Coinbase move to support USDC shows importance of interest income to bottom line

Quick Take

  • Berenberg Capital Markets analyst said Coinbase’s move “makes sense,” given the exchanges reliance on USDC interest income.
  • The move, however, is unlikely to significantly dampen USDC’s market decline, according to Gartner.

Coinbase's move this week to shore up USDC by taking an equity stake in Circle shows just how important interest income from the stablecoin is to the company's bottom line. 

The announcement came amid declining market share for USDC and fresh competition from new competitors such as payments giant PayPal. Coinbase highlighted the "fundamental importance of stablecoins to the broader cryptoeconomy."

“Coinbase providing Circle with some measure of support makes sense,” said Mark Palmer, a digital assets and fintech research analyst at Berenberg Capital Markets.

"Interest income from USDC represented almost 23% of the company’s net revenue in the second quarter, and USDC’s market cap has only continued to decline," he added. "Coinbase is relying upon this revenue, especially as its transaction-based revenue remains at depressed levels."

'Taking' a stake

Coinbase acquired its stake in Circle Internet Financial on "a non-cash basis," according to a person familiar with the matter.

While the size of Coinbase’s stake in Circle has not been disclosed, the new setup also replaces the Centre Consortium. The group, which was founded by Circle and Coinbase in 2018, was meant to serve as a foundation for a number of firms contributing to the issuance of USDC.

"We assume the changes, including Coinbase’s new equity stake, will better align and incentivize both companies to grow the value of Circle’s business," said Devin Ryan, Director of Financial Technology Research at JMP Securities.

Although it beat analysts' estimates, Coinbase reported this month it generated $151 million in USDC stablecoin interest income during the second quarter, down from $199 million in the previous quarter. The company said USDC’s 28% decrease in market capitalization was a contributing factor.

USDC's market decline

USDC’s share of the stablecoin market has dropped significantly since the beginning of the year, with the amount in circulation falling to $24 billion from about $42 billion, according to The Block Research. Meanwhile, Tether’s stablecoin has grown its market share.

Gartner senior blockchain industry analyst Avivah Litan said she doesn’t expect Coinbase’s move to substantially slow USDC’s market decline.

"Coinbase and Circle have little influence over user appetite for cryptocurrencies and stablecoins, which have been mainly used to support DeFi trades," Litan said. "The bottom line is money is flowing out of the chains, and support for more chains won’t make it flow in."

Coinbase and Circle said yesterday that USDC will launch on six new blockchains sometime between September and October,

Earlier this month Circle said it was banking on $1 billion in cash reserves to weather USDC's decreasing market as competition among stablecoins stiffens. Fintech giant PayPal recently announced it was launching its own stablecoin.

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