Woofun AI reports that despite USDC circulating supply reaching a historic high, Circle’s profitability is being systematically eroded by revenue-sharing agreements with partners like Coinbase and BlackRock. The core paradox of the stablecoin market is that scale no longer guarantees margin retention for the issuer. Written by Cathy, the analysis reveals that for every additional dollar of USDC minted, the primary beneficiary is not Circle, but its distribution partners. This dynamic has created a structural vulnerability where increased issuance directly correlates with decreased net income for the issuer, fundamentally altering the value proposition for shareholders.

The market context highlights a stark divergence between asset growth and stock performance. In May 2026, the total stablecoin market capitalization breached $320 billion, signaling robust industry adoption. Within this expansion, the circulating supply of USDC surged to $78.1 billion, surpassing previous records set before its initial public offering. Logically, such scale should drive shareholder value.

However, during the first quarter of 2026, while earnings per share exceeded expectations, total revenue fell short of Wall Street’s thresholds. Consequently, the stock price experienced a significant pullback from its peak. The market is voting with its feet, recognizing that USDC’s success is not translating into proportional profits for Circle.

The deeper driver is the leakage of interest income to intermediaries, turning a growth story into a margin compression narrative.

To understand the revenue mechanics, one must examine how interest from USDC reserves is allocated. From 2022 to 2024, 95% to 99% of Circle’s revenue derived from purchasing short-term U.S. government bonds and engaging in reverse repos with USDC reserves. In a high-interest environment of 5%, each dollar of reserve generates $0.05 in annual interest.

However, Circle does not retain this full amount. Unlike USDT, which operates with different distribution dynamics, USDC holders expect parity in purchasing power, forcing Circle to share yields to maintain competitiveness. The entity controlling trading pairs, withdrawal channels, and wallet access holds the pricing power. Thus, the $0.05 interest is fragmented among multiple stakeholders, with Circle retaining only a minimal fraction to cover compliance, auditing, and cross-chain infrastructure costs.

The largest share of this interest goes to BlackRock and Coinbase. Approximately 80% to 90% of Circle’s reserves are held in government money market funds managed by BlackRock, which charges management fees estimated at 8 to 10 basis points. Circle itself retains a small portion, known as "issuer reserve funds," estimated at 12 to 15 basis points. Compared to the roughly 5% gross income, this retention is negligible. The real bulk of the revenue flows to Coinbase.

Under their cooperation agreement, any interest remaining after USDC is deposited on the Coinbase platform belongs entirely to Coinbase. In the first quarter of 2026, approximately $19 billion in USDC was held on Coinbase, accounting for over 25% of the total circulating supply. As a result, more than 25% of the reserve income disappeared outright from Circle’s bottom line. Per Woofun AI, the company submitted financials showing that this partner cut represents a permanent burden on the balance sheet, as Coinbase’s appetite for this risk-free income stream continues to grow.

Exchange incentives further dilute Circle’s earnings. Binance also requires appeasement to maintain liquidity. Circle paid Binance an upfront fee of $60.25 million and continued to provide monthly incentives as long as Binance held more than $1.5 billion in USDC. These payments are necessary to keep USDC competitive against other stablecoins on the exchange.

Furthermore, USDC circulating in DeFi and other channels does not retain all its interest either. That portion is split 50-50 with Coinbase. Layer by layer, the interest from one dollar travels through a complex web of fees: BlackRock takes the management fee first, Circle keeps a small base amount of a few dozen basis points, Coinbase takes all custody-related fees, Binance receives its incentives, and the remaining small amount is split in half. This fragmentation ensures that Circle bears the compliance and operational costs while partners capture the majority of the yield.

The financial reality of this model is evident in Circle’s earnings reports. In fiscal year 2024, Circle’s total revenue was $1.661 billion, of which $908 million was paid as royalties to Coinbase, accounting for 54.2% of total revenue. By fiscal year 2025, Circle’s profit margin after deducting distribution costs dropped to just 39%. For every $100 in interest earned, over $60 was paid to partners. This margin erosion is critical for investors. The earnings reports reveal that Circle’s profitability is not driven by operational efficiency but by the terms of its distribution agreements. The high costs associated with partners have become a permanent feature of the business model, limiting the upside from increased issuance.

Regulatory headwinds further complicate Circle’s ability to retain revenue. The circulating supply of USDC reached $75.3 billion by the end of 2025, but rate cuts were eroding the foundation. In the fourth quarter of fiscal year 2025, while the average circulating supply doubled year-on-year, the yield on reserves dropped by 68 basis points, leaving only 3.8%. Much of the newly added supply came from Coinbase offering holding rewards of 3.5% to 4% and Binance using liquidity incentives to attract funds.

This money stays in the accounts of these partners, and the newly generated interest flows back to them according to the agreement. The GENIUS act, which took effect in July 2025, was supposed to be an advantage for Circle, a leader in compliance. Instead, it gave partners the biggest boost yet. The act prohibits stablecoin issuers from paying any interest to holders, blocking Circle’s attempt to bypass exchanges and directly offer rewards to users.

However, Coinbase is not subject to this restriction. It packages the interest it receives from Circle as its own user rewards and distributes them legally to holders. Regulation cut off the issuer’s path to reaching users but left the door open for partners. Circle’s last bargaining chip was taken away by regulators. The only variable left is the OCC. This regulatory agency proposed supplementary rules at the beginning of 2026. If it ultimately determines that partners using royalties to reward users constitutes indirect interest payment and bans such practices, it could severely dampen demand for USDC in the short term. But in the long run, this might give Circle an opportunity to overturn the 50-50 split agreement under the guise of compliance.

Meanwhile, Coinbase’s Base chain handled 62% of the world’s on-chain stablecoin transactions in the first quarter of 2026, exceeding the total volume of all other chains combined. The more on-chain liquidity concentrates on Base, the more interest Circle loses.

Competitor contrast highlights Circle’s strategic disadvantage. Tether, with a team of around 300 people and reserves of approximately $118 billion, earned $5.2 billion in the first half of 2024, with annual earnings reportedly exceeding $10 billion. It almost monopolizes all the interest, not giving a single cent to partners. Why? Because in regions like Latin America and Africa, where severe inflation prevails, users want the purchasing power of dollars themselves and don’t care about those 4% in interest.

This basic need gives Tether absolute pricing power; it even charges a 0.1% fee for creation and redemption. Tether does not need partners because it controls the demand side in emerging markets. In contrast, PayPal does the opposite. With the peak circulating supply of PYUSD reaching $4 billion, PayPal pays holders rewards of around 4% out of its own marketing budget. It doesn’t expect to make money from stablecoins but uses them as a lubricant for its cross-border payment network.

It reduces friction in remittances in 70 international markets, shortening merchant settlements from days to minutes and keeping users trapped in their own wallets. PayPal is its own partner, integrating stablecoins into its existing utility model. Circle lacks Tether’s monopoly in emerging markets and PayPal’s direct access to end-users. It can only spend money to buy traffic from exchanges, like someone selling water when both the source and the pipes are in someone else’s hands.

Investment outlook suggests that margins and future threats will define Circle’s value. For investors focused on CRCL, what’s more important than the market cap of USDC is the profit margin after deducting distribution costs. In fiscal year 2025, it was 39%. Once it drops below 35%, it signals a red alert of increasing pressure from partners. Another indicator is the actions of competitors. Tether is reportedly preparing a compliant stablecoin, USAT, for the U.S. market. If it chooses to offer discounts to partners, Circle’s distribution costs will only increase further.

USDC is likely to continue growing and become the "electricity, water, and gas" of the on-chain world. But the profits from electricity, water, and gas never go to those who generate them—they go to those who charge for them. The Federal Reserve’s policies determine the revenue ceiling, while negotiations with Coinbase determine the profit floor. This marks a fundamental shift in the stablecoin industry, where issuers are becoming mere conduits for partner revenue rather than independent profit centers.