Circle, the issuer of the USDC stablecoin, has published a preliminary prospectus for its stock market IPO. The figures show attractive revenues of almost $1.7 billion for 2024, but operating income of just $167 million. While Circle isn’t parsimonious in its spending, the massive dent is the monies paid to Coinbase, which previously had a 50% stake in the stablecoin. Circle spent more than a billion in 2024 in distribution costs, most of which went to Coinbase. The biggest concern is whether this might constrain future opportunities.
Despite despite increasing competition, there are many opportunities given USDC is the leading regulated stablecoin. In late 2024 it entered into a deal with Binance, although the prospectus revealed this involved a significant upfront payment. For example, it mentioned a “$74.1 million increase in other distribution incentive costs related to new strategic distribution partnerships, including our upfront, one-time fee to Binance.”
The USDC stablecoin opportunity in capital markets
While stablecoins are still heavily linked to crypto markets, USDC is in pole position to take advantage of a broader use of tokenized money market funds and stablecoins in capital markets, particularly the use of tokenized assets as collateral for margin. Circle recently acquired the yield earning tokenized treasury firm Hashnote, which has its USYC fund offering. Additionally, Circle entered into a deal with New York Stock Exchange owner ICE. In its prospectus it highlights that this combination of stablecoin and money market fund (MMF) means it can instantly redeem the tokenized MMF on demand, a key advantage that we’ve previously highlighted.
Some might note that USYC has lost its top spot amongst tokenized money market funds since acquisition, with assets under management almost halving, and is now down in third spot. USYC was always vulnerable to such movements because at the time of the acquisition, 97% of the token was used as collateral for the Usual stablecoin which already had plans to diversify. The combination of USYC and the ICE deal are far more important.
The USDC stablecoin was originally part of the Centre Consortium, which planned to have other partners, starting with Circle and Coinbase, but it stayed that way. That was until 2023 when Circle took control of the stablecoin and Centre was dissolved.
The Coinbase shackles on USDC
Without outlining all the details, the prospectus provides some of the deal’s highlights, although they are not the easiest to decipher. Circle paid $209.9 million in the form of approximately 8.4 million shares for the other half of Centre. And then there’s the revenue split.
Circle gets a small first cut of revenues to cover very basic costs. Then there is a revenue split based on amounts held in custodial wallets by Circle and Coinbase. And beyond that, presumably for off platform holdings, Coinbase gets half. The amount of USDC held by Coinbase has grown from 5% in 2022 to 20% in 2024, and as a result, distribution costs have risen.
We’ve written several times about new stablecoins such as the Global Dollar and M, which aim to share revenues with distributors. Circle’s challenge is its deal with Coinbase that limits its scope to share revenues with other parties in the near term, likely until 2029 at the least. The prospectus description about the deal could use greater clarity. It mentions an initial three year term, which can be renewed for another three years. It’s unclear whether there’s a rolling renewal after that, although there are termination options. But Coinbase would only want to terminate if it launched its own coin.
Looking at the Binance deal, how much will Circle get for a one off upfront payment? Is there anything preventing Binance doing other deals that involve revenue sharing? Today Binance has stablecoin balances of almost $38 billion, split between Tether ($30.7bn), USDC ($5.5bn) and FDUSD ($1.67bn). It has $2 billion of its own treasury in USDC versus around $1.3bn in Tether. If Binance could earn 2% on its total holdings that would be worth $750 million a year.
Why didn’t Coinbase take equity?
Stepping back, both Circle and Coinbase might have been better off financially if instead Coinbase had taken a large equity stake, rather than a cut of revenues. Circle’s valuation would be significantly higher. But strategically, that could have been problematic for deals with other exchanges and the dilution effect on existing stockholders. Perhaps they could have created a special class of stock and agreed to offload most of it in an IPO. With a smart group of people, there was doubtless much strategizing on these points.
But for the Coinbase deal, one could cheekily compare Circle’s $156 million net income with Tether’s $12 billion in profit last year. Now Tether takes big risks, too big for a stablecoin. So we extrapolated Circle’s top line onto Tether, and given Tether’s far higher issuance, projected an equivalent of $5.6 billion in revenues. Tether had less than 100 employees compared to Circle’s 900 team. Hence, we’d estimate that a prudent version of Tether would have earned between $4.5 and $5 billion in 2024.
Without the millstone of Coinbase, that could have been what Circle might have looked like this year. So the conundrum with Circle is its massive opportunity compared to a pretty pedestrian bottom line. The unanswered question is whether the Coinbase deal extends beyond six years.
