Coinbase has recently upped the ante on interest rates for USD Coin (USDC), a stablecoin pegged to the US dollar. This move comes amid a period of fluctuating supply levels and regulatory scrutiny.
Attractive rates to boost holdings
Coinbase’s decision to increase the annual percentage yield (APY) on USDC to 6% is a strategic effort to attract and retain customers in a highly competitive market. Initially, the interest rate offered was a modest 2%, but this has been gradually raised over several months, culminating in the current rate, which is applicable to holdings up to $250,000. Balances exceeding this threshold will earn a slightly lower APY of 5%.
This increment has placed Coinbase at a competitive edge, especially when compared to the riskier alternatives available on the blockchain. However, the situation is not uniform across all users. Disparities have been observed, with some account holders reporting interest rates as low as 0.58%, while others enjoy up to 5% APY. Tom Dunleavy, CIO and partner at MV Capital highlighted these differences, suggesting they might be related to the amounts held in Coinbase accounts.
Regulatory challenges and market dynamics
The surge in interest rates is juxtaposed against a backdrop of legal challenges and a declining supply of USDC. The U.S. Securities and Exchange Commission (SEC) has recently filed charges against Coinbase, alleging various violations related to securities offerings. While the charges do not directly address the USDC rewards program, they have cast a shadow of uncertainty over its compliance status concerning federal securities laws.
It is important to note that Coinbase’s move also coincides with a noticeable decrease in the circulating supply of USDC. Over the past year, the supply has dwindled to under 25 billion, marking its lowest level since 2021. This decline started earlier in the year when USDC faced challenges related to its exposure to the US banking crisis, particularly with the failure of Silicon Valley Bank, where Circle, the issuer of USDC, had some reserves.
This led to a temporary depegging of USDC, with its value dropping as low as $0.87 before recovering. Despite market conditions showing signs of improvement, USDC’s market share continues on a downward trajectory.
