Circle’s USD Coin (USDC) and other stablecoins are facing potential compliance challenges due to a new amendment in the 2024 National Defense Authorization Act (NDAA) recently passed by the United States Senate.
According to Berenberg analyst Mark Palmer’s July 31 investment note, the amendment could introduce new Know Your Customer (KYC) and Anti-Money Laundering (AML) measures that stablecoin issuers might struggle to comply with.
The proposed amendment requires the U.S. Treasury Secretary to establish examination standards for crypto assets to ensure compliance with money laundering and sanctions laws.
If it remains in the final version of the NDAA, it could present problems for stablecoin issuers.
Palmer pointed out that identifying stablecoin holders is only possible during issuance and redemption, and this requirement could lead to a deterioration in USDC’s market cap.
Over the past few months, USDC’s market cap has declined by approximately 39%, amounting to $17.5 billion since March 5.
This development not only impacts Circle but also poses challenges for Coinbase.
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Palmer highlighted that in the first quarter of the year, 27% of Coinbase’s net revenue came from interest income on USDC. The potential setbacks for both Circle and Coinbase could be concerning for investors.
Coinbase’s shares have shown significant outperformance in the traditional equities market since the beginning of the year, surging 170% from $33 on January 1 to $98.61 at the time of the publication of the investment note.
Berenberg attributed this outperformance to favorable rulings for Ripple Labs and the interest generated by major institutions like BlackRock and Fidelity in filing for spot Bitcoin exchange-traded funds (ETFs).
However, the bullish factors for Coinbase might be on shaky ground. SEC Chair Gary Gensler’s recent comments have raised uncertainty among investors.
Gensler stated that cryptocurrencies could fall under the purview of the SEC, implying that regulations might be on the horizon.
Additionally, his response to Bitcoin ETF applications suggested potential opposition to their approvals.
Despite these uncertainties, Berenberg maintained a “hold” rating for Coinbase stock.
The company’s large balance of cash and equivalents offers financial cushion and flexibility for navigating the uncertain landscape of the cryptocurrency market.
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