Circle vs Tether: Who Withstands Fed Rate Cuts

Circle and Tether share a single lever that governs nearly all their profit, and they don't control it: the Federal Reserve's interest rate. 94% of the $694 million Circle earned in the first quarter of 2026 comes from the interest yielded by the U.S. Treasury bills (ASIC) backing every USDC; Tether holds approximately $141 billion in Treasury debt that does the same for every USDT. Both are, at their core, the same carry trade (placing third-party money into a yielding asset and keeping the return) built upon the U.S. official rate. When that rate drops, income drops with it. One analyst has already put a number on the blow: a 100-basis-point cut (one percentage point) would strip Circle of about $618 million per year, 23% of its revenue. This analysis does not revisit the March collapse due to the CLARITY Act—that was regulatory risk regarding user yield—; here the trigger is the Federal Reserve itself, and the Fed meets again on July 29, ten days after the publication of this text. We cross-reference each company's income sensitivity with the rate-cut probability curve to explain why the same move sinks Circle while barely grazing Tether.

Why are Circle and Tether essentially the same business built on the Fed?

A dollar-backed stablecoin functions like a narrow bank—it receives dollars from the user, issues a 1:1 redeemable token in exchange, and parks the money in short-term Treasury bills and repurchase agreements (repos) on that same debt; the user earns no interest while the issuer does—and Circle states this bluntly in its Q1 2026 results: out of $694 million in revenue, $653 million came from reserve yields, i.e., 94%. Subscription, services, and transaction revenue—the part independent of the Fed—contributed $42 million. USDC circulation ended the quarter at $77 billion (up 28% year-over-year) and on-chain volume reached $21.5 trillion, but the cash flow still enters almost entirely through the same tap.

Tether, being private, reports less, but its March 31, 2026, attestation paints an identical structure on a larger scale: $141 billion in U.S. Treasury exposure ($117 billion in direct T-bills, $19.3 billion in overnight reverse repo, and $4.7 billion in term repo), making it the 17th largest holder of U.S. debt in the world. With short-term yields above 4%, that position generates several billion dollars in interest annually. The question is not whether a rate cut affects them, but by how much and who suffers more.

How much does each issuer lose per rate cut?

Circle's sensitivity was quantified by Omar Kanji, an investor at Dragonfly, in an August 2025 analysis: a 100-basis-point cut would slash annual revenue by $618 million (23%) and gross profit by $303 million (30%). The linear breakdown by 25-basis-point increments stems from those same figures: roughly $155 million for every quarter-point. A methodological warning is necessary: Kanji calculated based on a circulation of approximately $65 billion; with USDC now at $77 billion, the actual loss per cut today would be higher, not lower.

For Tether, the benchmark comes from crypto-specialized media: every 25-basis-point cut removes about $318 million in annual revenue, and a 75-basis-point cycle would mean roughly $953 million less. This figure implies a rate-sensitive base of about $127 billion—consistent with T-bills plus overnight repo that reprice almost immediately, and excluding gold (approx. $20 billion) and Bitcoin (approx. $7 billion) from the reserves, which do not yield interest. Compared against the attestation, the estimate is conservative if anything: the declared sensitive base is nearly $141 billion.

The highest step in the table is Kanji's linear calculation extended to 125 basis points: a $773 million drop in annual revenue if the Fed completes the landing cycle to the 2.25%–2.50% range. This is the most severe traceable figure and marks the direction of the problem: the longer the cycle, the larger the bite out of revenue that depends 94% on the official rate.

In absolute terms, Tether loses twice as much per cut because its rate-sensitive base is nearly double that of Circle. And yet, it is Circle that is in danger: what decides the story is the ability to absorb the loss, and there Tether boasts an $8.23 billion cushion compared to a Circle profit that already fell 15% in a single quarter.

Why is the same cut lethal for Circle and bearable for Tether?

Tether closed the first quarter of 2026 with $1.04 billion in net profit and an excess reserve cushion of $8.23 billion, an all-time high. This cushion is money above the 1:1 backing of every USDT: equity that buffers losses without touching parity. With annualized profits in the range of $4 billion, even the harshest scenario in the table—a cumulative 125-basis-point cut stripping $1.59 billion per year—would leave Tether comfortably in the black with its cushion intact. Its reserves also include about $20 billion in gold and $7 billion in Bitcoin, assets that do not depend on the Fed rate and diversify the source of yield.

Circle does not have that margin. As a publicly traded company, its 618 million cut for every percentage point hits both the revenue line and 30% of gross profit simultaneously: the same movement weighs more heavily at the bottom of the account than at the top, because the company's costs do not shrink at the same rate as revenue. The stock has priced this in violently. CRCL closed at 60,46 dollars on July 17, 2026, following a double blow that same week —Mizuho's downgrade on July 14 and an 8% drop on the 16th, when Visa presented a platform for financial institutions to issue and manage stablecoins— after losing around 45% in June 2026 alone, following a trend in 2025 that DL News described at the time as a drop of nearly 48% from its June peak that year, which was close to 299 dollars. Net profit for the quarter already fell by 15% compared to the previous one, with reserve yields sliding to 3,5% as the Fed eased its policy. The same cycle that Tether neutralizes with its cushion costs Circle 30% of gross profit for every point, on a stock that has already fallen nearly 45% in a month.

Why does Circle pay its own interest income to Coinbase?

The sensitivity table hides an aggravating factor. Circle does not keep all the interest yielded by its reserves: it shares it with its primary distribution channel. According to the agreement presented in Coinbase's regulatory filings, the exchange takes 100% of the interest generated by USDC held by users in its products and 50% of the residual reserve income from USDC circulating outside of them. In 2024, Circle paid Coinbase over $908 million for this—more than half of its total revenue that year. In Q1 2026, the sum of distribution, transaction, and other costs rose to $407 million, up 17% year-over-year, driven by these payments.

This arrangement goes back a long way, which is why it carries such weight. Circle and Coinbase launched USDC in 2018 under the Centre consortium; upon dissolving it in August 2023, Circle became the sole issuer and compensated Coinbase with an equity stake and this reserve revenue-sharing scheme. The bill scaled quickly: from about $690 million paid to Coinbase in 2023 to over $908 million in 2024. And since its IPO in June 2025 under the ticker CRCL, every point of that cost is scrutinized by a public market that punishes the mix of income tied to the Fed and costs tied to a partner that already backs a rival.

The structural problem is twofold when rates drop. Interest income falls, but the obligation to share with Coinbase does not disappear: on USDC housed in Coinbase, the exchange collects 100% of the interest regardless of where the Fed stands. Circle is left with the lower-margin business while the higher-margin one is shared. And the clock is ticking: that sharing agreement has its initial expiration around August 18, 2026, just three weeks after the Fed meeting. Circle enters renegotiations from a weak position—battered stock, threatened income—against a Coinbase that, since June 30, also backs OUSD, the Open Standard consortium stablecoin that competes directly with USDC. The partner taking half the interest income is also a shareholder in the rival.

What does the Fed probability say and what happens on July 29?

The federal funds rate has remained in the 3.50%–3.75% range since the March 18, 2026 meeting. For the July 29 meeting, the futures market tracked by the CME FedWatch discounts a rate cut with virtually zero probability. An important nuance is necessary: the absence of a cut does not mean the Fed will simply hold rates. The June dot plot turned hawkish —nine members went as far as projecting a hike— so that "no cut" is split, as of July 17, between a hold of ~64% and a hike of ~36% — the probability of a hike reached 46% on July 13 before easing. The sister piece on the spread between DeFi lending and federal funds placed the hold near 70% using early July data. In other words, the axe is not expected to fall on July 29 —if anything, the bias could lean in the opposite direction—; what is at stake that day is the signal for September and the rest of the year.

The Fed only publishes its dot plot—individual members' projections on the rate path—at the March, June, September, and December meetings; the July meeting does not include new dots. Therefore, all information will arrive through two channels: the wording of the statement and Chairman Powell's press conference. A shift in nuance regarding the labor market or inflation would be enough for futures to suddenly reprice the probability of cuts in September and December, and with it, the implied value of Circle and Tether's future income.

What should be watched on the day of the meeting?

Looking ahead to the July 29, 2026 Fed meeting, three specific things, in order of relevance:

• The language of the statement regarding the balance of risks. If the Fed softens its description of employment or opens the door to "adjustments" in September, the market will pull forward cuts, and the sensitivity table will move from hypothesis to schedule.
• CRCL's reaction during the session. As the only listed issuer, Circle is the public thermometer for rate fear; Tether, being private, does not offer this real-time reading.
• Any comments from Powell on the path toward year-end. Without a dot plot, that press conference is the only qualitative guide until September.

And a fourth, linked to the Fed though outside its script: the renewal of the Coinbase agreement in mid-August. If Circle accepts worse terms to retain its channel, the sharing of an already shrinking income takes a larger slice; if it loses it, a competitive rift opens. The July 29 meeting and that renegotiation form a single risk block separated by twenty days.

What is the lesson for stablecoin holders?

The first is that the backing of a stablecoin and the health of its issuer's business are two distinct risks. USDC and USDT maintained their parity throughout everything described; no Fed cut breaks the 1:1 redemption as long as reserves exist. What a cycle of cuts erodes is not the currency, but the income statement of the issuer—and that matters to a Circle shareholder much more than to a USDC holder. To delve deeper into this separation, our guide on stablecoin risks breaks down what to watch in reserves versus what to watch in the issuer.

The second is that a cycle of cuts distributes pain unequally: it functions as a market share weapon. Tether can absorb the cut with its cushion and even subsidize integrations to gain ground, while Circle faces falling rates, rigid distribution costs, a renegotiation from a position of weakness, and a new competitor backed by its own partner. The outcome of this asymmetry is increasingly decided in the FOMC room on July 29 and at the renegotiation table with Coinbase in August, not in the product's features. For context on this competition for yield, see BlackRock's entry into yield-bearing stablecoins.

Sources and links: Circle — Q1 2026 Results · Tether — Q1 2026 Attestation · DL News — Circle rate-cut analysis · Decrypt — Circle-Coinbase distribution agreement · ChainCatcher — Tether rate sensitivity · CME Group — FedWatch Tool