Morgan Stanley Downgrades Circle, Slashes Price Target on USDC Growth Doubts

Morgan Stanley cut Circle Internet (CRCL) to underweight from equal-weight on August 3, 2026, and slashed its price target to $38 from $106, arguing that the company’s long-term earnings power is weaker than the market has priced in. Shares fell 6% on the news, extending a decline that now leaves the stock down roughly 30% for the year. The call, from analyst James Faucette, centers on a single question that matters far beyond one stock: can USDC keep growing fast enough, and profitably enough, to justify Circle’s valuation.

Why Wall Street is souring on USDC

Circle’s business is built largely on the interest it earns holding reserves backing its USDC stablecoin. That model works well when USDC’s circulating supply keeps expanding and interest rates stay supportive. Morgan Stanley’s downgrade signals doubt on the first count. The bank cut its USDC supply forecasts by roughly 33% for 2027 and about 44% for 2028, a dramatic reduction that ripples directly into revenue assumptions. As a result, Morgan Stanley now expects Circle’s GAAP earnings per share to come in about 3% below consensus for 2027 and roughly 20% below consensus for 2028 — a gap that widens the further out the forecast goes, suggesting the bank sees a structural slowdown rather than a temporary dip.

Behind the numbers is a shift in where the money is expected to come from. Morgan Stanley pointed to pressure on reserve income — the core, high-margin part of Circle’s business — alongside a shift toward lower-margin transaction revenue. In other words, even if USDC continues to circulate, Circle may increasingly earn less per dollar of activity than it has historically.

Competition closing in from several directions

The downgrade also reflects a crowding of the field Circle once had largely to itself. Morgan Stanley flagged competition from tokenized money market funds and tokenized deposits — instruments offered by traditional financial institutions that can serve some of the same cash-management and settlement functions as a stablecoin, often with the backing of established banks and asset managers. The bank also cited a new stablecoin model, Open USD, built around shared governance, which represents a structurally different challenge: rather than a single issuer capturing the reserve income, a shared-governance model could distribute both control and economics more broadly, potentially squeezing Circle’s take.

Adding a concrete data point to these industry shifts, BlackRock launched two blockchain-based money market products the same day as the downgrade — a reminder that the world’s largest asset managers are moving directly into tokenized cash products rather than simply partnering with stablecoin issuers. For Circle, that means competing not just with other crypto-native stablecoins but with the tokenized-fund arms of the biggest names in traditional finance.

The Morgan Stanley downgrade did not arrive in isolation. It follows an earlier downgrade from JPMorgan, which had pointed to Circle’s revised deal with Hyperliquid and a competitive dynamic with Coinbase over how USDC distribution economics are split. Coinbase has historically been a major partner in distributing USDC, and any renegotiation of that revenue-sharing arrangement directly affects how much of USDC’s economics Circle actually keeps. Two major banks flagging distribution and partner-economics concerns within a short span suggests this is becoming a consensus worry on Wall Street, not an isolated read.

One additional figure from the Morgan Stanley note is worth sitting with: agentic payments — transactions initiated by automated software agents rather than humans — are running at around $41,900 per day in volume, with an implied average transaction size of roughly 24 cents. Agentic payments are frequently cited as a next-generation use case for stablecoins, but the current scale suggests this remains an early, small-dollar experiment rather than a meaningful offset to slowing USDC reserve growth.

What to watch next

For investors and industry observers, several concrete developments will help clarify whether Morgan Stanley’s thesis holds:

• USDC’s actual circulating supply figures over coming quarters, measured against the reduced 2027 and 2028 forecasts
• Details on how Open USD’s shared-governance structure allocates reserve income among participants
• Uptake of BlackRock’s new blockchain-based money market products and whether other asset managers follow with similar launches
• Any further changes to Circle’s distribution agreements, including with Coinbase and Hyperliquid
• Growth trends in agentic payment volume, given its currently small transaction sizes and daily totals

None of this changes the underlying fact that USDC remains one of the largest stablecoins in circulation. But the twin downgrades from Morgan Stanley and JPMorgan mark a shift in how seriously Wall Street is questioning whether Circle can defend its margins as tokenized finance becomes more crowded and more competitive.

Source: CoinDesk

This content is for informational purposes only and does not constitute financial or investment advice.