On March 2026, Eastern Standard Time, after the draft of the “CLARITY Act” in the United States introduced clauses to restrict passive income, the controversy surrounding USDC and its issuer Circle (CRCL) heated up rapidly. During the same period, Circle's stock price drew market attention with an approximate 20% drop in one trading day, exacerbated by the combination of regulatory draft and stock price crash, igniting panic surrounding the question of whether the “income model was being suppressed.” On the surface, this appeared to be a concentrated blow to crypto income products, but the deeper contradiction lies in the fact that the bill targets the distributing platforms that distribute income to users, while the market simplistically interprets this as a direct denial of the issuer's business model. In this round of emotion-driven sell-offs, the resilience of Circle's business model, relying on reserve interest, was overshadowed by amplified pessimistic expectations.

Where the Regulatory Focus Is: Targeting the "Distribution End" Rather Than the USDC Itself

From the draft framework, the “CLARITY Act” first draws a thick line in terms of income forms: on one end is passive income available to ordinary token holders, which can be obtained with almost no operation; on the other end are functional incentives tied to actual usage behaviors such as payments and transactions. The draft clearly tends to tighten the space for the former while leaving some leeway for the latter—in other words, daily transaction cashbacks, payment discounts, and other behavioral incentives are more likely to be viewed as compliant, while purely “lying down and earning interest” products are likely to come under strict regulation.

To understand this, it is essential to distinguish between the roles of the issuer and the distributor. The issuer, like Circle, is responsible for the issuance and reserve management of USDC, while the distributor, such as Coinbase, provides custody, trading, and income products to end users. The current draft's focus is closer to the latter—especially those passive income products packaged as “low-risk, redeemable at any time,” rather than the existence and issuance logic of the USDC asset itself. On a practical level, the regulation seems to be asking: Who is pushing a kind of “deposit substitute” income promise onto retail investors?

A widely discussed case in the market is the annual approximately 3.5% income products on platforms like Coinbase being seen as a regulatory focus sample. According to the brief, this remains unverified information, but it is enough to demonstrate that the regulation attempts to restrict not the interest rate of government bonds themselves, but rather the product form that “sells this portion of the interest to retail investors” as passive income. The draft focuses on how these earnings are packaged, marketed, and guaranteed, rather than simply denying the on-chain dollar asset's existence value.

It is precisely because of this that the information vacuum becomes a catalyst for amplifying panic. The bill currently lacks a clear effective timeline and executive boundaries: is it a complete block on passive income, or is it a matter of redefining product thresholds, disclosure obligations, and target audience? This series of unresolved questions has let the market fill the vacuum with the most pessimistic imaginations under nearly no details, with emotions running far ahead of the legal text.

How Circle Makes Money: Distinction Between Reserve Interest and "Passive Interest Payments"

Outside the tumultuous narrative, Circle's way of making money is not mysterious. The brief has repeatedly confirmed that Circle's core income comes from holding U.S. Treasury bonds and other high-security assets for reserve interest—it earns the interest margin through compliant custody of reserve assets, rather than paying interest directly to ordinary USDC holders based on their balances like traditional banks. For Circle, USDC serves more as a digital certificate of a reserve asset pool, with Treasury interest remaining on the balance sheet, monetized by the company in the form of service fees and reserve earnings, rather than being a deposit substitute that inherently possesses “automated wealth management” attributes.

This has an important distinction from the “passive income” that regulators are now tightening:

On one side, “Reserve earnings belong to the issuer,” with Circle using its own capital and compliance obligations to assume reserve management responsibilities, while the regulatory logic approaches financial infrastructure;

On the other side, “Passive income paid to users,” where the platform packages part of the interest margin into over 3% annual yields, selling it to end users who do not deeply participate in risk assessment. The real concern of regulation is that the latter may evolve into shadow banking-like expectations of guaranteed returns, rather than the former, which operates under audit and custody constraints in the reserve earning structure.

The brief mentioned a market forecast of Circle achieving about $2.64 billion in reserve income by 2025, marked as unverified, but it provides an important perspective: even if the distribution side's income products are compressed, Circle's interest margin income and compliant reserve model on the reserve side face limited direct impact in the short term. The draft does not deny the model of “holding Treasury bonds to earn interest,” it merely attempts to limit how this interest margin is repackaged as passive investment products for retail investors.

In other words, even if platforms do not launch large-scale “lying earn USDC yields” products in the future, Circle can still maintain its core cash flow through reserve interest, institutional-level service fees, and other methods within a compliant framework. The compression is more likely to be on the product space of “how to distribute this piece of cake to end-users,” rather than on the existence of the cake itself.

Stock Price Plummets 20%: The Market Is Punishing Expectations, Not the Balance Sheet

After the CLARITY draft was released in March 2026, Circle’s stock price was widely reported by the media as having a one-day decline of about 20%, but the brief also clearly stated that it cannot further extrapolate more detailed opening and closing prices or range paths. The observable fact is singular: the market executed a severe repricing, concentrating released concerns about regulatory uncertainties on the CRCL stock.

From the narrative logic, this round of sell-offs is largely a process of “chain equal”:

● Investors first interpreted “restricting passive income” as a contraction of the USDC-related income ecosystem;

● Next, they extended this point simply to conclude “USDC can no longer serve as a high-interest vehicle,” thus arriving at the conclusion that the “USDC business model is being suppressed”;

● Finally, this conclusion was linearly extrapolated to Circle's overall valuation, discounting all growth and profit expectations related to USDC.

The problem is that the regulatory targets and the business model have been completely confused in this chain. The bill aims more directly at the compliance of distribution-side income products, rather than denying the very issuance model of “using government bonds as reserves and earning interest.” But in practice, investors often do not dismantle this detail under emotional pressure, instead choosing to abandon the entire income narrative in a “one-size-fits-all” manner, making Circle a concentrated outlet for expectation collapse.

In an environment of incomplete information and sensationalist media, such a stampede pattern is easier to form. The media uses extreme language like “suppressing income” and “cryptocurrency version of a crackdown on shadow banking” to grab attention, while social media amplifies panic through second-hand and third-hand recounting, drowning out rational details and role distinctions in high-frequency retweets. For many funds that only see the keywords “20% plummet” and “restricting income,” the simplest decision is—sell first, observe later.

Wall Street Divided: Phase Resistance or Emotional Misfire?

In this round of intense fluctuations, selling institutions did not form a single narrative. According to the brief, Citi Bank views CLARITY as “phase resistance but not detrimental to long-term fundamentals” in its latest report, giving a $243 target price, while also marking it as a high-risk target. The core meaning of this statement is that the regulation will temporarily compress the valuation premium and increase uncertainty, but they do not see it as a mortal blow to Circle's long-term business logic.

On the other side, Bernstein emphasizes the emotional component in the current downward trend. The brief quotes their perspective that this round of selling was more driven by “misreading leading to emotional sell-off,” rather than a sudden collapse of fundamentals. Bernstein gives CRCL an approximate $190 target price, but this figure is marked as unverified information, and their detailed rating language has also been included in the range of prohibited excessive quoting. However, based solely on public qualitative judgments, they reach a consensus with Citi on a key point: regulatory uncertainty should be seen as a short-term discount factor, rather than a verdict on the entire business model.

From the sell-side perspective, the real game lies in how to price this uncertainty. Some institutions choose to maintain higher target prices but explicitly remind in their reports of “high risk,” which effectively serves as a signal: current prices have shown significant discounts, and regulatory shadows represent both pressure and potential arbitrage trading opportunities. Others may be more cautious, believing that until the text and execution standards are clarified, the market will continue to exert pressure on such targets, leading to valuations being persistently below fundamental levels.

This divide reflects two different betting approaches: one bets that “once the regulatory boot drops, compliance paths will bring about a new round of institutional premiums”; the other worries that regulation will continue to stretch uncertainty, keeping such assets in a defensively passive “policy discount range” for the long term.

Who Will See Their Earnings Squeezed: Platforms, Users, or Issuers?

To see how CLARITY might reshape the interest structure, one first needs to break down the current income chain surrounding USDC. The existing model can roughly be summarized into three layers:

● The first layer, government bond interest belongs to the issuer. Circle uses real dollar reserves to purchase U.S. Treasury bonds and other safe assets, earning interest income. This is the upstream and also the most fundamental source of income;

● The second layer, platforms redistribute income. Distribution platforms like Coinbase collaborate with Circle or other liquidity providers, repackaging part of the interest margin into income products for users while taking a certain fee or price difference in between;

● The third layer, users receive part of the return. End users holding USDC obtain a return of several percentage points annually through staking, locking up, or “automatic interest” products, which for them resemble a “digital dollar version of a money market fund.”

Under the CLARITY framework, if there is a substantive tightening of “passive income,” it is the second and third layers that are intuitively squeezed. The interest margin space that can be packaged as quasi-wealth management products at the platform end will be compressed, meaning that user-side interest expectations will be significantly lowered, and they may even be forced to exit products characterized by “automatic interest without operation.” Meanwhile, for Circle, which is at the highest level, its earned interest margin on the reserve side has not been directly denied. At least according to the current draft's public narrative, there is no statement saying, “restrictions on issuers earning interest through government bond reserves.”

In this constraint, the response paths for distribution platforms are likely to shift:

● Transition from “passive income” to fee reductions, for example, holding or using USDC can enjoy lower transaction fees, guiding users to benefit through activity rather than balance size;

● Through transaction rebates, points systems, payment discounts, convert into behavior-linked incentives, thus continuing to pass benefits to users within a compliant framework, rather than directly promising static annual returns;

● Explore customized income arrangements for institutional or high-net-worth clients, reducing dependence on passive income products for retail investors while providing fuller disclosure and setting higher thresholds.

Thus, a more pivotal narrative begins to emerge: the regulatory target may not simply be to “suppress” one side, but rather reshape the distribution order of earnings. In the new order, upstream reserve earnings still exist, but the channels through which, to what extent, and in what compliant packaging form they are transmitted to end users will be redesigned. The platform side will transition from “inactive wealth management distributors” to “compliant incentive designers,” while Circle will need to negotiate its voice in the value chain with platforms and regulators in this process.

After the Storm: Repricing Circle's Valuation and Long-Term Observation Indicators

Returning to the initial question: has Circle been “wrongfully killed” by the market this time, or has the fundamental faced a systemic blow? Combining the above analysis, it can be seen that this round of sell-offs stems more from a collective misreading and extrapolation of expectations regarding regulatory targets, rather than a direct denial of Circle's reserve income model. The CLARITY Act aims at passive income products and distribution-side risks, rather than denying the very issuance logic of “using safe assets as reserves to earn interest.”

What truly determines long-term impact is not the current sensationalist panic interpretations, but rather subsequent how the regulations are implemented and the strictness of enforcement. If the final text raises thresholds in information disclosure and suitability management without completely closing off income transmission channels, then Circle and the platforms have ample room to adjust through product structures and incentive methods, seeking new balance points; conversely, if boundaries are drawn too narrowly, some income narratives constructed around USDC will be forced to rewrite, but this still mostly affects the profit model on the distribution side.

In the future, the relationship between Circle and various platforms will also be reshaped: under a compliant framework, how to reconstruct income products, transitioning from “annual returns” to “rate discounts, functional benefits,” will become a continuing product and regulatory negotiation. Who can better understand regulatory intentions and design compliant yet attractive alternative products will gain higher pricing power in the new order.

For investors and industry participants, a necessary self-reminder is to distinguish between policy noise and commercial essence. In the coming observations, at least three indicators are worth long-term monitoring:

● Reserve income performance: whether Circle maintains its interest margin capabilities on Treasury bonds and other assets, whether reserve scale and income forecasts (like the mentioned but unverified $2.64 billion) show structural changes;

● Compliance progress rhythm: the release path, effective timeline, and implementation details for CLARITY and related supporting rules, especially concerning the boundaries drawn between passive income and behavioral incentives;

● Institutional pricing changes: how target prices and risk tags from sell-side institutions such as Citi and Bernstein adjust with regulatory clarity, whether viewing current events as a one-time shock or continually reducing long-term expectations.

Only when true turning points are seen in these core variables can Circle's valuation repricing be considered complete, and the medium to long-term trends post-storm will gradually become clearer.

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