Concerns Arise for USDC and Stablecoins as US Defense Bill Raises Potential Challenges, Analysts Warn

Circle’s USD Coin (USDC) and other stablecoins could potentially face significant compliance challenges if a new national defense bill, which passed in the United States Senate, becomes law.

According to an investment note by Berenberg analyst Mark Palmer on July 31, an amendment to the 2024 National Defense Authorization Act (NDAA) may introduce new Know Your Customer (KYC) and anti-money laundering measures that stablecoin issuers might struggle to comply with. The amendment aims to have the U.S. Treasury Secretary establish examination standards for crypto assets to ensure compliance with money laundering and sanctions laws.

Palmer expressed concerns about the impact of this amendment, as the identities of stablecoin holders can typically be determined only during the issuance and redemption of the asset. If implemented, this requirement could lead to a deterioration in USDC’s market cap, which has already seen a decline of approximately 39% (about $17.5 billion) since March 5.

This development could also have knock-on effects for Coinbase, as the exchange derived 27% of its net revenue from interest income on USDC in the first quarter of the year.

Berenberg attributed Coinbase’s strong performance earlier this year to favorable rulings for Ripple Labs and the anticipation of spot Bitcoin exchange-traded funds (ETFs) from major institutions like BlackRock and Fidelity. However, recent comments from SEC Chair Gary Gensler have dampened enthusiasm in the market. Gensler emphasized that cryptocurrencies fall within the SEC’s purview, and his response to Bitcoin ETF applications suggested potential opposition to their approvals.

Despite these uncertainties, Berenberg maintained its “hold” rating for Coinbase stock, acknowledging significant uncertainty for the company’s future. However, the firm believes Coinbase’s substantial balance of cash and equivalents provides cushion and flexibility to ensure the company’s financial longevity.

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