Author: Nancy, PANews

After years of preparing for an IPO without success, Circle, the issuer of the stablecoin USDC, has recently submitted an application to the U.S. SEC to list on the New York Stock Exchange. However, issues such as a nearly halved valuation, revenue heavily reliant on U.S. Treasury bonds, and high commission fees eroding profits have raised market doubts about Circle's business prospects.

Valuation Nearly Halved, Selling Equity to Coinbase for Full USDC Issuance Rights

On the eve of the U.S. House of Representatives planning to amend and vote on the stablecoin regulatory bill GENIUS Act, documents on the SEC website showed that Circle submitted an S-1 filing to the SEC for an initial public offering, with the stock ticker "CRCL," and applied to list on the New York Stock Exchange. Meanwhile, Circle has hired JPMorgan and Citibank to assist with its IPO; both institutions were also part of the financial advisory team for Coinbase's IPO.

However, Circle's prospectus did not disclose specific details about the number of shares to be issued or the target price range. Circle's valuation has fluctuated several times due to market conditions and its own scale, from $4.5 billion during the SPAC merger in 2021, to $9 billion after revising the merger agreement in 2022, and down to an estimated $5 billion in secondary market trading in 2024. According to Forbes, in this traditional IPO plan, Circle's target valuation is between $4 billion and $5 billion, nearly halving from its peak.

Before the IPO, Circle has completely taken control of the USDC issuance rights. According to The Block, Circle acquired the remaining 50% stake in the Centre Consortium, previously held by Coinbase, for $210 million in stock in 2023. The Centre Consortium is the joint venture responsible for issuing the USDC stablecoin, founded by Coinbase and Circle in 2018.

Circle disclosed in the "Significant Transactions" section of its prospectus that "in August 2023, simultaneously with signing a cooperation agreement, we acquired the remaining 50% stake in Centre Consortium LLC from Coinbase." The transaction was paid for with approximately 8.4 million shares of Circle common stock (valued at $209.9 million). After the acquisition, Centre became a wholly-owned subsidiary of Circle and was dissolved in December 2023, with its net assets transferred to another wholly-owned subsidiary of Circle. Coinbase also disclosed that its acquisition of Circle equity was granted through an agreement rather than a cash purchase. This means that Circle used company shares to gain full control over USDC, and this transaction will not directly affect Circle's cash flow.

In fact, Circle began preparing for an IPO as early as 2021, reaching a merger agreement with SPAC company Concord Acquisition to go public via SPAC, but the deal was delayed due to lack of SEC approval and was ultimately terminated at the end of 2022. In January 2024, Circle revealed that it had secretly submitted an IPO application and stated that it would proceed after the SEC completed its review process.

Compared to previous attempts, the background of this application has changed significantly: the stablecoin market has achieved qualitative leaps in scale, with strong growth momentum, and stablecoins, including USDC, are increasingly influential in global finance; at the same time, the U.S. has a positive attitude towards compliant stablecoins, creating more development space for the stablecoin sector, with giants like JPMorgan, PayPal, Visa, Fidelity, and Ripple all laying out plans for stablecoins. Additionally, as U.S. crypto regulatory policies become clearer, companies like Kraken, eToro, Gemini, and CoreWeave are also seeking IPOs.

Revenue Highly Dependent on U.S. Treasury Bonds, Coinbase's High Commissions Erode Profits

However, Circle's IPO prospects are facing multiple doubts, with its core business model and profitability sparking market discussions.

Firstly, Circle's revenue is highly dependent on U.S. Treasury bond yields, and under the shadow of expected interest rate cuts by the Federal Reserve, this model is precarious. According to the IPO documents, Circle's total revenue for 2024 is projected to be $1.676 billion, with revenue growth primarily coming from reserve income, specifically interest income generated from USDC reserves, which accounts for over 99% of total revenue, and this interest income mainly comes from U.S. Treasury bonds. In a sense, Circle's revenue model resembles a U.S. Treasury arbitrage game.

Secondly, high distribution costs further erode Circle's profits. Circle's net profit for 2024 is projected to be $155.67 million, a 41.8% decrease from 2023. This decline is attributed to a significant increase in distribution and transaction costs, with Circle spending $1.0108 billion in 2024, accounting for 60.7% of total revenue, a 40.4% increase from 2023. Coinbase is the primary distribution platform for USDC. According to Coinbase's previous financial reports, in Q4 2024 alone, Coinbase generated $225.9 million in revenue from USDC, with an estimated total of about $900 million for the entire year. This means Circle is spending more to maintain the circulation of the USDC ecosystem, but revenue growth has not kept pace.

In fact, according to the S-1 filing, Coinbase, as its core partner, can receive 50% of the remaining income from USDC stablecoin reserves. Coinbase's share of the revenue is directly linked to the amount of USDC held on its exchange. The documents indicate that as the amount of USDC held on the Coinbase platform increases, its share of the revenue correspondingly rises; conversely, it decreases. In 2024, the proportion of USDC held on the Coinbase platform has significantly increased from 5% in 2022 to 20%.

Matthew Sigel, head of digital asset research at VanEck, stated that despite overall revenue growth, the significant rise in distribution and transaction costs has negatively impacted Circle's EBITDA (earnings before interest, taxes, depreciation, and amortization) and net profit. Circle has also warned that Coinbase's business strategy and policies directly affect the distribution costs and revenue sharing of USDC, and Circle cannot control or oversee Coinbase's decisions.

However, to reduce dependence on Coinbase, Circle has been actively expanding its global partnerships in recent years, including collaborations with global digital finance companies such as Grab, Nubank, and Mercado Libre.

But according to Omar Kanji, a partner at Dragonfly Capital, there is nothing to look forward to in Circle's IPO application, and it is completely incomprehensible how it is priced at $5 billion. The interest rates are severely eroded by distribution costs, the core revenue driver of interest rates has peaked and begun to decline, the valuation is absurdly high, and annual salary expenses exceed $250 million. It feels more like a desperate attempt to cash out before major players enter the scene.

"As Nubank, Binance, and other large financial institutions begin to collaborate with Circle, how the market evaluates its distribution network and Circle's net profit margin remains unclear. How the market accepts Circle partly depends on how they communicate this information to investors, how they execute the story they tell the market, which stablecoin bill prevails, and most importantly, how the market evolves and how stablecoins are adopted on a large scale. If USDC dominates, then even if their commission rates decline, Circle can still achieve a high valuation multiple because their market potential for expansion is enormous. Regardless, a few points are clear: 1) The model of sharing revenue with B2B partners will exist in the long term; 2) As the overall stablecoin market grows, the profit margins for issuers will shrink; 3) Issuers need to diversify their revenue sources, not just rely on net interest margins," said Wyatt Lonergan, a partner at VanEck Ventures.

In summary, although the improvement in the U.S. crypto regulatory environment and the boom in the stablecoin sector provide a window for listing, under the dual pressure of expected interest rate cuts by the Federal Reserve and soaring promotion costs, whether Circle can further establish competitiveness through an IPO remains uncertain.

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