On August 3, a sell-side research report from Morgan Stanley abruptly turned the decent narrative into a new chapter. As one of Wall Street's mainstream investment banks, it slashed the rating of Circle Internet Group from "Equal Weight" to "Underweight" and cut the target price from $106 to $38, representing a single adjustment of nearly 64%, almost signaling to the market that the previous valuation and growth narrative needed to be rewritten. On the day the report was released, Circle's stock price, already trading under a regulatory framework, fell by about 6%, bringing its total drop for the year to around 30%. This USDC issuer shifted from the aura of being a "compliance path model" to being a target for collective repricing by the capital market. Morgan Stanley's sharp cut was not merely a target price adjustment, but pointed to the logic of USDC’s profit model relying on interest income from reserve assets, marking the beginning of a systematic questioning on Wall Street: In an environment accelerated by regulatory constraints and product competition, can the business model and long-term profitability of USDC issuers still support past capital market expectations?
From $106 to $38: Circle Repriced
The target price cut from $106 to $38, a reduction of about 64%, is not a simple "minor adjustment" in Wall Street’s context but a formal reevaluation of valuation. The previous "Equal Weight" meant that Circle could still be compared to the average performance of the sector from the sell-side perspective, and funds could view it as a "normal risk asset" for weighting allocation within a compliance framework; now reduced to "Underweight" is equivalent to writing a clear conclusion in a research system under the constraints of securities regulation: relative to similar fintech and infrastructure assets, Circle's risk-reward ratio is no longer attractive. This combination of rating and target price will directly enter the internal risk control models and investment committee materials of institutional investors, serving as a formal basis for adjusting position weights and reassessing capital costs.
In terms of specific funding behavior, this sharp cut altered Circle's hierarchical position within portfolios: from a "sector-neutral stock" that could maintain or moderately increase holdings, it was pushed into the realm of "problematic holdings" that needed justification for not reducing positions. Against the backdrop of a stock price that has already fallen by about 30% this year, Morgan Stanley's research report contains elements of "following the market"—using a lower target price to align with the retracement that has already occurred—and may also become a trigger point for a new wave of selling pressure: the stock price fell another approximately 6% that day, reflecting that some funds converted the sell-side viewpoint quickly into trading instructions. For institutions that must explain every risk exposure under regulated investment policies, this research report provided a reason that could be written into compliance documents, formally classifying Circle from "worth waiting for data to prove" to a structural risk asset that requires careful treatment.
USDC's Growth Slows: The Myth of Reserve Income Crumbles
In Morgan Stanley's narrative, Circle is pushed from "structural opportunity" to "structural risk," with the key not lying in a season or two of cost control but in the systematic downward revision of USDC's growth expectations. James Faucette, cited by media, claimed that USDC's scale expansion is slowing, directly limiting the core growth space for "reserve income." According to a single source, Morgan Stanley's report lowered the projections for USDC supply in 2027 and 2028 by approximately 33% and 44%, respectively, marking them as pending verification, which essentially tells regulated funds: The narrative that "as long as the size grows, interest naturally piles up profits" no longer holds under foreseeable interest rates and regulatory environments.
The business model of USDC was once sufficiently simple and charming: Circle, as the issuer, concentrated the dollars exchanged by users as reserve assets, mainly allocating them to compliant USD assets and U.S. Treasury bonds, accumulating interest income as "reserve income" during periods of rising interest rates. As long as the scale continued to expand, and was managed safely and transparently within the regulated reserve management framework, this model could output considerable profits almost without risk. However, as growth slows, interest rate environments are reassessed, and regulatory constraints on reserve safety cannot be relaxed, Circle is forced to rely more on transaction and payment-related revenues—these types of income naturally have lower fees and thinner profit margins, requiring high frequency and scale and subjected to more detailed compliance scrutiny in the payment and settlement fields. Based on this, Morgan Stanley's report concluded that Circle shifted from a high-leverage profit model of "eating reserve interest" back to a low-profit margin trajectory of "doing transaction channels," and in an environment constrained by both securities and payment regulation, this transformation means that long-term profit prospects no longer carry the high growth premium that was once assigned.
Attack from Tokenized Funds and Bank Deposits
As Circle is squeezed back into the low-margin transaction channel, Morgan Stanley's report also cites a single source that identified another approaching pressure: tokenized money market funds, tokenized deposits, and a new product called OpenUSD (pending verification). These products do not treat "compliance" as an additional label but are integrated into the traditional financial regulatory framework from the moment of their inception: tokenized money market funds generally fall directly within existing securities and fund regulatory systems and must undergo continuous regulatory scrutiny and information disclosure; tokenized deposits are issued or supported by licensed banks, providing customers with visible protection under the shelter of banking regulation and deposit insurance systems. In comparison, the USDC-style single issuer model, although trying to interface with regulation, is more like a "compliance innovator" standing on the periphery of the system. Once regulatory-native tokenized products emerge at scale, this peripheral compliance advantage will rapidly become diluted.
According to the same source, along this logic, tokenized money market funds, tokenized deposits, and OpenUSD are viewed as variables that pose a direct competitive threat to USDC (pending verification): users can choose between tokenized assets directly constrained by securities, fund, or banking rules, and a portion of the demand that originally emphasized "on-chain dollars that are compliant" is attracted by stronger regulatory endorsement and traditional safety nets. For Circle, this not only means that USDC's future supply and reserve scale may face pressure, but also implies that its licenses and compliance paths no longer carry a scarcity premium: as more alternatives based on the existing regulatory framework emerge, Circle’s regulatory permission and structural design shift from a "moat" to an "entrance ticket," with the valuation narrative imposed by the capital market forced to move from "high-growth compliant unicorn" to "just one of many regulated tokenized dollar options."
From Regulatory Darling to Being Questioned: Circle's New Position
Before going public, Circle, as the issuer of USDC, maintained cooperation with regulatory agencies across multiple jurisdictions and was seen as a "representative of the compliance path": the bank license, trust structure, and dialogue with regulators allowed it to occupy a narrative high ground between crypto and traditional finance for a time. After completing the IPO and entering an environment constrained by securities regulation, the capital market subsequently packaged it as a "high-growth technology company," granting it a target price of over $106 based on USDC's global expansion and reserve asset interest, viewing it as a scarce asset with both a compliance model and fintech premium.
Morgan Stanley's direct downgrade from "Equal Weight" to "Underweight," along with the cut in target price from $106 to $38, is not just a compression of valuation numbers, but a rewriting of Circle's category: no longer tolerating an unclear profit path under the narrative of technology growth stocks, but pulling it back to the track of "low-profit margin financial infrastructure," demanding stable profits, clear cost structures, and predictable compliance expenditures. The report's questioning of long-term profit models and revenue structures indicates that the market has begun to scrutinize the balance between USDC's reserve income, transaction income, and compliance costs more harshly, rather than merely focusing on scale and growth rates. According to a single source, Circle's upcoming Q2 financial report is expected to provide more details constrained by regulatory disclosure, and investors will pay closer attention to the integrity of risk disclosure, the transparency of reserve management, and the execution of asset safety and customer fund segregation—these regulatory requirements both compress the interest margin space generated by reserves and raise compliance operating costs, directly driving the market to reprice Circle from a "storytelling tech stock" to a "financial infrastructure operator that must speak with regulatory metrics and profit data."
Rating Discrepancies and Approaching Financial Reports: The Next Round of Review
As Morgan Stanley pushes Circle toward the "Underweight" side, a unified opinion has not formed within the sell-side camp. According to a single source, TD Cowen continues to give Circle a "Buy" rating with a target price of $82 (pending verification), and against the backdrop of Morgan Stanley slashing the target price from $106 to $38, this extreme discrepancy turns Circle into a case study of public bets between research divisions on Wall Street: one side bets that USDC's network effect as a compliant dollar-pegged token can still support a high valuation, while the other regards the narrowing interest margin, business transformation, and accumulated compliance costs as an insurmountable profitability ceiling. The rating conflict itself has become a "procedural trial" of Circle's business model, forcing the market to take sides between two sets of narratives.
This gamble will soon face a round of "evidence presentation." According to a single source, Circle plans to release its Q2 financial report on August 5, 2026, and disclose more financial and operational data organized under the constraints of securities regulation (pending verification); according to another source, the current USDC circulation is approximately $73.77 billion (pending verification), while Morgan Stanley has already cut its projections for USDC supply in 2027 and 2028 by approximately 33% and 44%, respectively (pending verification), identifying products such as tokenized money market funds, tokenized deposits, and OpenUSD as competitive (pending verification). At this time, every element of Circle's revenue structure, every instance of reserve asset reallocation, and every piece of risk disclosure will simultaneously be scrutinized by sell-side analysts, institutional investors, and potential regulators as part of an "evidence chain": Can it still maintain a technology growth stock-style valuation narrative, or has it been thoroughly classified as a financial infrastructure squeezed by regulatory interest margins? More significantly, the repricing and review paths for Circle will serve as a reference for other dollar-pegged tokens and issuers of tokenized dollar products—if this leading issuer is required by the capital market to provide a more robust profit curve and detailed compliance explanation in advance, the space for later entrants in fundraising, licensing strategies, and disclosure standards will also tighten, and the valuation methods and risk tolerance of the entire sector will shift closer to more "regulated" financial assets.
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