Circle Faces Back-To-Back Catalysts As Senate Votes On CLARITY Act, And Fed Weighs Rate Hike

• The Senate is set to vote on the upcoming Clarity Act on Tuesday, a day before the Federal Reserve's rate decision is to be announced.
• Reserve income of Circle stood at around $667 million of Circle's total $701 million in second-quarter revenue, which earned a 3.5% interest rate, which could be repriced within weeks if the Federal Reserve announces a rate hike.
• Circle is also readying to launch its Arc blockchain on Wednesday as part of a push into revenue lines that contributed under 5% of Circle's total revenue last quarter.

Circle Internet Group (CRCL) enters a week where two Washington events take place a day apart, both influencing the reserve income that makes up nearly all of its revenue.

The Senate is scheduled to hold a procedural vote on the Digital Asset Market Clarity Act, commonly known as the CLARITY Act, on Tuesday afternoon, while The Federal Open Market Committee is set to make its rate decision on Wednesday, with the futures market expecting a quarter-point increase. Both these events can impact Circle's business.

The CLARITY Act 

Before leaving for its August recess, Majority Leader John Thune filed cloture on the motion to move HR 3633 on August 8. The motion became eligible for a vote under Senate procedure at 2:15 pm ET on Tuesday, one day after the chamber reconvened. It takes 60 senators to advance the vote.

If the bill fails, sponsors will have to bring the legislation back to the floor after the midterms and push the market structure framework to 2027. The Senate Banking Committee passed its own bill on May 15, with two Democrats voting for it. However, at present stablecoin, rewards, ethics rules for officials, crypto assets, decentralized finance (DeFi) liability, and anti-money laundering (AML) rules remain unresolved.

As of mid-September, the 309-page text for the banking committee currently bans interest or yield paid simply for holding a stablecoin balance, but allows rewards linked to activity. Banking groups have pushed to eliminate that carveout. 

In July, the American Bankers Association, the Independent Community Bankers of America (ICA), and dozens of state banking associations wrote jointly, urging stricter regulation, citing that banks could lose their business. 

The GENIUS Act already prohibits payment of stablecoin issuers from paying interest to holders, which is why Circle keeps the income generated by its reserves.

Circle’s New Arc Blockchain Launch

Circle also plans to launch Arc, its institutional blockchain, on Wednesday, the same day as the Federal Reserve is supposedly looking to announce its decision on a rate cut. Founding validators of the blockchain include BlackRock (BLK), Mastercard (MA), Visa (V), and DTCC. Arc and payments and network service lines are the path to less interest-rate-sensitive revenue management, said in a statement. Those lines contributed less than 5% of the total, or $34 million, in the last quarter.

Why The Federal Reserve Rate Hike Matters

The second catalyst is the upcoming Federal Reserve's rate hike decision. Circle makes most of its revenue from interest, not crypto trading. 

When customers buy its USDC stablecoin, Circle holds the dollar behind it in its short-term Treasury bills and gets to keep the interest reserve income, which accounted for nearly $668 million of the company's $701 million in second-quarter revenue. This was earned on the average reserve of $76.5 billion, which was about 95.2% of its total revenue. That makes the business sensitive to the Fed's policy. 

For every $1 billion of reserves, Circle receives about $2.5 million more a year for each quarter-point rate increase, which stands to roughly $190 million across its current total reserve pile of $74.2 billion.

If tighter policy keeps pressure on crypto markets, customers could cash out of USDC, leaving Circle with a better rate on a smaller pile of reserves, as circulation has already been slipping.

Further, according to the Fed Watch tool, around 87.3% of the markets expect a rate hike of 375 to 400 bps – the last leg before a rate cut is announced. 

Last month, Morgan Stanley cut the Circle stock from ‘Equalweight' to ‘Underweight’ rating and lowered its price target to $38 from $106, citing a weaker long-term earnings outlook tied to slower USDC growth.

CRCL’s price closed up over 0.3% on Friday. On Stocktwits, retail sentiment remained in the ‘Extremely Bearish’ zone, accompanied by ‘low’ chatter levels over the past day.

Read also: Jordi Visser Puts Bitcoin In The Same Bucket As SpaceX, Anthropic And OpenAI, Says ‘None Of Them Make Money’

For updates and corrections, email newsroom[at]stocktwits[dot]com.