Morgan Stanley slashed Circle's price target from $106 to $38 on August 3, cutting it by 64% and signaling a fundamental shift in how Wall Street views the stablecoin business. The downgrade isn't about Circle stumbling on execution. It's about the entire reserve income model breaking down, the one that made stablecoins profitable in the first place.

USDC supply has contracted from nearly $80 billion in March to $73 billion by August. Morgan Stanley is forecasting even worse ahead, slashing 2027 supply projections by a third and 2028 forecasts by 44%. The bank cited tokenized money market funds from BlackRock and others as the culprit. Institutional money that once parked itself in stablecoins now prefers on-chain money market funds that pay yield directly, without the middleman taking a cut.

The Prisoner's Dilemma

Competition is eating Circle alive from another angle. JPMorgan separately flagged that Circle's revised agreement with Hyperliquid created what amounts to a prisoner's dilemma between Circle and Coinbase. Both are desperate to expand USDC distribution, but doing so means cutting revenue shares with exchanges to unsustainable levels. Win distribution, lose margin. Hold margin, lose distribution. There's no winning move.

The broader stablecoin market has shrunk by $10 billion since May, and new entrants are making things worse. Open USD, a stablecoin model with shared governance and reserve economics built for multiple issuers, raises the structural cost of defending USDC's market position. Circle would need to spend more on incentives just to maintain what it already has.

When Circle went public in early 2026, the thesis sounded bulletproof. Settlement infrastructure. Second-largest stablecoin. Collect rent on every dollar flowing through it. The stock surged 120% through March as analysts called USDC a core settlement rail. Six months later, that narrative has collapsed. The reserve income model worked when stablecoins were the only on-chain dollar option. That assumption no longer holds.

This is informational material about market developments and regulatory changes. It is not financial advice or a recommendation to buy or sell any asset.