

However, this advantage also exposes Circle’s core vulnerability—when the interest rate cycle reverses, even if USDC circulation continues to grow, the growth rate of income could be fully offset by declining yields.

The Implementation of the GENIUS Act: How Institutionalized Regulation Reshapes the Competitive Landscape

The Institutional Framework of the GENIUS Act

The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act) is currently the most systematic stablecoin legislation globally, passed by the U.S. Congress in summer 2025. The bill establishes a comprehensive federal licensing, regulation, and enforcement framework for payment stablecoin issuers, covering reserve standards, AML compliance, capital requirements, and consumer protection.

As of mid-2026, the bill is entering an intensive rulemaking phase. On February 25, 2026, the OCC issued proposed rules establishing a comprehensive framework for “licensed payment stablecoin issuers” (PPSI), including over 200 questions for public comment. The FDIC released proposals on April 7 and June 3, 2026, concerning AML standards and regulatory frameworks. The Treasury Department issued a proposal on April 1, 2026, clarifying that state-level regulation with “substantially similar” standards to the federal framework would provide a regulatory pathway for issuers with a market cap under $10 billion. The deadline for all these rules to be legally implemented is July 18, 2026.

Pathways for New Entrants

The core impact of the GENIUS Act is that it sets a systematic threshold for stablecoin issuance but also opens multiple new entry channels.

For Circle, the first-mover advantage is tangible. Circle received conditional approval from the OCC in December 2025 to establish First National Digital Currency Bank, N.A., a national trust bank, making it the only stablecoin issuer with a federal trust bank license in the U.S. While other potential competitors are still navigating rule interpretations and compliance, Circle already has a formal banking-level infrastructure.

However, the arrival of new entrants is also a certainty. At least three types of players are positioning themselves: first, crypto-native firms like Coinbase, which received conditional OCC approval in April 2026 to operate as a trust bank; second, traditional financial institutions like JPMorgan and Standard Chartered, which see stablecoins as a core driver of crypto asset growth; third, politically connected projects such as World Liberty Financial’s USD1, which has approached a market cap of nearly $3.5 billion in less than eight months, becoming the fifth-largest stablecoin globally.

Specific Pathways of Competitive Pressure

How will the influx of more competitors compress Circle’s moat? Mechanistically, there are three main pathways:

1. Market Share Dilution.
As of Q1 2026, the total stablecoin market cap was about $322.5 billion. USDT held $189.4 billion (58.7%), and USDC held $76.4 billion (about 24%), together controlling over 80% of the market. But with rapid growth of new entrants like PYUSD and USD1 (PYUSD grew 20% quarter-over-quarter), USDC’s share slightly declined by 1.2% in Q1 2026. Although this small change in one quarter isn’t a trend, continued investment in compliance and technology by new entrants could sustain share erosion.

2. Structural Compression of Distribution Costs.
The reserve income model has an implicit constraint: Circle must share reserve yields with distribution partners (notably Coinbase). Distribution, trading, and other costs reached $407 million in the quarter, up 17%. If new stablecoin issuers can enter with lower distribution costs or self-distribution models, Circle’s distribution expense ratio could be pressured downward.

3. Product Differentiation Needs.
Once compliance barriers are leveled by the GENIUS Act, competition will shift toward product differentiation and network effects. Circle is actively deploying strategic initiatives, including the ARC blockchain network (which completed a $222 million token presale valued at $3 billion, backed by A16Z Crypto, BlackRock, and Standard Chartered), Circle Payment Network (CPN), with an annualized transaction volume approaching $10 billion as of May 7, up 75% quarter-over-quarter), and AI-oriented Agent Stack tools.

An Underestimated Moat: Regulatory First-Mover Advantage

While the above analysis emphasizes competitive pressure, Circle possesses an underestimated moat: regulatory first-mover advantage. The implementation of the GENIUS Act will not instantly produce dozens of compliant stablecoin issuers—obtaining OCC or FDIC PPSI licenses involves complex approval processes, and existing licensees need time to build compliance systems. More importantly, once the industry is under federal regulation, cross-state and cross-border portability will give license holders significant operational flexibility. Some analysts suggest the possibility of completely repealing the GENIUS Act after the 2026 midterm elections is “extremely low,” but shifts in Congress could influence ongoing market structure legislation. This indicates that the current regulatory framework offers relatively high policy stability.

Additionally, the proposed OCC rules explicitly state that PPSI cannot pay any form of interest or yield to stablecoin holders, whether in cash, tokens, or other forms. This means all compliant stablecoin issuers operating in the U.S. are prohibited from paying deposit interest to users. Competition will then focus on network utility and service quality, rather than interest rate subsidies—objectively protecting Circle’s profit margin structure.

The Linkage Mechanism Between CRCL Stock Price and Fed Interest Rate Expectations

Interest Rate Sensitivity: A Proven Pricing Logic

The valuation logic of CRCL stock is straightforward: the market views Circle as an “interest rate proxy asset.” When the market expects the Fed to maintain high rates or hike further, Circle’s reserve income outlook is upwardly revised; when rate cut expectations increase, it is revised downward.

This sensitivity can be validated by comparing Circle with interest rate futures. On May 11, 2026, CRCL surged from $105 to $126 intraday and then fell back to $115, closely aligning with short-term market interest rate expectations that day.

Options market data show that CRCL’s implied volatility is significantly higher than that of traditional financial stocks, reflecting market uncertainty about the pricing of interest-sensitive assets. As of May 29, 2026, CRCL closed at $113, with a market cap of approximately $23.55 billion. The average analyst target price is $152.07, with a high of $280 and a low of $77—this wide range directly indicates market disagreement on interest rate trajectory expectations.

Discrepancy Between Net Profit and Market Valuation: Why Are Stock Price and Net Income Not Aligned?

CRCL exhibits a puzzling phenomenon: despite declining net profit, its stock price has not fallen proportionally. In Q1 2026, Circle’s net income from ongoing operations decreased 15% year-over-year to $55.2 million, but adjusted EBITDA grew 24% to $151 million.

The root cause lies in Circle’s accounting structure. In fiscal 2025, Circle reported a net loss attributable to common shareholders of $70 million, partly due to $845 million in compensation expenses and non-recurring costs related to the IPO. Non-cash items and one-time expenses (such as stock-based compensation and accounting treatments related to ARC tokens pre-sales) cause significant divergence between net income and adjusted EBITDA.

Because reserve income has high operating leverage—incremental reserve assets incur minimal management costs—once non-recurring expenses are cleared, net income becomes highly sensitive to reserve income. The market prices CRCL as an “operating leverage proxy” during interest rate cycles, rather than strictly based on current GAAP net profit.

Quantitative Projection of Interest Rate Paths

Based on the Fed’s dot plot guidance, the implied median policy rate for 2026 is 3.4%, with only one rate cut expected during the year. Using this as a baseline:

• Base Scenario (Rates remain at 3.5%-3.75%): If the Fed cuts once, reserve yields stay around 3.4%-3.6%. With USDC circulation growing at 28% annually from $77 billion to about $98.5 billion, reserve income could grow by approximately 20-25%, aligning with current operating expense guidance ($570-$585 million).

• Downside Scenario (More aggressive rate cuts): If the Fed cuts more than expected (exceeding one cut, with rates falling to around 3.0% by year-end), reserve yields could drop to 3.0%-3.2%. Even with continued USDC growth, reserve income growth could be fully offset.

• Upside Scenario (Prolonged high rates): If the Fed delays rate cuts into late 2026 or 2027 due to persistent inflation, reserve yields could stay above 3.5%, and combined with ongoing USDC growth, total revenue could approach or exceed the $1.25B forecast by Wells Fargo, corresponding to an $83.2 billion valuation anchor.

It’s worth noting that Wells Fargo’s April 2026 report uses an EV/RLDC (revenue minus distribution costs) valuation framework, assigning a buy rating and a target price of $111. Its forecast of a 62% EBITDA margin in 2028 aligns with market optimism about Circle’s long-term profitability.

Latest Developments: From Interest Spread to Infrastructure Paradigm Shift

On-Chain USDC Penetration: Signal of Flow Release

The most notable change in Q1 2026 is the surge in on-chain transaction volume. USDC’s quarterly on-chain volume reached $21.5 trillion, up 263% year-over-year. Including Solana, third-party estimates suggest the total approaches $30 trillion. This implies that the $77 billion USDC circulating supply was moved approximately 28 times within a quarter, indicating deep integration of USDC into on-chain financial settlement processes rather than idle reserves stored in cold wallets.

Additionally, Mizuho Securities reports that, as of 2026, USDC’s adjusted trading volume has surpassed USDT, accounting for 64% of the market—reversing USDT’s long-standing dominance since 2019. This structural shift reflects a genuine preference among institutional funds for compliant stablecoins, reshaping competitive dynamics.

Tokenized Settlement Layer Potential

The global tokenized asset management market has grown from $1.5 billion in Q1 2023 to $26.5 billion in Q1 2026, a 17-fold increase over three years. More importantly, this growth correlates with USDC at a 95% rate, far exceeding its 55% correlation with the broader crypto market. BlackRock’s BUIDL fund and Franklin D. Dempsey’s tokenization funds use USDC for settlement, and Circle’s managed tokenized money market fund USYC has assets exceeding $3 billion, up over 300% year-over-year, making it the largest tokenized money market fund globally.

Circle’s current revenue from RWA (real-world assets) settlement is minimal, and this infrastructure layer’s monetization is still early-stage. But if NYSE and Nasdaq push forward with 24/7 tokenized stock trading, USDC as a settlement asset could significantly expand Circle’s monetization potential.

CPN and AI Payments: Increasing Uncertainty

The most underestimated variable for Circle is the Circle Payment Network (CPN). It is a permissioned payment settlement channel where financial institutions can conduct cross-border payments, with Circle charging basis points for network services. Currently, CPN’s annualized transaction volume approaches $10 billion, up 75% quarter-over-quarter. Compared to the total on-chain volume of $21.5 trillion, CPN’s penetration is less than 0.05%, but “the gap itself is space.” If CPN can channel even a small portion of on-chain flow into paid services, Circle’s revenue structure could undergo a fundamental transformation.

Additionally, Circle has launched an AI-oriented Agent Stack toolkit, including Circle CLI, Agent Wallets, and Agent Marketplace, with over 500 integrated endpoints in early stages. CEO Jeremy Allaire described this as “the biggest platform revolution in internet history,” aiming to fuse AI systems with blockchain-based economic operating systems.

These two strategic directions are core to Circle’s transition from a pure interest spread business to a diversified infrastructure platform. However, these new revenue streams currently account for less than 6% of total revenue, insufficient in the short term to alter its core valuation as a “rate-sensitive company.”

Conclusion

Circle’s valuation cannot be simply applied through any single model. Based on current data and industry trends, investors should allocate weights across at least three dimensions:

• Dimension 1 (60-70%): Interest rate proxy model. Circle remains a reserve income-driven enterprise; its core valuation should reference high-operating leverage, interest rate-sensitive financial infrastructure. Key variables are the Fed’s rate path and USDC circulation growth.

• Dimension 2 (15-20%): Regulatory moat premium. The institutionalization of the GENIUS Act opens entry pathways but also converts Circle’s first-mover license advantage into a sustainable pricing premium. The Fed’s dot plot indicating a 3.4% median rate in 2026 provides a relatively stable operating environment.

• Dimension 3 (10-15%): Payment network and AI options. The rapid growth of CPN and early AI payment deployments constitute bullish options for Circle. If either achieves scalable monetization, the current valuation framework will face systemic restructuring.

The stablecoin market in the first half of 2026 has already witnessed two key changes—USDC’s on-chain transaction volume surpassing USDT in dollar terms, and accelerated progress in GENIUS Act rulemaking—both providing strategic opportunities from business model and regulatory perspectives. Yet, the market needs time to verify whether high-frequency USDC circulation can translate into substantial revenue growth for Circle, and how high the regulatory barriers for new entrants will ultimately be.