Analysts Say That USDC and Stablecoins May Have a Problem with The U.S. Defense Bill

A prominent analyst has weighed in on the proposed U.S. Defense Bill amendment. According to the Berenberg analyst, if approved, the United States Defense Bill could create compliance issues for stablecoins such as Circle's USD Coin(USDC).

The proposed amendment would mandate the U.S. Secretary of the Treasury to set examination criteria for crypto assets, which could introduce new Know Your Customer (KYC) and anti-money-laundering regulations.

Possible Effects of The Bill On USDC

Mark Palmer, an analyst at Berenberg, said in an investment note on July 31 that a new amendment to the 2024 NDAA could introduce new KYC and AML measures, which stablecoin issuers could not implement.

The amendment would ask the U.S. Treasury Secretary to establish examination standards' for crypto assets, which would help regulators enforce money laundering and sanctions legislation, Palmer wrote.

If this amendment is included in the final NDAA, we believe it could be problematic," Palmer said, adding that the identity of stablecoin holders could only be established when the asset was issued and redeemed. This would likely result in a further decrease in USDC's market cap," he added.

USDC's market cap has been declining steadily recently, dropping by $17,5 billion (39%) since March 5. This decline could be a major setback for Circle in the short term, but it could also present a challenge for Coinbase, Palmer observed. He noted that the exchange generated 27% of its net income from interest revenue on USDC during the year's first three months.

Analysts' Take on the Significant Performance of the Coinbase Shares

Since the start of 2018, Coinbase's shares have significantly outperformed the general stock market.

Berenberg attributes the outperformance of Coinbase to two factors. The first is the favorable ruling given to Ripple Labs, while the second is Bitcoin spot ETFs from big names like BlackRock, Fidelity, and others.

Berenberg believes that these bullish catalysts for Coinbase are shaky as recent SEC Chief Gary Gensler's comments have stalled the rally.

For context, in an interview with Bloomberg on July 28, Gensler said that crypto investors should not believe that the SEC doesn't have jurisdiction over cryptocurrencies." Berenberg also noted that Gensler's tepid answer to a question about Bitcoin ETF applications suggests that the SEC may not approve them.

For the time being, Coinbase stock remains a hold," according to analysts. They note that there is still a lot of uncertainty surrounding the company's future. Still, its large cash and equivalents balance provides a buffer and flexibility regarding its financial stability.

According to a Twitter source, the SEC's case pinpointed 13 of the most low-risk" assets on Coinbase as securities, claiming that the exchange falls under the regulator's jurisdiction by selling them to customers.

But the SEC's earlier request that Coinbase delists every token it offers (except its flagship token, bitcoin) shows that the agency is pushing for more power in crypto. If Coinbase agrees to this, it will set a precedent for most U.S. crypto businesses to operate outside of the law if they don't register with the SEC.

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