Article translation: Block unicorn
The company earned billions of dollars in interest income by holding U.S. Treasury reserves as collateral for its stablecoin and paid fees to other platforms for distributing and settling USDC across the payment system. For every dollar Circle earns, it pays approximately 60 cents to its USDC partners. As long as the profit margin was large enough, it could afford this expense. But with the arrival of a low-interest-rate environment, this USDC issuer has lost too much profit. For most of its history, Circle had only one product: USDC.
In its recently released Q1 2026 earnings report, the issuer of USDC announced several initiatives aimed at enhancing value within its operational scope. These include: a $222 million pre-sale of its native Layer-1 token, ARC, with a fully diluted valuation of $3 billion; the launch of an AI agent infrastructure; and the expansion of its Circle payment network to enable banks to facilitate stablecoin payments while avoiding the volatility of digital assets. Circle’s achievements over the past several quarters will transform this landscape.
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 payments stack.
Today, I will assess whether Circle can leverage vertical integration to offset the shrinking yield business, which continues to contract with each Fed rate cut.
The missing buoy
In the first quarter of 2026, Circle's total revenue was $6.94 billion, a 20% year-over-year increase. This growth was entirely driven by the expansion of circulating stablecoin volume, with no improvement in USDC itself. The circulating stablecoin volume rose 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 is facing bigger challenges. The era of low interest rates has arrived, with the Federal Reserve's rate dropping from 4.5% a year ago to 3.75% today.
Although the average circulating supply of USDC increased by 39% year-over-year through the first quarter of 2026, Circle’s reserve income grew by only 17% year-over-year to $653 million. This was due to a 66-basis-point decline in the average reserve ratio, which fell from 4.16% in the first quarter of 2025 to 3.50% in the first quarter of 2026, significantly offsetting the growth.
This is not a one-time occurrence. Over the past four quarters, the gap between Circle's reserve income growth rate and the USDC supply growth rate has consistently narrowed.
Circle's primary source of revenue has not grown in proportion to its circulating stablecoin supply.
The company also faces issues with value erosion.
60 cents wake-up
This means that the cost for the platform to hold and distribute each dollar of USDC exceeds 60 cents. Of the $405 million in USDC, Circle paid only $330 million (approximately 80%) to Coinbase as distribution costs in the first quarter of 2026. Of the $653 million in reserve revenue this quarter, Circle paid $405 million to partners for distribution and transaction costs.
In an industry where new players are constantly entering and integrating at every level of the technology stack, this is undoubtedly a significant loss of money.
At this moment, various signs indicate that Circle should confront reality. Persistently falling interest rates have reduced its reserve income; distribution costs remain high, continuously eroding value; and Circle’s core business remains a yield proxy, whose value shrinks with each Federal Reserve rate cut. Under President Donald Trump, market expectations for a dovish stance by the Federal Reserve have grown stronger.
What is Circle's response? 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 already has.
The USDC issuer has, for years, observed others capturing value at every layer built on top of the foundational issuance layer of the stablecoin stack.
At the issuance layer, Circle issues USDC and EURC, backed by U.S. Treasury reserves held through Circl, a reserve fund under BlackRock, managing a 1:1 peg and handling issuance and redemption via Circle Mint. Ninety-four percent of its total revenue comes from yields on the government bond reserves.
Subsequently, Circle expanded into 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 bridge transaction volume. Although this mechanism is responsible for routing USDC across chains, CCTP itself operates on blockchains owned by others. Therefore, Circle cannot generate significant direct revenue from it.
All other layers in the stack belong to others.
The settlement system operates 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 must pay revenue shares, incentive program fees, and integration costs to deliver USDC to users.
Third-party institutions, such as decentralized finance (DeFi) protocols, fintech companies, neobanks, and prediction markets, have built applications and products that use USDC. This means end users—whether retail or institutional—do not need to transact directly with Circle.
This structure means Circle earns only 40 cents for every dollar it makes.
Master the tech stack
On May 11, Circle announced three investment initiatives aimed at vertically integrating previously unowned layers of its business.
First is settlement.Circle owns the native Layer-1 blockchain Arc, designed to capture fees currently generated by USDC transfers on blockchains such as Ethereum, Solana, and Tron.
Arc, which is EVM-compatible, provides sub-second finality and uses USDC as its native gas token, with transaction fees of approximately $0.001 each. To make its chain more appealing to institutional users, Circle offers configurable privacy and a quantum-resistant architecture. In contrast, general-purpose public blockchains like Ethereum and Solana are fully transparent and cannot provide privacy for sensitive transactions such as institutional payments.
Circle raised $222 million through its ARC token presale, achieving a $3 billion valuation. This funding round was 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.
Second is distribution.The Circle Payments Network (CPN) helps USDC issuers reduce their reliance on Coinbase.
CPN directly connects financial institutions to Circle’s network, enabling the minting, redemption, and routing of USDC without the need for exchanges. The network serves 136 registered institutions (a 36% increase quarter-over-quarter), processes $8.3 billion in annualized transaction volume (a 17% increase quarter-over-quarter), and offers fiat payment services in over 50 countries.
As a result, the share of USDC based on Circle’s own infrastructure nearly tripled, rising from approximately 6% a year ago to 17.2%. Even as reserve yields declined, the RLD profit margin (revenue minus distribution and transaction costs as a percentage of revenue) steadily improved from 38% in the second quarter of 2025 to 41% in the first quarter of 2026.
Circle has not yet commercialized CPN and is currently prioritizing user growth over monetization. However, once commercialized, Circle will generate usage-based revenue for every additional dollar of CPN usage, without relying on interest rates.
Circle has built a complete agent economy through products such as Agent Wallets, Nanopayments (enabling gas-free USDC transfers as low as $0.000001 [one millionth of a dollar]), the Agent Marketplace (where agents can discover and pay for services), and the Circle CLI (accelerating agent registration and wallet configuration).
The third layer is the application layer.Circle captures ongoing value across the agent economy by charging a small fee on large transactions executed by AI agents through this third layer.
How large is the market opportunity for agent payments? Last month, Peter Schroeder, Circle’s Head of Marketing, announced that out of 140 million transactions completed by AI agents in nine months, USDC accounted for 98.6%.
Stack competition
Circle's expansion into the payments infrastructure has not been easy. Payment giant Stripe began at the top and gradually moved deeper through a series of acquisitions and product launches. The acquisition of Bridge gave Stripe control over the authorization, custody, foreign exchange, and card issuing layers. With the launch of Tempo, Stripe entered the settlement layer. Today, Stripe controls all seven payment layers and serves 5 million merchants.
Tether uses Plasma, developed by the issuer of USDT, as its settlement chain. However, Tether’s regulatory oversight remains less stringent than that of USDC.
Stripe dominates in peer-to-peer transactions, while Tether leads in USD transactions and cryptocurrency trading in emerging markets. Therefore, Circle is positioning itself in institutional settlement and machine-to-machine transactions, where regulatory credibility and programmable infrastructure may be more critical than checkout integrations dominated by Stripe.
CRCL's counterattack
Although Circle raised $222 million by preselling ARC tokens to institutional investors, the initial development funding for ARC actually came from CRCL’s shareholders. Ironically, Circle’s greatest challenge may lie in addressing internal resistance.
What does the appreciation of the ARC token mean for a publicly traded company? I pointed out this issue back in November last year.
The nature of the native token will generate some controversy in the public markets. Why would the market recognize or value a native token that captures the value created by Arc and CPN, rather than allowing that value to flow back into Circle’s income statement? Why should Circle’s surplus be used to fund a cost center that is not expected to return profits to shareholders? Existing shareholders would never tolerate this. Public market investors purchase CRCL for its reserve yields. They are unlikely to stand by as a new asset absorbs the appreciated value of the infrastructure underpinning their investment.
How will Circle address this issue? Is it reasonable for Arc to list separately? We will only know the answer after the first quarter following Arc’s mainnet launch.
Currently, Circle’s long-term goal is to capture as much value as possible by expanding its influence across these layers. Each time USDC settles on Arc, Circle earns settlement fees. When institutions transact via CPN, Circle retains distribution profits. Finally, Circle also aims to collect fees at this level when agents transact using Nanopayments on Arc.