From issuance to infrastructure

The company earns billions of dollars in interest income by holding reserves of Treasury bonds that serve 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 approximately 60 cents to USDC's partners. As long as profit margins are large enough, it can afford this expenditure. 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 its recently released Q1 2026 earnings report, the USDC issuer announced several initiatives aimed at enhancing value across its operations. These include: a $222 million pre-sale of its native Layer-1 token ARC, valuing it at $3 billion on a fully diluted basis; the launch of AI-powered agent infrastructure; and the expansion of its Circle payment network, enabling banks to facilitate stablecoin payments by mitigating the volatility of digital assets. Circle's achievements over the past few quarters will change this. In short, these moves 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 payments stack. Today, I will assess whether Circle can leverage vertical integration to offset the shrinking revenue business, which has been declining with each Fed rate cut. The Vanishing Buoys In the first quarter of 2026, Circle's total revenue was $694 million, a 20% year-over-year increase. This growth was entirely due to the expansion of the circulating stablecoin market; USDC itself saw no improvement. The circulating stablecoin market 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 declined by 62 basis points. Circle faces an even bigger problem. The era of low interest rates has arrived, with the Federal Reserve's interest rate falling from 4.5% a year ago to the current 3.75%. Although the average circulating supply of USDC increased by 39% year-over-year through the first quarter of 2026, Circle's reserve income only increased by 17% year-over-year, reaching $653 million. This is because the average reserve ratio decreased by 66 basis points year-over-year, from 4.16% in the first quarter of 2025 to 3.50% in the first quarter of 2026, significantly offsetting the aforementioned growth. This is not a one-off phenomenon. Over the past four quarters, the gap between Circle's reserve income growth rate and USDC supply growth rate has continued to narrow. Circle's primary revenue streams have not grown proportionally to its circulating stablecoin supply. The company also faces value loss issues. This means that the platform's cost per dollar for holding and distributing USDC exceeds 60 cents. Of the $405 million in USDC, Circle paid only $330 million (approximately 80%) to Coinbase in the first quarter of 2026 as distribution costs. Of the $653 million in reserve revenue this quarter, Circle paid $405 million to partners as distribution and transaction costs. In an industry where new players are constantly expanding and integrating into every layer of the technology stack, this undoubtedly represents a significant financial loss. At this moment, all signs indicate that Circle should face reality. Declining interest rates are reducing its reserve income; high distribution costs are causing continuous value loss; and Circle's core business remains a substitute for yield, its value shrinking with each Federal Reserve rate cut. Under President Donald Trump, market expectations for a dovish stance from the Federal Reserve are growing stronger. What is Circle's response? The answer is: vertical integration to capture more value across the entire business chain and reduce reliance on interest rate income. To understand what Circle is building, consider what it already has. Starting from the bottom layer of the stablecoin stack—the issuance layer—Circle has been observing others extracting value at each layer above it for years. At the issuance layer, Circle issues USDC and EURC, holding US Treasury reserves through BlackRock's Circle Reserve Fund, managing a 1:1 peg, and handling issuance and redemption through Circle Mint. 94% of its total revenue comes from government bond reserve yields. Subsequently, Circle expanded its business to the interoperability layer through its Cross-Chain Transfer Protocol (CCTP), which enables the transfer of USDC between blockchains and handles approximately 60% of cross-chain bridging transactions. While the mechanism handles the inter-chain routing of USDC, CCTP itself runs on chains owned by others. Therefore, Circle does not receive substantial direct revenue from it. All other layers in the stack are owned by others. The settlement system runs on Ethereum, Solana, and Tron. Each USDC transaction pays gas fees 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 deliver USDC to users. Third-party entities, such as decentralized finance (DeFi) protocols, fintech companies, new banks, and prediction markets, have built applications and products that use 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 earns. Controlling the Technology Stack On May 11, Circle announced three investment initiatives aimed at vertically integrating different layers of business it didn't previously own. First is settlement. Circle owns the native Layer-1 blockchain Arc, designed to capture fees currently generated from USDC transfers on its blockchain from blockchains like Ethereum, Solana, and Tron. EVM-compatible Arc provides sub-second final confirmation and uses USDC as its native gas fee token, with each transaction costing approximately $0.001. To make its chain more attractive to institutional users, Circle offers configurable privacy protections and a quantum-resistant architecture. General-purpose public chains like Ethereum and Solana, on the other hand, are completely transparent and cannot provide privacy protections for sensitive transactions such as institutional payments. Circle raised $222 million through its ARC token presale, valuing the company at $3 billion. This funding round was led by a $75 million funding round led by a16z, with other investors including BlackRock, Apollo Global Management, Intercontinental Exchange (parent company of the New York Stock Exchange), Standard Chartered Bank, ARK Invest, SBI Group, IDG Capital, Bullish, and Haun Ventures. Secondly, there's distribution. Circle Payments Network (CPN) helps USDC issuers reduce their reliance on Coinbase. The CPN connects financial institutions directly to Circle's network, enabling them to mint, redeem, and route USDC without going through exchanges. The network boasts 136 registered institutions (a 36% increase quarter-over-quarter), annualized transaction volume of $8.3 billion (a 17% increase quarter-over-quarter), and provides fiat currency payment services in over 50 countries. Consequently, the share of USDC based on Circle's own infrastructure has nearly tripled, growing from approximately 6% a year ago to 17.2%. Even with a decline in reserve returns, the RLDC profit margin (revenue minus distribution and transaction costs as a percentage of revenue) has steadily recovered from 38% in Q2 2025 to 41% in Q1 2026. Circle has not yet commercialized the CPN, prioritizing user growth over charging fees. Once commercialized, Circle will earn usage-based revenue for every dollar of CPN usage, without relying on interest rates. Circle has built a complete agent economy through products such as Agent Wallets, Nanopayments (supporting gas-free USDC transfers as low as $0.000001), Agent Marketplace (where agents can discover and use payment services), and Circle CLI (accelerating agent registration and wallet configuration). The third layer is the application layer. Through this third layer, Circle charges small fees for large transactions executed by AI agents, thereby capturing continuous value within the entire agent economy. How large is the market opportunity for agent payments? Last month, Peter Schroeder, Circle's head of marketing, announced that USDC accounted for 98.6% of the 140 million transactions completed by AI agents in nine months.

The Stack Race

Circle's expansion into the payment system has not been easy. Payment giant Stripe started at the top and then gradually moved deeper through a series of transactions and product launches. The acquisition of Bridge gave Stripe control of the authorization, custody, foreign exchange, and card issuance layers. With the launch of Tempo, Stripe entered the settlement layer. Today, Stripe controls all seven payment layers, serving 5 million merchants.

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

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

Stripe dominates the interpersonal transaction space, while Tether leads in emerging market dollar and cryptocurrency transactions. Therefore, Circle is positioning itself in the institutional settlement and machine-based transaction space, where regulatory credibility and programmable infrastructure may be more important than the settlement integration dominated by Stripe. CRCL's Counterattack While Circle raised $222 million through a pre-sale of ARC tokens to institutional investors, ARC's initial development funding actually came from CRCL shareholders. Ironically, Circle's biggest obstacle may lie in dealing with internal resistance. What is the significance of Arc token value growth for a publicly traded company? I raised this question last November. "The nature of the native token will cause 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 letting that value flow back into Circle's profit and loss statement? Why would Circle's surplus be used to fund a cost center that is not expected to return profits to shareholders? Existing shareholders will never tolerate this. Public market investors buy CRCL for their reserve returns. They are unlikely to stand by and watch a new asset absorb the value-added returns of the infrastructure they have invested in." How will Circle address this issue? Is a separate listing of Arc reasonable? We will only know the answer in the first quarter after Arc's mainnet launch. Currently, Circle's long-term goal is to capture as much value as possible by continuously expanding its influence at these levels. Circle receives a settlement fee every time USDC settles on Arc. When institutions trade through CPN, Circle retains distribution profits. Finally, Circle also wants to be able to collect a fee at this level when agents transact through Nanopayments on Arc.