What Coinbase’s stake in stablecoin issuer Circle means for crypto
August 23, 2023 Alex Rustok
Coinbase investors may not reap the benefits of its new agreement with Circle, the issuer of the second largest stablecoin in the world, for some time, according to Wall Street analysts. Late Thursday, the companies announced that Coinbase had taken a minor equity stake in Circle, which includes a 50/50 revenue share of interest income going forward. (The previous share breakdown was undisclosed.) They also said they’re shuttering the USD Coin (USDC) consortium they co-founded and managed together, called Centre. The two companies “have agreed that with growing regulatory clarity for stablecoins in the U.S. and around the world, the requirement of a separate governance body like Centre, is no longer needed,” the companies’ CEOs said in a joint statement Thursday. “Centre will no longer exist as a stand-alone entity and Circle will remain as the issuer of USDC, bringing any Centre governance and operations responsibilities in-house.” The U.S. stablecoin market has been held back by regulatory uncertainty this year, and the market cap for USDC has dropped nearly 42% since the start of the year, according to CryptoQuant. Although Wall Street sees Coinbase benefiting from the investment in the long term, the potential impact is limited in the near term, analysts say. “The update could potentially offer upside to Street interest income estimates,” Alex Markgraff, an analyst at Key Banc Capital Markets, said in a note Monday. “All else is in fact not equal as [the] USDC market cap has drifted lower through 2Q23 and interest rates are subject to change.” JPMorgan’s Kenneth Worthington said Tuesday the firm still views USDC as a “meaningful piece of Coinbase’s revenue.” “We maintain our Neutral on Coinbase given regulatory overhang and bearishness seen in the crypto markets that have weighed on transaction volume growth,” he added. “Because we already modeled Coinbase’s share at ~45%, we do not expect material changes to our model or earnings projections.” Barclays analyst Ramsey El-Assal said the firm assumed USDC share “in the low-40s” but when adjusted to reflect the 50% share, its estimates for 2023 and 2024 interest income and adjusted EBITDA rise by about $40 million and $105 million, respectively. He added that by moving operations to Circle entirely, there “could be some cost savings as well, though we believe USDC is already a very high-margin product for Coinbase.” Stablecoins are cryptocurrencies whose prices are pegged to an underlying asset. It’s typically a fiat currency — usually the U.S. dollar — although some stablecoins are pegged to commodities or other financial assets. They’re designed to be less volatile than other cryptocurrencies, which have a price that moves largely by speculative trading. They also serve as a liquidity mechanism in moving money between the traditional markets and crypto markets. Mizuho analyst Dan Dolev was less optimistic about the news. He called the update a “last ditch attempt to breathe life into stablecoins.” “The negatives outweigh the positives,” he said Tuesday. “The Circle equity stake deepens COIN’s exposure to a dwindling asset class … casting doubt about the standalone business model of stablecoins.” The update closely follows the launch of PayPal ‘s dollar-backed stablecoin , PayPal USD – a first from a major U.S. financial institution. The announcement came earlier this month as market participants await a vote in Congress on a key stablecoin bill , which had advanced to the House with three other crypto bills for the first time.
