Coinbase and Circle fall 10% as CLARITY Act fails. Their stablecoin income runs on rates

Coinbase fell 10.1% to $172.11 and Circle Internet Group fell 11.5% to $86.25 on Tuesday after the Senate voted 49-50 against advancing the CLARITY Act, the crypto market-structure bill the industry spent the year pushing through Congress. The two stocks lost about $7.9 billion of market value between them, by TECHi's arithmetic from Nasdaq.com data, and bitcoin slid 3.8% to about $75,500, per CoinGecko.

The Senate took away the regulatory catalyst. It did not touch the part of both businesses that runs on interest rates, and that part is about to get a raise. Circle earns almost all of its revenue from the Treasury bills and cash behind USDC, and its own filing estimates that a one-point rise in rates adds $737 million a year to that income. Stablecoin revenue was a quarter of Coinbase's net revenue last quarter, while its trading revenue fell 22%. The Federal Reserve is expected to raise rates on Wednesday.

Why Coinbase and Circle stock fell: the CLARITY Act's 49-50 vote

The procedural vote needed 60 senators and got 49. Every Democrat voted no, joined by four Republicans, Susan Collins of Maine, Josh Hawley of Missouri, Jerry Moran of Kansas and Thom Tillis of North Carolina, and Tillis entered a motion that allows the bill to be brought back for another vote, NPR reported. Democrats who had negotiated for months voted against it over the ethics dispute about President Trump's crypto holdings. "We got close to resolving some of the toughest outstanding issues around law enforcement and national security, but ultimately, the failure to address this fundamental conflict of interest made it impossible for me to support moving forward," Sen. Mark Warner of Virginia said, The Block reported. Kirsten Gillibrand, Catherine Cortez Masto, Angela Alsobrooks and Cory Booker, all seen as possible votes, also voted no.

The market had started to price the defeat before the roll call. On Monday, TECHi laid out the cloture math and the ethics deal, including Bernstein's view that a pass was not priced in and prediction-market odds near 30%. Those odds kept falling into the vote, to about 15% on Tuesday by Yahoo Finance's count, and Coinbase was already down about 6% before the Senate met. The rest of the sector followed it down. Strategy fell 5.4%, Galaxy Digital 7.6%, Bullish 5.4%, Gemini 9.5% and Robinhood 3.4%, against a 0.65% decline in the Nasdaq 100 tracker, per Nasdaq.com closing quotes. Coinbase traded 18.7 million shares, more than twice its average volume.

What comes next is slow. The House has canceled its last two weeks of September and would not vote before the November elections, and the SEC and CFTC are pressing ahead with their own rulemaking, The Block reported. Tillis's motion keeps the bill alive, but a second vote needs floor time and at least 11 more senators than the first one found.

What Coinbase's filing says is at stake

The bill mattered most for the line that has been shrinking. Coinbase's transaction revenue fell 21.6% to $599.2 million in the June quarter from $764.3 million a year earlier, and total revenue fell 18.5% to $1.22 billion, according to its quarterly filing. The company posted an operating loss of $113.5 million. Transaction revenue is where a federal market-structure law would have shown up first, in clearer rules for which tokens an exchange can list and which regulator oversees them.

Stablecoin revenue held up far better. It was $292.1 million in the quarter, down 5% from $308.9 million, and made up 25.3% of Coinbase's $1.15 billion of net revenue, by TECHi's arithmetic from the filing. That revenue is Coinbase's share of the interest earned on USDC reserves, which means it moves with interest rates and with how much USDC sits on Coinbase's platform, not with what happens on the Senate floor.

That share is slipping at the margin. Circle paid Coinbase $7.7 million less in distribution costs in the second quarter than a year earlier "due to a decrease in Coinbase's share of the total average USDC on-platform balances," according to Circle's filing, even as Circle's payments to other distribution partners rose. For Coinbase stock, the question after Tuesday is whether the stablecoin line can carry more of the business while trading and listings wait for Congress.

What the CLARITY Act's failure does not change: USDC rewards

The stablecoin fight inside the bill was about rewards, and Coinbase pays a lot of them. The company spent $119.1 million on USDC rewards to customers in the June quarter, up 16% from $102.5 million a year earlier, booked as a sales and marketing expense in its 10-Q. Set against $292.1 million of stablecoin revenue, that leaves about $173 million, by TECHi's arithmetic, which is the figure a rewards restriction would have squeezed.

The final CLARITY text did not ban those payments. It kept the prohibition on paying interest on idle stablecoin balances, allowed usage-based rewards, and gave the Treasury secretary an 18-month power to impose a circuit breaker on rewards if they drained deposits from community banks, as TECHi reported from The Block's reading of the final draft on Monday. With the bill stalled, Coinbase's rewards program stays under the rules already in place, without that tripwire. Banks that lobbied against rewards through the spring lost nothing on Tuesday, and neither did Coinbase's rewards line.

Circle's framework is also already law. Its filing describes national stablecoin legislation, "including the GENIUS Act," as expected to provide increased certainty and accelerate institutional adoption. The CLARITY Act was the next layer, covering how the broader crypto market is supervised. Its failure delays the growth case for USDC in trading, payments and tokenized assets. It does not change how Circle is allowed to issue USDC or earn money on the reserves.

Circle's income statement is a rate trade

Circle is even more exposed to rates, and in a way the Senate vote does not change. Reserve income was $667.7 million of its $701.3 million of total revenue and reserve income in the June quarter, about 95%, according to its 10-Q. It paid $410.4 million of that out in distribution and transaction costs, leaving revenue less distribution costs of $289 million, a 41% margin, and net income from continuing operations of $48.2 million. USDC in circulation grew 19% to $73.3 billion, while the reserve return rate fell to 3.5% from 4.1% as rates came down over the year.

The filing spells out what happens when rates move. Starting from an average yield of 3.49% in June, a 100-basis-point increase would add an estimated $737 million to reserve income over 12 months and $360 million to distribution and transaction costs, Circle said, assuming USDC in circulation stays at its June 30 level. Circle earns reserve income "at interest rates close to the prevailing SOFR," the short-term benchmark that follows the Fed.

A quarter-point hike on Wednesday would therefore add roughly $184 million a year to reserve income and $90 million to distribution costs, or about $94 million to what Circle keeps, by TECHi's arithmetic from those estimates and before any change in USDC balances. That is small next to the $2.8 billion of market value Circle lost on Tuesday. It is not small next to $48 million of quarterly net income.

The Fed hike and a 5% Treasury: good for reserve income, hard on crypto prices

Traders are pricing about a 92% chance of a quarter-point Fed increase on Wednesday, the first since July 2023, Reuters reported. The 10-year Treasury yield ended Tuesday near 5.01%, per CNBC data, after touching its highest level since 2007 in the morning. Because USDC reserves earn rates close to SOFR, the Fed's policy rate matters more to Circle than the 10-year does, but both point the same way.

The same rates cut the other way for the rest of the crypto trade. Higher yields raise the cost of holding assets that pay nothing, and bitcoin, which TECHi tracks on its bitcoin price page, fell below $76,000 on Tuesday. Lower crypto prices and thinner trading are what shrink Coinbase's transaction revenue. The combined picture is a company whose steadier business benefits from the Fed and whose larger, more volatile business is hurt by it, just as the legislation that was supposed to steady that business stalled.

For Circle, the risk is USDC growth rather than rates. Its reserve income is a product of the rate and the balance, and the bill's market-structure framework was expected to widen where regulated dollar stablecoins could be used. USDC's market value was about $73.7 billion on Tuesday, per CoinGecko, little changed from the end of June.

What comes next for Coinbase, Circle and the CLARITY Act

Three dates matter. The Fed's decision on Wednesday sets the reserve rate for the fourth quarter, and each quarter point is worth roughly $94 million a year to Circle on its own estimates. The Senate's calendar decides whether Tillis's motion to reconsider produces a second vote before the elections; without one, the House will not act until after November. And both companies' next quarterly reports will show whether USDC balances kept growing without the law, and whether Coinbase's stablecoin revenue, a quarter of its net revenue, rose with rates while trading revenue fell. TECHi's Coinbase quote page tracks the stock in the meantime.