Circle: From Issuance to Infrastructure

Article Author: Prathik Desai

Article Compiled by: Block unicorn

The company has earned billions in interest income by holding U.S. Treasury reserves as collateral for its stablecoin and pays fees to other platforms for distributing and settling USDC throughout the payment system. For every dollar Circle earns, it pays about 60 cents to USDC partners. As long as the profit margin is large enough, it can afford this expense. However, with the arrival of a low-interest-rate environment, the USDC issuer has lost too much profit. For most of its development, Circle has only had one product: USDC.

In the recently released Q1 2026 financial report, the USDC issuer announced several initiatives aimed at enhancing the value within its operational scope. These include: a $222 million presale for its native Layer-1 token ARC, with a fully diluted valuation of $3 billion; launching AI agent infrastructure; and expanding its Circle payment network to enable banks to facilitate stablecoin payments by avoiding the volatility of digital assets. The achievements Circle has made over the past few quarters will change this situation.

In summary, these initiatives mark Circle's attempt to transform from a single-layer company into a full-stack financial platform capable of operating and capturing value across multiple layers of the payment stack.

Today, I will assess whether Circle can leverage vertical integration to offset the shrinking revenue business, which has been continuously declining with each rate cut by the Federal Reserve.

The Disappearing Buoy

In Q1 2026, Circle's total revenue was $694 million, a year-on-year increase of 20%. This growth is entirely attributed to the expansion of the stablecoin supply in circulation, with no improvements in USDC itself. The supply of stablecoins in circulation grew from $235 billion in March 2025 to $315 billion in March 2026, an increase of over 30%. During the same period, USDC's market share dropped by 62 basis points.

Circle faces a larger problem. The era of low interest rates has arrived, with the Federal Reserve's rate dropping from 4.5% a year ago to the current 3.75%.

Although the average circulation of USDC grew by 39% year-on-year by Q1 2026, Circle's reserve income only increased by 17% year-on-year to $653 million. This is because the average reserve rate fell by 66 basis points year-on-year, from 4.16% in Q1 2025 to 3.50% in Q1 2026, significantly offsetting the aforementioned growth.

This is not a one-time phenomenon. Over the past four quarters, the gap between Circle's reserve income growth rate and the USDC supply growth rate has continued to narrow.

Circle's primary source of income has not grown in proportion to its circulating stablecoin supply.

The company is also facing issues of value erosion.

The 60-Cent Awakening

This means that the cost of holding and distributing USDC on the platform exceeds 60 cents for every dollar. Of the $405 million in USDC, Circle paid Coinbase $330 million (about 80%) as distribution costs in Q1 2026. From the $653 million in reserve income for the quarter, Circle paid partners $405 million as distribution and transaction costs.

In an industry where new players are constantly expanding and integrating across various layers of the tech stack, this is undoubtedly a significant loss of money.

At this moment, various signs indicate that Circle should face reality. Continuous declines in interest rates have led to a decrease in its reserve income; high distribution costs are continuously causing value erosion; and Circle's core business remains an alternative metric for yield, which diminishes in value with each rate cut by the Federal Reserve. Under President Donald Trump, the market's expectations for a dovish stance from the Federal Reserve have intensified.

What is Circle's response to this? The answer is: through vertical integration, capturing more value across the entire business chain and reducing reliance on interest income.

To understand what Circle is building, consider what it currently possesses.

The USDC issuer has started from the bottom layer of the stablecoin stack—the issuance layer—and has been observing others capture value at every layer above it for years.

At the issuance layer, Circle issues USDC and EURC, holding U.S. Treasury reserves through the Circl reserve fund under BlackRock, managing a 1:1 pegged exchange rate, and handling issuance and redemption through Circle Mint. 94% of its total revenue comes from government bond reserve income.

Subsequently, Circle expanded its business to the interoperability layer through its Cross-Chain Transfer Protocol (CCTP), which transfers USDC between blockchains and handles about 60% of cross-chain bridging transaction volume. Although this mechanism is responsible for routing USDC between chains, CCTP itself operates on chains owned by others. Therefore, Circle cannot derive substantial direct income from it.

All other layers in the stack are owned by others.

The settlement system operates on Ethereum, Solana, and Tron. Every USDC transaction incurs gas fees paid in other tokens (ETH, SOL, TRX), and Circle has no control over congestion, fees, or governance on these chains.

Distribution channels primarily rely on Coinbase, exchanges, and wallets. Circle needs to pay revenue sharing, incentive program fees, and integration costs to get USDC into users' hands.

Third-party institutions, such as decentralized finance (DeFi) protocols, fintech companies, neobanks, and prediction markets, have built applications and products using USDC. This means that end customers, whether retail or institutional, do not need to transact directly with Circle.

This structure results in Circle earning only 40 cents for every dollar it makes.

Mastering the Tech Stack

On May 11, Circle announced three investment plans aimed at vertically integrating different layers of business it previously did not own.

First is settlement. Circle has a native Layer-1 blockchain, Arc, designed to capture the fees currently generated from USDC transfers on blockchains like Ethereum, Solana, and Tron.

The EVM-compatible Arc provides sub-second finality and uses USDC as its native gas fee token, with transaction fees of about $0.001. To make its chain more attractive to institutional users, Circle offers configurable privacy protection and quantum-resistant architecture. In contrast, general-purpose public chains like Ethereum and Solana are entirely transparent and cannot provide privacy protection for sensitive transactions like institutional payments.

Circle raised $222 million through the ARC token presale, achieving a valuation of $3 billion. This round of financing was led by a16z with a $75 million investment, with other investors including BlackRock, Apollo Global Management, Intercontinental Exchange (parent company of the New York Stock Exchange), Standard Chartered, ARK Invest, SBI Group, IDG Capital, Bullish, and Haun Ventures.

Second is distribution. The Circle Payments Network (CPN) helps the USDC issuer reduce reliance on Coinbase.

CPN connects financial institutions directly to Circle's network, allowing them to mint, redeem, and route USDC without going through exchanges. The network has 136 registered institutions (a 36% quarter-on-quarter increase), with an annualized transaction volume of $8.3 billion (a 17% quarter-on-quarter increase), and provides fiat payment services in over 50 countries/regions.

As a result, the proportion of USDC based on Circle's own infrastructure has nearly tripled, growing from about 6% a year ago to 17.2%. Even with a decline in reserve return rates, the RLDC profit margin (revenue minus distribution and transaction costs as a percentage of revenue) has steadily rebounded from 38% in Q2 2025 to 41% in Q1 2026.

Circle has not yet commercialized CPN, prioritizing user growth over charging fees. However, once commercialized, for every dollar increase in CPN usage, Circle will generate usage-based revenue without relying on interest rates.

Circle has built a complete agent economy through products like Agent Wallets, Nanopayments (supporting gas-free USDC transfers as low as $0.000001 [one-millionth of a dollar]), Agent Marketplace (where agents can discover and pay for services), and Circle CLI (to accelerate agent registration and wallet configuration).

The third layer is the application layer. Through this third layer, Circle charges a small fee on large transactions executed by AI agents, thereby capturing ongoing value throughout the agent economy.

How large is the market opportunity for agent payments? Last month, Circle's marketing director Peter Schroeder announced that USDC accounted for 98.6% of the 140 million transactions completed by AI agents within nine months.

Stack Competition

Circle's expansion into the payment system is no easy task. Payment giant Stripe started at the top and gradually delved deeper through a series of acquisitions and product launches. The acquisition of Bridge allowed Stripe to control the authorization, custody, foreign exchange, and issuing layers. By launching Tempo, Stripe entered the settlement layer. Today, Stripe controls all seven payment layers, serving 5 million merchants.

Tether uses Plasma, incubated by the USDT issuer, as its settlement chain. However, Tether's regulatory scrutiny is still less than that of USDC.

Stripe dominates in person-to-person transactions, while Tether leads in dollar transactions in emerging markets and cryptocurrency trading. Therefore, Circle is positioning itself in the institutional settlement and machine trading space, where regulatory credibility and programmable infrastructure may be more important than the checkout integrations dominated by Stripe.

CRCL's Counterattack

Although Circle raised $222 million by preselling ARC tokens to institutional investors, the initial development funds for ARC actually came from CRCL shareholders. Ironically, the biggest resistance Circle faces may be how to deal with internal opposition.

What does the value growth of the Arc token mean for a publicly traded company? I pointed out this issue last November.

"The nature of a native token will raise some controversy in the public market. Why would the market recognize or value a native token that captures the value created by Arc and CPN, instead of allowing that value to flow back into Circle's profit and loss statement? Why should Circle's surplus be used to fund a cost center that is expected not to return profits to shareholders? Existing shareholders would never tolerate this. Public market investors buy CRCL for its reserve income. They are unlikely to watch a new asset absorb the appreciation benefits of the infrastructure they invested in."

How will Circle address this issue? Is it reasonable for Arc to be listed separately? We will only know the answer after the first quarter following the launch of the Arc mainnet.

Currently, Circle's long-term goal is to capture as much value as possible by continuously expanding its influence at these layers. Every time USDC settles on Arc, Circle earns a settlement fee. When institutions transact through CPN, Circle will retain distribution profits. Finally, when agents transact through Nanopayments on Arc, Circle also hopes to charge fees at that layer.

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