Morgan Stanley lowers its Circle price target to $38, saying USDC is squeezed by tokenized alternati

Circle's share price fell about 6% on Monday. Morgan Stanley downgraded its rating to underweight and slashed its target price to US$38.

According to a report, Morgan Stanley downgraded the rating of stablecoin issuer Circle to "underweight" and significantly lowered its target price by 64% from the previous US$106 to US$38. Affected by this, Circle shares fell about 6% on Monday. The move is not a simple numerical adjustment, but a drastic reassessment of Circle's profitability. For a company whose core products revolve around dollar-pegged digital assets, the investment bank's judgment suggests that the stablecoin business model is facing structural resistance, with an impact that far exceeds trading volume this quarter.

Reserve earnings are under pressure, growth slows down

This downgrade is not a simple reaction to a week of sluggish crypto market. Morgan Stanley pointed to three specific factors for the weakening of Circle's long-term earnings path: slowing USDC growth, increasing pressure on reserve income, and a shift towards lower-margin trading income. USDC's market value is well below its peak in 2022. Although the stablecoin still dominates the DeFi space, this dominance has not translated into explosive growth in the near future. The investment bank now expects that the gains Circle earns from its large holdings of U.S. Treasurys will be further compressed, eroding the high-margin income that previously supported its profits.

Transaction costs are growing, but profit margins are thinner. Unlike Tether, which historically relied on huge reserve yields and less on trading volume, Circle's path to profitability relies on becoming a ubiquitous payment track. This story has been told for years, but the results are still mixed. The stablecoin market is maturing, and maturity is often accompanied by thinner economic benefits rather than thicker ones.

New competitors are eating away at the dominance of stablecoins

The competitive landscape has changed, and not just competition from other stablecoins. Tokenized money market funds, tokenized bank deposits, and projects like Open USD are beginning to erode the use cases that were once exclusive to stablecoins. When tokens backed by U.S. Treasurys issued by BlackRock or Franklin Templeton provide income directly on the chain, the reason for holding a non-yielding USDC for trading is greatly weakened.

Recent tokenization milestones, including the real-time settlement between JPMorgan Chase and Ondo, and the total real-world assets on the chain exceeding $20 billion, suggest that institutions are building infrastructure that bypasses traditional stablecoins. Circle's bet that USDC will become the clearing layer of the Internet is now facing a fragmented reality. In a world where licensed fund tokens can provide the same clearing function while paying a small amount of return to the holder, the zero-yield stablecoin model is beginning to look obsolete. Morgan Stanley views these tokenization alternatives as a direct threat to Circle's economic model, and timing is important because the infrastructure is no longer theoretical, but is already online and is settling billions of dollars.

stablecoins face regulatory test

At the same time, Washington's attitude towards stablecoin legislation remains uncertain, which casts a shadow on Circle's public valuation prospects. Political struggle is intensifying. Large banks are pushing to amend a landmark crypto bill in an attempt to gain an advantage before a Senate vote to rewrite stablecoin issuance rules. If regulation favors tokenized deposits issued by banks, or imposes strict reserve requirements that weaken Circle's flexibility, the company's revenue model will face another unpopular adjustment.

Circle has built a reputation as a compliant, transparent publisher-a virtue in an industry often characterized by opacity. But compliance alone will not protect companies from legislative risks. The regulatory clarity Circle has been seeking for years may ultimately favor institutions that have entered the realm of tokenized deposits. This is not an overall bearish on blockchain-based payments, but it is a problem for an independent stablecoin issuer that is not part of a large banking group.

What factors are still valid and what are still bad

is not all negative. USDC continues to dominate DeFi on Ethereum, and Circle's partnership with the exchange gives it a distribution advantage that new entrants cannot replicate overnight. The stablecoin also did not experience the decoupling nightmares encountered by smaller algorithmic experiments. But the market's reaction to the Morgan Stanley report-the 6% decline, while not catastrophic, was by no means indifferent-suggests that investors are increasingly pricing the environment as: Tether and a few profitable alternatives squeeze Circle from both ends.

The open question is whether Circle can transform quickly enough in a market that no longer requires a single dominant stablecoin. If USDC becomes one of many settlement tokens rather than the chain dollar standard, resetting its share price to $38 may not be the end of a re-rating. It could signal the beginning of a repricing of the entire category that just a year ago seemed unshakable.