Morgan Stanley Cuts Circle Target to $38, Citing USDC Pressure From Tokenized Yield Rivals

Circle shares slid about 6% Monday after Morgan Stanley downgraded the stablecoin issuer to underweight and cut its price target to $38. The new target marks a 64% reduction from the prior $106, according to the original report. The bank framed the move as a broad reset of Circle's earnings outlook, signaling deeper challenges for the stablecoin model beyond near-term volume swings. Morgan Stanley pointed to three main drags on long-run profitability: slowing growth in USDC, increasing pressure on reserve income, and a revenue mix that is shifting toward lower-margin transaction fees. USDC's market capitalization remains well below its 2022 peak. While it still holds a leading role in DeFi, that strength has not translated into rapid recent expansion. The bank also expects Circle's yield on its Treasury-heavy reserves to compress further, reducing a high-margin income stream that has historically supported results. Transaction revenue is increasing, but margins are thinner. Unlike Tether’s model, which has leaned heavily on large reserve earnings, Circle's profitability hinges more on USDC becoming a widely used payment and settlement rail—a strategy that has produced uneven outcomes as the market matures. Competitive pressure is also expanding beyond traditional stablecoins. Tokenized money market funds, tokenized bank deposits, and projects such as Open USD are increasingly targeting use cases that stablecoins once dominated. When on-chain Treasury-backed tokens from firms like BlackRock or Franklin Templeton can deliver yield directly, the rationale for holding non-yielding USDC weakens. Recent tokenization milestones—including JPMorgan's live settlement with Ondo and total on-chain real-world assets surpassing $20 billion—underscore that institutional infrastructure is already operating at scale. Morgan Stanley cited these tokenized alternatives as a direct threat to Circle's economics, arguing the shift is no longer theoretical as billions are already being settled. Regulatory uncertainty adds another layer of risk. Washington's approach to stablecoin legislation remains unsettled, with major banks reportedly seeking late-stage changes to a landmark crypto bill ahead of a Senate vote. A framework that favors bank-issued tokenized deposits, or one that imposes strict reserve requirements, could force another reset of Circle's revenue model. Circle is widely viewed as one of the sector's more compliant and transparent issuers, but that posture does not eliminate legislative risk. Regulatory clarity could arrive in a form that benefits the very institutions accelerating into tokenized deposits—an outcome that may be constructive for blockchain-based payments overall but challenging for a standalone stablecoin issuer. USDC retains key strengths, including a strong position in Ethereum-based DeFi and distribution advantages through exchange partnerships. It has also avoided the destabilizing depegs that plagued smaller algorithmic projects. Still, the market reaction to Morgan Stanley's note suggests investors are increasingly pricing in a landscape where Tether and yield-bearing alternatives pressure Circle from multiple directions. The central question is whether Circle can adapt quickly enough if the market shifts away from a single dominant on-chain dollar. If USDC becomes one settlement token among many rather than the default standard, Morgan Stanley's $38 target may not be the end of the rerating—it may be the beginning of a broader repricing for an industry that looked far more insulated a year ago.