Transcript Ep. 812: USDC’s Circle Just Filed to IPO. Would It Make a Good Investment?

Laura Shin:

Hey everyone. Thank you for supporting Unchained, where we do our best to help you stay on top of crypto news. If you enjoy the show, we'd really appreciate it if you could take a moment right now to leave us a 5-star review. This helps other listeners discover Unchained. And who knows, you may hear me read your review on an upcoming episode.

Laura Shin:

Well, what did you think of that valuation? Because I saw also some takes about that on crypto Twitter.

Omar Kanji:

Yeah. I mean, I think 5 is high. I have looked at it in the past. I am probably a buyer somewhere between 2 and 3, but I don't know if the market gets there. I think there is part of this story which is there is not pure play stablecoin exposure in the public markets today.

And if you want that, there's ways to get it. You can obviously become an investor in Coinbase, and you get this nice little revenue share that flows in from Circle. You can invest in PayPal, which obviously has their stablecoin today. There's a number of different equities that you can invest into if you want that type of exposure, but there's nothing as pure play as investing in Circle.

And so, there's a world in which Circle is this limited asset. There's not a lot of different ways to express this view that stablecoins are going to eat traditional payments. And so, then if you want that, maybe there's a world in which you're like, okay, there are challenges in a variety of different senses, and that's okay. I want to own this business in this category that's certainly going to keep growing, and this is my way to express that bet.

And so, I can see both sides of it, for sure. Personally, I still find making a bet at that price is expensive.

Laura Shin:

Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin.

We are now featuring quotes from listeners on the show. Today, we have a few responding to my interview with Infinex founder, Kain Warwick. On X, Garth Trader says, "I always enjoy the conversations on your show. We need intelligent dialogue to move past the narrative of this being a space full of scams."

And also on X, Manu writes, "Infinex is looking like a real change maker in the space, and they made it all look so simple. Makes you wonder what took so long."

To have your comment featured, write a review of the podcast overall or leave a comment on our video on YouTube or  X.

This is the April 4, 2025 episode of Unchained.

BitKey is the Bitcoin wallet from the team behind Square and Cash App. It's the first 2-of-3 multisig hardware wallet with recovery tools that replace the need for a seed phrase. Get 20% off with code "UNCHAINED'.

Imagine an AI that speaks crypto and does the work of a team of analysts. Introducing Focal by FalconX, bringing clarity to a world of noise. Visit askfocal.com.

Mantle is building the future of on-chain finance. Experience its Enhanced Index Fund, Mantle Banking and MantleX. Visit group.mantle.xyz to learn more.

Today's guest is Omar Kanji, partner at Dragonfly. Welcome Omar.

Omar Kanji:

Hey, Laura. How are you?

Laura Shin:

Good. So we're here to discuss Circle's S-1, which it filed to list its IPO on the New York Stock Exchange under the ticker CRCL. And this was actually the second time that Circle has attempted to go public. The first time was as a SPAC merger in 2021, which ultimately didn't go through. Crypto Twitter really enjoyed dissecting this S-1. When you looked it over, what stood out to you?

Omar Kanji:

Yeah. There's a number of things, I guess, that stood out when I looked at it. First, we've always gotten this anecdotal reporting from Tether, and it's a subset of their underlying financials, and they highlight a number of things which highlight the strength of their business.

And Circle's was a broader look and at a much more refined level into that company. And seeing everything that's happened since they last tried to go public with the SPAC, and how things have developed over the years, and what that's meant in terms of getting distribution, and getting their stablecoin out there.

And so, it was just fascinating to dig into the various line items and really see what was happening behind the hood in the story.

Laura Shin:

So, the biggest point that I saw people discussing was the distribution fees that Circle pays. For instance, in 2024, Coinbase received more than half of Circle's revenue, $900 million or slightly above. And that was a pretty much little cost to Coinbase.

And similarly, in November, Circle and Binance struck a two-year deal in which Circle paid Binance a one-time fee of $60.25 million, and a monthly incentive fee that ranges from a double digit percentage of USDC to Binance to high double digit percentages. And that's an exchange for Binance holding a certain amount of USDC in its treasury.

And I wondered how you thought Circle -- or whether or not you thought Circle could deal with these high distribution costs in a way that could somehow lower them, or will these always be a big chunk -- take a big chunk of their revenue?

Omar Kanji:

Yeah. I think it's almost a necessary step for the business to continue to scale in any way, shape or form. If you just look at the state of the world, there's so many different stablecoin issuers now that are competing for a piece of the pie.

And when you look at where the users sit, they tend to sit on these different CeFi venues, or they sit in fintech applications. And for all of them, they are effectively presented with a menu of stablecoins to choose from. And in some cases, they're presented with a single stablecoin to choose from.

And I think, when you look at the world through that lens, the only way you can get your stablecoin into the hands of those users is by paying and doing these distribution deals. And so, that's exactly what happened.

Obviously, Coinbase Circle is a story that's gone on for a very long time, almost since the inception of Circle. But if you look at some of this stuff they're doing today, whether it's Nubank or whether it's Binance, these are -- or Grab, there's a number of different deals that they're doing to get their product into the hands of users. And if you don't do those deals, they'll just never happen.

And so, the question then becomes, how much of the economics can you keep versus how much do you have to give away? And if the platform that they're doing the deal with owns this user and can monetize them in a number of different ways, they arguably should get the lion's share of the economics. And we're seeing that play out throughout their financials.

Laura Shin:

And out of curiosity, I'm not sure about this, so obviously, a place like Coinbase doesn't have USDT, but do you have an awareness of whether Tether similarly pays such a high amount in fees to other exchanges?

Omar Kanji:

Yeah. It's all undocumented. In my interpretation, is that the vast majority of the time, they don't. It's a function of their role in the market and how long they've been around. And the market share that they've got and the network affects USDT as accrued. And so, I would bet that their underlying economics do not look anywhere near to what Circle's do.

Laura Shin:

Oh, okay, okay. Right. There's sort of kind of -- what's the word? There's sort of like an oil in the system that is a little bit more necessary than USDC is at this point.

So I did see -- the other talking point was people were noticing how dependent Circle's revenue is on interest rates. And, one little factoid, a number of people called out was that even just a 1% decrease in interest rates -- I'm not talking about a single percentage point, but just a 1% decrease in that rate could reduce the stablecoin reserve income by 441 million. This is at Circle.

And so people were wondering about that. Meanwhile, Circle itself was arguing that a decrease in interest rates could result in a rise of USDC in circulation. But I don't know what you thought of rationale.

Omar Kanji:

Yeah, no. For sure. It's funny to see the impact rates just have on these businesses. And if you think about them at a very basic level, and if you think about it from the way you would be purchasing this IPO, you are buying equity in a company that takes other people's money, invests it into treasury products, and gets a portion of that as income back to you as an equity holder.

And so, it's probably like a levered bet on rates, and where those rates go over time. And I think it was fascinating, like a 2% moving rate, just to add to your point here, it cuts their total top line in half.

And the Fed, and I mean, obviously there's a lot going on in the broader markets today, but there was two forecast cuts for this year. There's a 90% chance of that happening. If you extend the duration over the next couple years, there's a series of cuts that are going to be priced in. There's a view as to where long term economic rates go. Historically it's been 2%. Today, given some of the structural issues, maybe that sits a little bit higher.

But I think the general consensus view is that rates over any material period are going to end up lower than they are today. And so, it's a question of this is a falling knife. You will try and catch it, you will try and pay a fair price for this falling knife. And ideally, you can get a lot of distribution so that the rates, when they do inevitably go down, are offset by the increase in the supply of USDC, and in turn, you end up making an equivalent amount of money.

And so, I haven't been as surprised, to be frank, just given that. I guess, I watched the whole thing happen on the way up, and now I'm watching it come back down. But it is incredible to see just the sheer amount of money that stablecoins print as interest rates do go high. And when you can reach material distribution, the numbers start to look really, really big, and, I mean, in '24, there's Circle's top line was $1.6 billion.

Laura Shin:

Yeah. I mean, I agree with everything that you said there. It's just like that future bit. There's so many variables because it's like, they could increase the amount of USDC in circulation, but then it's also like there's going to be other competitors, new competitors. It's not just Tether. So then, there's just so many variables that could affect that number.

Omar Kanji:

Totally. This is exactly why they're doing those distribution deals. Because they see all of these competitors coming in, they recognize the market is largely up for grabs, and they know interest rates are going down. And as a function of their business, they just need to continue growing, and make USDC the canonical stablecoin across the industry.

Laura Shin:

Yeah. We'll talk about this in a moment. But looking at it, I was kind of like, regulation might be the deciding factor. But we'll get to that in a second. Because, I did also want to note the other thing crypto Twitter was chatting about was the compensation costs. They were very high. More than 250 million a year, another 140 million a year in general and administrative expenses.

Omar Kanji:

Yeah.

Laura Shin:

And I wondered what you made of that, whether or not you saw any way for them to lower those.

Omar Kanji:

Yeah. I think as a headline number, it's shocking. Like, if you really dig into it, is it crazy? There's like 900 employees, it's like 300k of a head, like that's not that bad. Obviously, expensive.

But if you take some time and you dig through the S-1, you'll see there is a ton of effort going into regulatory compliance, and regulatory compliance across jurisdictions, and making sure that they are represented at a political level across every jurisdiction, globally.  And so, you can begin to understand where the compensation and the G&A costs start to flow through.

I think from a technological perspective, if the only thing was this is a tech story, and this is how much they're spending, and stablecoins today, as great as they are, they're not really technologically innovative. I think it would be hard to wrap your head around some of those numbers.

But when you look at it from the perspective, okay, they're playing a game on a number of different fronts. Both in Congress, outside of Congress, globally. Then it starts to make a little bit more sense. But I think anyone that's investing is hopeful that over time they can scale some of these costs down.

And it's hard without the requisite granularity to really get in there and see exactly what is going on underneath the hood. But the hope is over time they can make the business a little more, with a little better operational leverage.

Laura Shin:

Yeah. One last comment on that. DeFi people always say -- what is it? I forget. Something in the front, party in the back. Yeah. To me looking at stable -- sorry, at Circle's, that's when it's a little bit like stablecoin in the front, compliance in the back, or something.

But interestingly, even though that seems it would be an edge, we reported here in a news article that Jeremy Allaire was not at the White House Crypto Summit, and we got a source which -- I don't remember how we expressed in the article. So people read the article to find out how we describe this source.

But the source said that it was due to Howard Lutnick that he ended up not there, so. And, Howard Lutnick, for people who don't know, he's a what? A former investor in Tether. He had to, I think, divest for the US Commerce Secretary in one way.

Omar Kanji:

Yeah. Exactly. Yeah. There's various ties to the whole Tether side of the story. And it's funny just to see the way Tether is articulated throughout that S-1. It certainly seems like this big bad wolf that operates on the other side of the world that's doing all kinds of nefarious things.

And Circle certainly positions itself on the other side, which is a smart play that they very much should be doing as they file this S-1 and go market their story. And they come as the regulated payment stablecoin that is clean and doing all of the right things.

Laura Shin:

Yeah. I mean that playbook definitely worked for Coinbase, but we'll see how this plays out for Circle. So in a moment we'll talk a little bit more about, just what we can expect from the market reaction to this Circle IPO. But first, a quick word from the sponsors make the show possible.

BitKey is the only Bitcoin Wallet on Time Magazine's Best Inventions List of 2024. Built by the team behind Square and Cash App, BitKey is a 2-of-3 multi signature wallet, and the first hardware wallet with an innovative recovery suite that eliminates the need for seed phrases in self custody. Their new inheritance feature means BitKey is not just the easiest way to self custody your Bitcoin, it's the easiest way to ensure it ends up in the hands of loved ones when it's time for it to leave yours. Learn more at bitkey.world. B-I-T-K-E-Y.world. Use code "UNCHAINED" for 20% off.

Picture this! The crypto market just got wrecked by billions in liquidations. You need to figure out what happened and what's next. But where do you even start? Meet Focal by FalconX, your AI-powered crypto analyst. It's like having a legion of experts at your fingertips, ready to break down market moving events, chart DeFi protocol TVL, or explain why Solana mindshare is rising. Get clarity in a world of noise with Focal. Learn more at askfocal.com

We have another listener comment. This one in response to Infinex founder, Kain Warwick's explanation of the crypto community's reaction to Hyperliquid's Jellyfix. On X, @lukedesci says, "changing protocol rules mid-game is exactly why defi keeps failing. transparency first, changes second. $jelly proves this point."

Again, if you want to hear your comment featured on the show, please write a review or leave a comment on an episode on YouTube or X.

Back to my conversation with Omar.

So you wrote a Tweet analyzing this S-1, and one of the things you wrote was, "32x '24 earnings for a business that just lost its mini-monopoly and is facing several headwinds is expensive when growth is structurally challenged." So what are these structural challenges you see to Circle's growth, and do you think there's any way they could overcome them?

Omar Kanji:

Yeah. I think the big part of the Circle story that is challenging for public market investors is, like, not only, number one, are you wearing a lot of regulatory risk, which is, at any given moment one of the various different bills that is working its way through the various forms of US government could pass, and fundamentally alter the entire landscape of this industry, and in the way, these companies operate throughout the US.

So you have this big bogeyman in the closet that you're potentially dealing with at any given point in time. And it's very clear from everything that's happened in the US government today, and since the Trump election that there is going to be some more clarity ahead. Something will get through, some-- there will be some guidance. And so, you have this backdrop of regulatory clarity for the first time in a very long time.

And I think, with that also comes some of the huge competitive challenges the business faces, which is, the second there is regulatory clarity, this sandbox that crypto companies have fortunately been able to play in and build great businesses around is now a global sandbox. And everyone is allowed to join the party.

And I think, as Bank of America, you see all this stuff going on throughout the news, and you see all this reporting, everyone is just waiting to get into this game. And they're waiting to get in because it's a phenomenal business. You can take in a deposit, you can make money off that, and you owe nothing to that customer. And ultimately, you can -- It's like a better version of an insurance company. And if you go to a bank, it's a bank with no regulation, really.

And it is a phenomenal business to be in, and a lot of people would love to be in it. And a lot of people have really great brands that they can use to distribute a product like stablecoins globally. And they have physical locations, they have huge digital presences, they have massive marketing budgets. They have similar companies that they can work with, and have a huge consortium approach. There's a lot of different things that they can do once they have the clarity that, okay, you are allowed to enter the industry.

And so, I think, when you look at it from an equity investor perspective and you say, hey, I'm going to invest in this business, you're like, okay, this company has done great. They've really done a good job, and they survived some really hard times. SVB, I'm not sure if you remember, but there was the whole Circle depeg. And that was tough. I mean, their circulating supply went down, they were close to 60 billion a few years ago, went down to the 20s, and today, fortunately, they've grown back.

But the business has been through a lot, it has survived, it's scaled all these things. But you look at this business, then you look at what's happening in the future, and you're like, okay, do I really want to pay up for a business like this that has a number of challenges ahead that might not be able to make its own mark, and not be able to continue scaling and growing?

And at the same time, interest rates are certainly going down? And so, you have this really tough backdrop for a company that's going to market and trying to sell their story and saying, hey, you should pay for my equity at $5 billion when I have all of these challenges ahead.

Laura Shin:

Yeah. Well, what did you think of that valuation? Because I saw also some takes about that on crypto Twitter.

Omar Kanji:

Yeah. I mean, I think 5 is high. I have looked at it in the past. I am probably a buyer somewhere between two and three. But I don't know if the market gets there. I think there is part of this story which is there is not pure play stablecoin exposure in the public markets today. And if you want that, there's ways to get it.

You can obviously become an investor in Coinbase, and you get this nice little revenue share that flows in from Circle. You can invest in PayPal, which obviously has their stablecoin today. There's a number of different equities that you can invest into if you want that type of exposure. But there's nothing as pure play as investing in Circle.

And so, there's a world in which Circle is this limited asset. There's not a lot of different ways to express this view that stablecoins are going to eat traditional payments. And so, then if you want that, maybe there's a world in which you're like, okay, there are challenges in a variety of different senses, and that's okay. I want to own this business in this category that's certainly going to keep growing, and this is my way to express that bet.

And so, I can see both sides of it for sure. Personally, I still find making a bet at that price is expensive.

Laura Shin:

So let's circle back to your regulatory comments, because as we speak, these stablecoin bills are moving through Congress. There is one in the House which just passed a vote on Wednesday, that's called the Stable Act. Then for those of you who remember the Stable Genius reference, there's the Genius Act in the Senate, which passed the Senate Banking Committee last month.

And I am seeing that crypto executives at the same time are trying to see if they can work into these bills that Congress allow interest to be paid on these stablecoins. And I wondered how you thought that that might affect as well really Circle's business, but really any stablecoins business. How does that affect the competition?

Omar Kanji:

Yeah. I think, if you just look at it purely from an economics perspective, and you say, okay, stablecoin issuers are now going to pass on all of the yield they generate, the business becomes extremely unattractive very fast. And the reason being, today, you in effect get to hold a dollar, make all of the interest income off of it, and then at some point in time, you end up redeeming that dollar back to the customer when they decide they want their money back. And so, you get all of that today, 4.5% is yours.

If you start passing along all of the interest, that 4.5% is no longer yours. It goes back to the customer. And so, the business itself ultimately ends up becoming quite unattractive. And there are iterations of this product live. BlackRock's BUIDL Fund is on-chain and it's a tokenized treasury fund. And all that interest goes back to the treasurized token holders. The way they make money is the small 20 basis point fee.

And so, that business model, relatively speaking to stablecoin model, is just not as appealing. At the same time, passing along yield back to customers is for all intents and purposes, is a security. And I think Circle says as much in their S-1. And everything that you have seen broadly online is if stablecoins start passing back yield to token holders, their securities, they're effectively bonds.

And so, I think there's a few different elements to it in the way that I see the world. I think from a utility and usefulness perspective, that is certainly a better version of the world. Your digital dollar, you should very much get the yield that goes along with your digital dollars that are being locked up.

And it's great to see across the crypto world today, the number of improvements that have been made in that regard for investors and a number of companies. But one of them has been able to get into the tokenized collateral space, where when you put on a derivatives trade, the margin that you are using ends up earning you yield, which reduces your margin requirements. And it's a really great way to make money more useful. And so, it's been awesome to see that.

I mean Circle as a company itself, they bought Hashnote, they have USYC, which is their tokenized money market product. So they certainly see that part of the world starting to grow and evolve. And, I guess, the two sides of the world are, if you're allowed passing yield back to token holders -- or sorry, to stablecoin holders, you end up being a security issuer, you end up not having as great of an economic model, but you end up providing a better product to customers.

Then on the flip side, if you can't, then you get to keep your great business, but at the same time, customers are dealing with slightly less useful money, but at the same time, that you're giving them US dollar access. So I guess those are the broad different ways of looking at it.

Laura Shin:

Yeah. Honestly, just thinking about all these different factors we've been discussing, including compliance costs and everything, a part of me is just like, oh, all this stuff we always talk about on this show, like DeFi, AI -- like you could just see such a better product where you don't have to do the compliance, you just have something more that's software, but the algorithm is really smart and knows how to do it all, where customers get a competitive product, and get some of this interest, and yet, you don't do it in a way where, like DAO token vote holders might, for instance, do something that's in their interest but against the interest of the long-term sustainability of the actual stablecoin. Anyway.

Omar Kanji:

Totally, totally.

Laura Shin:

Totally going down a rabbit hole. But you alluded to this earlier. So because of the regulatory clarity, we will likely see a bunch of new entrants like banks and stuff like that. What do you kind of think might happen going forward? Because we're at this inflection point for sure. So what do you think the stablecoin space generally might look like over the next year or two?

Omar Kanji:

Yeah. I think initially what ends up happening is the legacy institutions are slow, and they get this clarity and then they're like, okay, it's time to move. And that period, from time to move to launching a stablecoin, probably looks something like a year, probably even longer actually.

But I think, one of the things that is true of large financial institutions is they don't move that quickly for better or for worse. And it's why we have the safety and stability, but at the same time, why there's not necessarily a ton of innovation.

But I'd say it does take time. Some of the smaller financial institutions that are looking to get market share, look to enter a new category, I could see them moving quite quickly. I mean, we're seeing some stuff with various states even here in the US, but I think you start to see it play out on a number of different levels. And I think over time, what happens is initially is heavy fragmentation, which is like there are hundreds of stablecoins in every currency that is applicable.

And then over time, I think what ends up happening is just consolidation. We go through this, it's relatively consolidated today. There's, let's say 10 to 12 different players in this market. That's 250 or so billion. Five years from now, it's a multi-trillion dollar market. You have probably 30 to 50 different issuers that are material in size. And then at some point, it ends up consolidating back, and maybe the banks all enter into a consortium, and they have what looks like card network type economics, or they end up -- or people end up going and acquiring different businesses. And there is just a small series of brands that end up existing and accounting for the bulk of different stablecoin supply throughout the world.

And I think it bifurcates globally where certain stablecoins are popular in certain geographies, very much as it is today. And so, you have some in North America, some in Europe, some in Asia that end up dominating supply in those regions. There's pretty broad interoperability. I think you start to see the rise of foreign currency stables. Today, that has not necessarily played out.

The Euro stables are relatively small today, but we start to see the rise of different stablecoins across different geographies start to pick up steam, and traction as you can integrate them more into everyday application that you use throughout your life in each of those geographies.

And so, I think fragmentation, consolidation, just like a lot of different industries, and there's a couple of really big winners.

Laura Shin:

Yeah, yeah. That totally makes sense. Well, I did want to ask just a couple of questions about the thing that everybody is still reeling from as we record, which is the tariffs that were just implemented. And I wondered, that's kind of like the next sort of wild card that could affect the stablecoin business in some way, and obviously, a Circle's IPO. So what do you think might happen there?

Omar Kanji:

Yeah. I think I started my career as a banker, and the one thing the public markets do not love, especially at IPO time, is volatility. And I think, if you were to look at the way the world generally tends to work is, people are trying to price in equity, and when prices are moving all over the place, there's a lot of volatility, and multiples are changing in real time, and no one has any certainty.

Like their existing book needs to be rebalanced, their future investments kind of fall to the wayside in some ways, and evaluating new companies anyways, their existing portfolio is dealing with all of these implications throughout the real world, especially in a backdrop where there's tariffs, and there's so many tariffs, and so many different types of tariffs, and the tariffs are changed by geography. And so, the implications to your existing portfolio are dramatic.

And so, I think what that ultimately ends up meaning is like, it is hard to get comfortable on taking a new risk, and adding that into your portfolio, and having a ton of conviction, and having conviction that it's going to survive and thrive in this regulatory environment.

And so, I think unfortunately for Circle, and unfortunately for a lot of the companies that are queued up in this IPO pipeline, this volatility is really not great. It's not great from new investors getting up to speed on the story. It's not great from a pricing perspective, multiples, as markets are volatile in the way that they are today, prices are going down and not up.

And so, that means your equity is less valuable as opposed to more valuable. And I think the ability to raise more money is more challenging, and you end up having smaller deals if they do get done. So overall, I would say it's not good from a variety of different vectors, and hopefully in the coming months things settle down a little bit and we end up seeing things start working out.

Laura Shin:

Yeah. Yeah. Because there are a number of crypto companies that have been rumored to be eyeing IPOs such as Ripple, Kraken, Gemini. There are others. But I guess, we'll just have to wait to see how it all shakes out. Thank you so much, Omar.

Omar Kanji:

Yeah, no. Thank you very much for having me, Laura. It was a pleasure.

Laura Shin:

Don't forget, next up is the weekly news recap today presented by Wondercraft AI. Stick around for this week in crypto after this short break.

Mantle is revolutionizing its on-chain financial hub. Powered by a $4 billion treasury and proven products like Mantle Network and mETH Protocol, Mantle is launching three innovation pillars; Enhanced Index Fund for optimized crypto exposure, Mantle Banking for blockchain-powered banking, and Mantle X for AI-driven innovation. Experience the future of finance with Mantle, and follow Mantle on X to stay tuned.

[This Week In Crypto]

Wondercraft AI:

And that's all. Thanks so much for joining us today. If you enjoyed this recap, go to unchainedcrypto.com/newsletter, that is, unchainedcrypto.com/newsletter, and sign up for our free newsletter, so that you can stay up-to-date with the latest in crypto.

Unchained is produced by Laura Shin, with help from Matt Pilchard, Juan Aranovich, Meghan Gavis, Pam Majumdar, and Margaret Kuria. The weekly recap was written by Steven Ehrlich and edited by Kari McMahon. Thanks for listening.