Tokenized Treasury Platforms: Capturing Stablecoin Beta
Similar to stablecoins, we believe tokenized treasuries will be an extremely competitive market with top players dominating and leaving little room for new entrants. With Circle also entering the tokenized money market funds space following a Hashnote acquisition for $99m, and with multiple mentions of their intentions to compete in the sector in their S1 filing, the competitive landscape is intensifying. Circle states: "By integrating TMMFs with Circle's existing infrastructure, we expect to enhance interoperability and enable investors to quickly transition between TMMFs and stablecoins, allowing traders to hold their assets in TMMFs while accruing yield and then be able to instantaneously convert into Circle stablecoins, which can then be used to purchase other digital assets on third party platforms." With Circle's dominance, it seems likely that tokenized treasury issuers will increasingly be pushed out of the issuance business and more into the distribution of these assets.
Circle's S1 filing also offers the clearest proof of how expensive distribution has become and how it is core to their business as issuers, highlighting the relationship between issuers and distributors. Under the August 2023 Collaboration Agreement, Circle splits revenues with Coinbase in the following way: "From this payment base, (i) we retain a portion ranging from an annualized low-double-digit basis point to high tenth of a basis point based on the amount of USDC in circulation on such day, in consideration of our role as stablecoin issuer and which is designed to reimburse us for indirect costs of issuing stablecoins and the management of the associated reserves, such as maintaining our accounting, treasury, regulatory, and compliance functions (the "issuer retention"), (ii) we and Coinbase each receive an amount equal to the remaining payment base multiplied by the percentage of such stablecoin that is held in the applicable party's custodial products or managed wallet services at the end of such day (after deducting (i) and (ii) above, the "residual payment base"), and (iii) after deducting amounts payable to other approved participants in the USDC ecosystem, Coinbase receives 50% of the residual payment base."
This results in substantial costs for Circle, with Coinbase Distribution Costs representing over 60% of total revenues ($720M in 2023, $1,010M in 2024), demonstrating the integral role of distributors in the stablecoin industry, which we believe will be a similar case for tokenized treasuries.
Additionally, while Section 11 explicitly bans stablecoin issuers from paying "any form of interest or yield" to holders, distributors like Coinbase face no such restriction. As a distributor receiving its share of USDC reserve income, Coinbase can book customer rewards as sales-and-marketing expenses and pass yield to users. By redistributing customer rewards as sales-and-marketing expense, Coinbase attempts to pass yield to users without violating the Act's prohibition. Coinbase's 10-Q filings reveal this strategy accelerating dramatically: in 2023, Coinbase shared just $34.9M of the $694M it earned from its Circle split, about 5%. By 2024, rewards leapt to $224.3M while stablecoin revenue rose to $910M, lifting the payout ratio to 24.6%. Q1-25 alone delivered $297.5M of stablecoin revenue and $100.0M in rewards, already 33.6%.
In line with our view regarding yield compression for intermediaries, we expect these ratios to continue to climb as commodified stables attempt to compete on yield distribution.
