Jefferies warns investors of potential risks to Circle's USDC from the new Open USD consortium, backed by major financial players.
Investment Bank Highlights Risks to USDC from New Stablecoin Consortium
Jefferies has issued a cautionary note to investors regarding Circle, the issuer of the USDC stablecoin, amidst rising competition from the newly formed Open USD consortium, which includes major players like Stripe and Coinbase.
Despite a 5% rebound in Circle shares following a significant 17% drop, Jefferies expressed skepticism about the market fully accounting for the risks associated with Circle's competitive landscape. The firm noted that the Open USD initiative, backed by over 140 companies, aims to distribute reserve income among its members, potentially undermining USDC's market position.
Circle currently holds about 25% of the $300 billion stablecoin market, but analysts warn that the entry of new competitors with established distribution networks could challenge USDC's growth. Jefferies highlighted that while USDC has benefited from early market entry since its launch in 2018, recent developments indicate a shift towards a more crowded marketplace.
Circle CEO Jeremy Allaire defended USDC's advantages, asserting that the stablecoin operates as a network business with significant ecosystem integrations and regulatory approvals that newcomers would find hard to replicate. Allaire also criticized the Open USD consortium's strategy of sharing reserve income, arguing that it could undermine the necessary revenue for infrastructure investments.
Concerns were also raised about Coinbase's role as Circle’s primary distribution partner, especially since their commercial agreement is up for renewal in August. Although Jefferies does not interpret Coinbase's participation in Open USD as a complete shift away from USDC, it acknowledges that the exchange may eventually support competing stablecoins, which could impede USDC's growth.
Challenges of Consortium Models
Lorenzo Valente, from ARK Invest, echoed Allaire's skepticism regarding the viability of consortium models in the crypto space. He pointed out that past initiatives, such as Meta's Diem, have struggled to achieve scale, primarily due to coordination challenges among multiple stakeholders with competing interests.
Valente emphasized that a large consortium could face slow decision-making processes and a lack of accountability, questioning whether such a diverse group could effectively navigate regulatory hurdles. He suggested that the model may not be sustainable, particularly if major participants lose interest during challenging times.
