Circle's $908M Distribution Fee Under Threat from Open USD Consortium

Circle's revenue-sharing agreement with Coinbase has locked in a distribution model that will cost Circle approximately $908 million in fiscal year 2024. This comes after CoinShares published a research note identifying Open USD (OUSD) as an existential threat to Circle's business model.

The friction point is structural, and it revolves around the fact that OUSD proposes to redistribute nearly all of the yield from its reserve income to distribution partners, minus a management fee. This could potentially commoditize the very pool of capital that Circle captures today.

Open USD has gained the support of over 140 firms, including Visa, Mastercard, Stripe, BlackRock, Coinbase, American Express, BNY, Google Cloud, IBM, and Ripple. Its reserve-sharing model inverts the issuer-keeps-the-float economics that Circle and Tether have relied on for years.

However, Circle has real defenses, approximately $73 billion in USDC circulation, an OCC federal trust bank charter, a NYDFS charter, and the upcoming launch of the Arc mainnet. But OUSD launches in months, and the question is whether Circle can continue to capture the income generated by that supply once a protocol exists to redirect it.