Circle's listing attracts attention to stablecoins, but there are three major challenges.

Recently, Circle's listing has sparked significant interest in stablecoins in the market. As a pioneer of compliant stablecoins, Circle's performance is highly anticipated. However, upon closely examining its IPO prospectus, we found that the company faces three main challenges:

1. Single source of income: 99% of the income comes from reserve funds, while other income only accounts for 1%.
2. High operating costs: 60% of revenue is paid to a certain trading platform, resulting in a net profit margin of only 9%.
3. Significant profit fluctuations: A net loss of $770 million in 2022, a profit of $270 million in 2023, and a decline back to $160 million in 2024.

Let's delve into the root causes of these issues and the measures Circle is taking in response.

1. Single Source of Income

Circle's core business model revolves around USDC. USDC is a stablecoin pegged to the US dollar at a 1:1 ratio, backed by low-risk assets such as US dollars and short-term government bonds. When users hold USDC, Circle invests these funds in assets like US Treasury bonds to earn interest income, while USDC holders do not receive any interest.

This model is essentially a form of "interest-free financing," similar to the deposit and loan business of banks, but with lower risks. Circle's profitability mainly depends on two factors: the circulation of USDC and the interest rate environment.

However, as the Federal Reserve enters a rate-cutting cycle, U.S. Treasury yields may drop to 2% or lower, directly affecting Circle's profits. Additionally, the entry of traditional financial institutions and emerging stablecoins starting to pay interest to holders also poses a challenge to Circle's model.

To address this issue, Circle is taking the following measures:

• Promote Circle Payments Network, providing USDC-based cross-border payment services
• Develop USDC custody and asset management tools to provide value-added services for institutional clients.
• Explore the non-USD stablecoin market, such as the issued EURC (Euro-pegged stablecoin)
• Expand into emerging markets such as Asia and Latin America

2. High Operating Costs

Circle pays 60% of its revenue to a trading platform, primarily for distribution and promotional expenses. This high percentage of revenue sharing seriously impacts Circle's profitability.

This situation stems from the partnership between Circle and the exchange platform during the early establishment of USDC. At that time, Circle's brand and distribution capabilities were relatively weak, and it needed to rely on the exchange's status and user network to expand USDC's market share.

According to data from 2024, based on a total circulation of 32 billion, the trading platform contributes approximately 50%-60% of the USDC circulation, which amounts to 16-19.2 billion USD. This highlights Circle's high reliance on the platform.

To reduce costs, Circle is taking the following measures:

• Attempt to renegotiate the profit-sharing agreement, but it is legally binding, making it quite difficult.
• Build your own distribution channels to reduce dependency on a single platform.

3. Significant Profit Fluctuations

The market capitalization of stablecoins is closely related to the cycles of the cryptocurrency industry. The issuance of USDC has gone through several key milestones:

• In 2020, the DeFi craze reached an issuance of 55 billion dollars.
• After the collapse of a certain stablecoin in 2022, funds flowed into USDC.
• At the beginning of 2023, a certain public chain emerged, driving the growth of USDC relative to other stablecoins.
• Due to the banking crisis and regulatory policy impacts in March 2023, the issuance of USDC decreased by approximately 50%.
• Recent policy changes have led to USDC growing to over 60 billion USD, an increase of approximately 80%.

These fluctuations directly affect Circle's profitability. To stabilize profits, Circle needs to:

• Promote income diversification and reduce dependence on interest rates.
• Optimize cost structure and improve profit margin stability
• Leverage compliance advantages to solidify market position and respond to market fluctuations

Conclusion

Stablecoins are driving the transformation of the financial system, and Circle's vision is to build a new financial system centered around USDC. Despite facing challenges, Circle's public listing has set a benchmark for the crypto industry and sparked interest in stablecoins. We will continue to follow the progress of this financial transformation.