Morgan Stanley Initiates Circle $66 PT: Fed Risk Weighs 2026

Business Overview

Circle issues USDC, the second-largest stablecoin, which currently holds approximately $70 billion in value as of February 1, 2026. USDC is backed 1:1 by US dollar reserves held in the Circle Reserve Fund, managed by BlackRock with approximately 20 basis points management fee. Circle earns yield through these underlying cash equivalents invested at near-SOFR rates.

We believe Circle's goal of creating a new internet financial system is compelling, though we think the market will be slow to reward the value of Circle's network until further proof of adoption and displacement of legacy systems begins to accelerate. Circle management estimates crypto-related activities account for 50-55% of USDC outstanding, with approximately 15% in decentralized finance protocols, 25% in the dollarization bucket, and 5-10% in miscellaneous categories.

Circle's Product Ecosystem

USDC is Circle's flagship product, launched in 2018, accounting for the vast majority of revenue today. As of 3Q25, USDC generated $711 million in reserve income to Circle. The company's highly fixed cost structure means interest rate movements remain a significant input until it can monetize ancillary offerings.

Circle Payments Network (CPN) is the company's payments platform geared toward cross-border, real-time payments. Circle does not currently monetize CPN, though management has indicated intention to begin doing so imminently. We think CPN momentum will be an important focus for investors as it represents Circle's share of stablecoin usage measured by payment transactions.

Arc is Circle's proprietary Layer-1 blockchain, one of the most important assets determining success of the Circle ecosystem. Arc is compatible with the Ethereum Virtual Machine, uses USDC as native gas, settles in approximately 1 second versus 10-15 minutes for Ethereum, and was architected for more consistent fees.

Total Addressable Market

Near-Term TAM: $3.6 Trillion

We believe Circle's near-term TAM includes several key categories. FINRA-reported margin debt totaled $1.2 trillion as of December 2025, following Interactive Brokers' announcement to allow 24/7 stablecoin funding. Consumer remittance represented $905 billion in 2024 volume according to Visa. Outstanding crypto derivatives account for approximately $800 billion, and bank deposits in high-inflation emerging markets (Argentina, Turkey, Ghana) represent about $720 billion.

Within these markets, we believe Circle is very well positioned given its open approach to regulation, compliance, and reserves. Notably, Circle's earnings will be partially influenced by propensity to hold stablecoins versus off-ramping into fiat currency.

Long-Term Opportunity

Our longer-term TAM estimate includes Circle's non-USDC products, most notably Circle Payments Network. In a bull-case adoption scenario, we believe stablecoin TAM could include the entire cross-border payments market, set to process approximately $44 trillion of non-wholesale volume in 2032, assuming all involved constituents do not off-ramp into local currencies.

Regulatory Landscape

CLARITY Act Slowdown Driven by Yield Debates

Following passage by the House, the CLARITY Act is stuck in the Senate. Our expert checks suggest yield prohibition debates are the factor slowing the bill down, and lawmakers may revisit the bill in mid-2026. While the GENIUS Act prohibited payment of yield to stablecoin holders, banks make the argument that even rewards pass-through (like Coinbase One's USDC Rewards) put regional and community banks at risk of deposit flight.

The GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act bars payment stablecoins from paying interest, while yield-bearing stablecoins and tokenized money market funds are not considered permitted payment stablecoins. Circle received conditional OCC approval for a National Trust Charter on December 12, 2025, which increases transparency but does not create incremental on-chain demand yet.

Competitive Regulatory Dynamics

On January 27, 2026, Tether launched USAT, its dollar-backed, GENIUS-compliant stablecoin. Given Tether's scale and brand name within crypto, we view the company as Circle's most formidable competitor, now capable of operating under GENIUS in direct competition with USDC. This launch attacks Circle's regulatory moat head-on.

Stablecoin Use Cases & Key Debates

Are Stablecoins More Efficient Than Traditional Systems?

The public's perception that stablecoins are structurally less expensive than traditional rails lacks nuance. The cost advantage depends on transacting currencies (G10-G10 versus exotic pairs) and on- and off-ramp costs. Our analysis of cross-border take rates from Wise shows the average cost to convert between G10 currencies was 42 basis points (including Wise's margin), and 125 basis points for selected exotic currencies.

Stablecoins offer faster settlement time and 24/7/365 operability, both theoretically more efficient than traditional rails. According to a Stanford paper analyzing approximately 41 million stablecoin transactions, 96.3% were completed in under 1 hour, and 99.4% within one day—significantly ahead of the FSB's 75% sub-hour completion goal.

We don't see widespread use for stablecoins in cross-border payments yet. While Circle's StableFX does cater to other currencies, liquidity is provided by CPN users, meaning off-ramp costs will be a debate until CPN grows enough to offer economical spreads.

Agentic AI and Micropayments

We think the most compelling secular bull case for stablecoins is usage by AI agents. As the world becomes more automated and interconnected, we believe stablecoin use cases will begin to emerge. The question "How do we empower agents to transact on our behalf?" will naturally arise as AI proliferates across American corporates.

Coinbase recently released x402, a derivative of HTTP status code 402 (Payment Required). With low fees and instant settlement, we view x402 development as a key determinant of stablecoin payment volume growth. Circle's relationship with Coinbase makes USDC the front-runner for stablecoins supporting the protocol.

Financial Analysis & Valuation

Coinbase Partnership Economics

The Centre Consortium, co-founded in 2018 by Circle and Coinbase, was dissolved in 2023. Coinbase ceded all USDC governance rights to Circle in exchange for full yield pass-through for all USDC held on Coinbase, and 50% pass-through of all third-party yield. Per Circle's filings, the company paid Coinbase $910 million in 2024, representing approximately 54% of 2024 revenue.

We do not believe the partnership will be significantly renegotiated, though the three-year cadence could become an event certain investors trade around given the significance of the partnership's impact on P&L. Circle has much more negotiating power than during prior negotiations given recent USDC growth.

Valuation Methodology

We initiate Circle at Equal-weight with a $66 price target, derived from applying a 25x multiple to our CY28E diluted EPS estimate of $2.63. For reference, Mastercard and Visa trade at 19.6x and 20.3x respectively (compared to 5-year averages of 30x and 26x). We view them as the best comparables to Circle given cost structure and network dynamics, although Circle is a higher-growth business with significant embedded regulatory and macro risk.

The network Circle is building could produce immense value for businesses, consumers, and governments while opening new payment types not previously possible. However, Circle's short-term macro exposure and relative scale warrant a slight discount to higher-growth fintech names. We also view Circle in its current form as less entrenched than Visa/Mastercard have become.

Key Catalysts & Risks

Potential Positive Catalysts

1. Crypto market recovery: USDC liquidity remains heavily concentrated (50-55% of total) in crypto markets. A recovery in crypto markets following recent drawdown would likely increase USDC outstanding significantly.
2. Re-negotiation of Coinbase agreement: Circle has much more negotiating power than during prior negotiations given recent USDC growth. While unlikely to reduce pass-through yield significantly, the company could seek concessions on payment base yield.
3. Regulatory developments: Positive interpretation of GENIUS and passage of CLARITY would remove significant overhang. The PARITY Act focusing on tax treatment of stablecoin transactions could also provide clarity.
4. Other revenue acceleration: CPN monetization and ancillary services growth would validate the long-term network thesis and reduce reliance on reserve income.

Potential Negative Catalysts

1. Rate cuts: We view rate cuts as an aggressive, multi-quarter headwind to both Circle's earnings and marginal flows into the stock. With timing and number of front-end rate cuts in 2026 a moving target, investors face near-term earnings risk.
2. USAT competitive pressure: Tether's GENIUS-compliant stablecoin launch directly competes with USDC. Given Tether's scale and crypto brand (crypto activities account for 50-55% of USDC), loss of market share could pressure valuation.
3. Regulatory setbacks: Bank lobbyists pushing for extension of yield prohibition beyond issuers to any platform offering economic return on payment stablecoins. Coinbase recently withdrew support for current CLARITY version over yield treatment.
4. Venezuelan regime change: Following US actions resulting in capture of President Maduro, stablecoins like USDC and USDT could experience outflows if Venezuela's currency stabilizes.

Investment Conclusion

We initiate coverage of Circle at Equal-weight with a $66 price target, reflecting a cautious stance given the uncertain regulatory pathway, current valuation, and heavy reliance on rate-sensitive reserve income. While Circle is well-positioned among independent stablecoin issuers given its regulatory compliance approach, we believe investors will wait for clearer catalysts before rewarding the stock with higher valuation.

The company faces multiple near-term headwinds including potential rate cuts impacting reserve income, the CLARITY Act stalling in the Senate, and intensifying competition from Tether's USAT launch. With reserve income accounting for approximately 96% of revenue and USDC outstanding heavily tied to crypto market performance (50-55%), earnings visibility remains limited in the current environment.

To become more constructive on Circle, we would look for: (1) significant acceleration of "other revenue" demonstrating monetization of CPN and ancillary services; (2) positive GENIUS interpretation and passage of CLARITY providing regulatory clarity; and (3) crypto market cap and USDC market cap growth. Conversely, we would become incrementally negative upon loss of stablecoin market share, lack of short-term USDC growth affecting out-year estimates, or evidence of weak customer interest in implementing the technology.

The Circle bull case centers on the compelling vision of a new internet financial system powered by stablecoins. However, the path to realizing this vision faces significant regulatory, competitive, and macroeconomic challenges that must be resolved before the market assigns premium valuation.

Key monitoring points for investors include quarterly USDC market cap trends, CPN volume growth and monetization progress, regulatory developments around CLARITY and GENIUS implementation, competitive dynamics with Tether and potential bank-issued stablecoins, and broader crypto market performance. The stock's elevated volatility (annualized vol of 83-85%) suggests investors should carefully consider position sizing and risk management.

While we acknowledge Circle's strong position in the emerging stablecoin ecosystem and the potential for significant long-term value creation, we believe a wait-and-see approach is prudent until greater clarity emerges on regulatory framework, revenue diversification, and sustainable USDC growth independent of crypto market volatility.