Circle shares took a beating Tuesday, falling 20% amid a flurry of developments, including draft legislative text that could limit USDC rewards, rival Tether moving toward greater transparency and a report that the company had frozen more than a dozen hot wallets.

Mizuho analysts attributed the drop to news that the Clarity Act "could potentially ban yield payments for simply holding a stablecoin (e.g. passive balances) and restrict any approach that makes the program in any way equivalent to a bank deposit," they said in a note.

Circle's shares (NASDAQ: CRCL) were trading for roughly $100 Tuesday afternoon, according to The Block price data.

Draft legislative language circulated Monday among cryptocurrency industry insiders appears to be more restrictive than hoped for and could become one of the final sticking points in broader digital asset legislation, a source familiar with the talks told The Block.

The bipartisan proposal from Sens. Angela Alsobrooks, D-Md., and Thom Tillis, R-N.C., would prevent crypto exchanges from paying rewards on stablecoin balances and further limit incentive structures by restricting access to transaction size data, making it harder to calculate rewards, the source said.

Banks have pushed back against allowing stablecoins to offer yields, arguing that such incentives could draw deposits away from traditional institutions, which rely on those funds to issue credit.

Restricting rewards could still weigh on Circle, even though its USDC stablecoin does not itself pay yield. Incentives offered by exchanges and platforms have helped drive stablecoin adoption, and limiting those rewards could dampen demand over time.

“Over the long term, not paying rewards reduces the attractiveness of holding USDC,” Mizuho analysts said.

Coinbase, which pays rewards to users who hold USDC on the exchange, also saw its shares decline by nearly 10% on Tuesday. Mizuho's analysts said USDC accounts for about ~20% of Coinbase's revenue and "a large part of it is paid out as rewards." Without a rewards program, there will be less incentive for users to hold money in USDC on the Coinbase platform, the analysts said.

Stablecoin rewards were previously addressed in the GENIUS Act, passed in July, which bars issuers from paying interest directly to holders. However, it does not prohibit third-party platforms, such as exchanges, from offering rewards.

Crypto firms argue that restricting rewards could stifle innovation.

Tether audit narrows Circle's advantage

For years, Circle has sought to position itself as the transparent and compliant alternative to Tether, the world's largest stablecoin issuer. On Tuesday, Tether — which has $184 billion of its U.S. dollar-pegged USDT stablecoin in circulation — said it is moving forward with its first full financial audit and has hired a Big Four accounting firm.

Tether said it has formally engaged a top-tier auditor to complete a comprehensive review of its financial statements, a move that could bolster the stablecoin issuer’s efforts to market itself as more transparent. Despite its scale, Tether has gained little traction in U.S. markets.

To address that shortfall, Tether recently launched the U.S.-focused stablecoin USAT.

For years, Tether has faced scrutiny over whether its tokens are fully backed. A completed audit would provide a more detailed and continuous view of assets, liabilities and internal controls.

It could also erode the competitive advantage Circle has enjoyed as a fully compliant U.S. stablecoin issuer.

Circle freezes wallets

Separately, blockchain sleuth ZachXBT said Tuesday that Circle had frozen the USDC balances of 16 hot wallets tied to various businesses.

"I spoke with one of the affected businesses directly and they stated it was due to an ongoing U.S. civil case whose details are not yet disclosed," ZachXBT said, adding that they had "reviewed the onchain activity and the exchanges, casinos and forex businesses do not appear to be related at all to each other."

Circle did not immediately respond to a request for comment regarding the draft legislation, Tether’s audit announcement or ZachXBT’s claims.