Morgan Stanley has downgraded Circle Internet Group to underweight and dramatically cut its price target to $38 from $106, triggering a 6% drop in the company’s shares on Monday. The downgrade reflects a deep reassessment of the stablecoin issuer’s earnings power, with analysts flagging decelerating USDC growth, mounting pressure on reserve income, and intensifying competition from tokenized money market funds.
Circle’s flagship stablecoin, USDC, remains the second-largest by market capitalization, but its expansion has notably lagged behind Tether’s USDT. Morgan Stanley pointed to a weaker long-term earnings trajectory, anchored by three specific headwinds: slower USDC adoption, compression of yields on the Treasury-heavy reserves that generate most of Circle’s revenue, and a potential shift toward lower-margin transaction fees. The bank’s call is more than a routine adjustment—it signals that the zero-yield stablecoin model may be structurally challenged as the market matures.
A critical factor is the rise of tokenized alternatives. Products like BlackRock’s BUIDL and Franklin Templeton’s on-chain money market funds offer yield directly to holders, undermining the appeal of holding non-yield-bearing stablecoins for settlement or cash management. These instruments have gained traction, with total on-chain real-world assets surpassing $20 billion and major institutions like JPMorgan already settling live transactions with Ondo Finance. Morgan Stanley explicitly cited such tokenized funds as a direct threat to Circle’s economics, warning that they could divert liquidity and compress the company’s market share.
Regulatory uncertainty adds another layer of risk. While Circle has positioned itself as the compliant, transparent issuer, pending U.S. legislation could tilt the playing field in favor of bank-issued tokenized deposits or impose stringent reserve requirements that limit Circle’s flexibility. The very regulatory clarity the company has sought could end up benefiting traditional financial giants now entering the space.
Despite the grim outlook, USDC continues to dominate Ethereum-based DeFi, and Circle’s exchange partnerships provide a distribution advantage. However, the 6% share-price slide suggests investors are increasingly pricing in a future where Circle is squeezed between Tether’s dominance and a growing array of yield-bearing tokens. The downgrade may represent the start of a broader repricing for standalone stablecoin issuers, rather than a one-off valuation reset.
