All-in Arc, Circle is betting big in an unstoppable gamble

Author: Prathik Desai

Original Title: Circle Draws an Arc，Can it address the rate-cut problem?

Translation and Editing: BitpushNews

2026 is here. When we video call with people around the world, the delay is only one or two seconds at most, and the marginal cost is almost zero. However, when it comes to transferring funds between institutions, countries, or systems, we still face deadlines, high fees, and reliance on settlement windows that close on weekends.

Cryptocurrencies once promised to solve this problem through stablecoins, which have existed for over a decade. Yet, despite the significant, quantifiable savings stablecoins can bring, businesses and commercial institutions have not fully adopted them for fund transfers.

We have previously discussed this issue, as well as how inherent privacy concerns in public blockchains act as obstacles here. We also listed privacy infrastructure as a top crypto theme to watch in 2026.

Stablecoin issuer Circle has seized this opportunity by building its first-layer blockchain, Arc, to address industry demands for privacy and stablecoin infrastructure.

In this in-depth analysis, I will explain why Circle is now building an L1 blockchain, what the biggest challenges are, and how this move could potentially change the stablecoin ecosystem.

The story begins…

Why launch an L1 blockchain now?

Currently, stablecoin issuance is entirely driven by interest income and heavily reliant on distribution channels. Since its launch last June, this has become even clearer through public reports from USDC issuers.

I mentioned last year:

In Q3, despite USDC’s circulation increasing by over 100% year-over-year, reserve income only grew by 66%, reaching $711 million. The rest was offset by the Federal Reserve’s rate cuts. The average yield dropped 96 basis points, reducing Circle’s reserve income by $122 million.

For every $1 of reserve income earned in Q3, Circle spent over 60 cents on distribution and transaction costs, including wallet integrations, exchange listings, incentive programs, and revenue sharing.

The Federal Reserve has begun cutting rates. In December 2025, it effectively lowered the federal funds rate by 25 basis points to 3.50%–3.75%. The central bank also announced it would stop quantitative tightening on December 1.

Recently, the US economy has been signaling to policymakers that it’s time to soften the stance in response to disappointing data.

The US Manufacturing Purchasing Managers’ Index (PMI) for December 2025 was 47.9 (below 50 indicates contraction), marking the tenth consecutive month of decline. The December employment report will be released later today, but recent months’ data have been lackluster.

Putting all this together helps explain why Circle is desperately shifting toward a new business model.

The issuer aims to reduce dependence on short- to medium-term rate declines while building a second engine that can rely on broader, more diversified distribution channels.

Arc Transformation

Arc is precisely the transformation direction Circle relies on.

Circle is building Arc as an open, first-layer blockchain designed specifically for cross-border enterprise payments via stablecoins. It also aims to provide sub-second finality (transaction confirmation speed) and configurable privacy options, allowing enterprises to enable privacy features to conceal sensitive payment data.

By shifting from a stablecoin issuer to a stablecoin settlement stack operator, Circle’s goal is to establish a business model where funds flow in a manner that enterprises care about.

During the testnet phase, Circle’s Arc has already partnered with over 100 companies, including traditional financial giants and tech leaders like BlackRock, Amazon Web Services, HSBC, Standard Chartered, and Visa.

Although Arc is still in the testnet stage and will face a series of challenges before success (which I will discuss later), I find this move quite interesting given its timing and the problems it aims to solve.

First, it charges gas fees (network transaction fees) in its native token. Arc’s design is to charge low, predictable, USD-denominated transaction fees in USDC. This eliminates the need for corporate finance departments to hold ETH, SOL, or any other cryptocurrencies solely to pay transaction fees.

Second, Arc offers sub-second finality and a 24/7 open settlement window. CFOs may not care about shaving milliseconds like traders do, but if they encounter weekends or cross-border intermediary chains that prevent their payments from settling after clicking “send,” they will lose sleep.

Third, and perhaps most importantly, Arc provides configurable privacy. By explicitly offering an opt-in privacy feature, it bridges the gap between the transparency built into public blockchains and the need for enterprises to keep sensitive information (such as B2B invoices, fund transfers, and payroll settlements) confidential.

What’s most interesting is that none of these features require stakeholders to accept the ideological aspects of cryptocurrencies. Instead, Arc removes crypto features that enterprises dislike—such as absolute transparency, fee volatility, and uncertain settlement—making blockchain usable in mainstream business contexts.

But can Circle build these features on existing chains? Why create its own blockchain?

Circle has always been “renting space.” On someone else’s chain, Circle would be forced to inherit their fee tokens, compete for network resources with other participants, follow their governance rules, and face risks of network outages. It would also lose the entire revenue stream if it cannot charge fees in USDC. Circle has already paid distribution costs to expand USDC’s reach on other platforms. By launching its own chain, it hopes to own the “space” and earn “rent” by providing “space” to everyone using its infrastructure.

However, this is not an easy win. Circle faces fierce competitors.

In issuer terms, Tether remains the biggest threat, with the highest liquidity worldwide. It has also launched a regulation-friendly stablecoin, USAT, to strengthen its presence in the US market.

Beyond issuers, players like Stripe also pose threats—they are building similar solutions to what Circle is doing with Arc.

In September 2025, Stripe and Paradigm announced Tempo, a payment-priority blockchain built around stablecoins. Tempo’s architecture allows paying gas fees with any stablecoin and aims for sub-second finality as well.

Apart from external threats, Arc itself may face many issues.

It might struggle with cold start problems in attracting liquidity and developers. Enterprises won’t choose Circle’s Arc just because it looks best on paper. Many already use traditional payment platforms like PayPal and are more inclined to stick with platforms that already have counterparties and integrated services.

Arc’s “configurable privacy” will be a controversial topic. The opt-in feature gives enterprises what they want, but it will also attract regulatory scrutiny. Arc must prove to the market that its privacy means “business confidentiality with auditability,” not just a potential loophole.

Despite these obstacles, I am optimistic about Circle’s opportunities for two reasons.

First, its distribution channels and reputation. Circle doesn’t need to prove to the market that USDC is a true dollar token. It is embedded in countless exchanges, wallets, fintech processes, and increasingly in institutional pipelines. Now that Circle is a publicly listed company, its initiatives look different from any other crypto firm. Its public reputation lends credibility to its products. This also forces Circle to build Arc in a way that can be clearly explained to compliance and finance teams on the board.

Second, Circle’s payment network. Combined with Arc, it can create a network of institutions and payment channels that execute real-world transactions within a compliant framework.

Arc may still fail. But does it have other options? As rate cuts become the norm and the new year likely brings more easing, for a competitive issuer, this is the only rational choice.