All-in on Arc, Circle is making a high-stakes gamble it can't afford to lose

Author: Prathik Desai

Source: BitpushNews

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

Cryptocurrencies once promised to solve this issue throughStablecoin, and stablecoins have been around for over a decade. However, despite the significant and quantifiable savings they offer, businesses and commercial institutions have yet to fully adopt them for fund transfers.

We've previously discussed this issue and how inherent privacy concerns within public blockchains are an obstacle here. We also listed privacy infrastructure as the top cryptocurrency topic to watch in 2026.

Stablecoin issuer Circle has seized this opportunity by addressing the industry's demand for privacy and stablecoin infrastructure through its Layer 1 blockchain, Arc.

In this in-depth analysis, I will explain why Circle is now building a Layer 1 blockchain, the biggest challenges it faces, and how this move could potentially transform the stablecoin ecosystem.

The story begins...

Currently, the stablecoin issuance business is entirely driven by interest income and heavily relies on channel distribution. This has become even clearer since Circle’s public reports following the listing of USDC last June.

I mentioned last year:

> In the third quarter, despite a more than 100% year-over-year increase in USDC’s circulation, reserve revenue grew only 66% to reach $711 million. The remainder was offset by Federal Reserve rate cuts. A decline of 96 basis points in average yield led to a $122 million decrease in Circle’s reserve revenue.

> For every $1 of reserve revenue 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 interest rates. In December 2025, it lowered the effective rate by 25 basis points to 3.50%-3.75%. The central bank also announced an end to quantitative tightening as of December 1.

Recently, the U.S. economy has been signaling policymakers that it's time to soften their stance in response to lackluster data.

The ISM Manufacturing PMI for December 2025 came in at 47.9 (below 50 indicates contraction), marking the tenth consecutive month of contraction. The December jobs report will be released later today, but data from recent months have been underwhelming.

When you put all this together, it explains why Circle is desperately pivoting toward a new business model.

This issuer wants to reduce its reliance on declining short-to-medium-term interest rates while building a second engine that can depend on broader and more diversified distribution channels.

Arc is precisely the direction Circle is counting on for its transformation.

Circle has built Arc as an open first-layer blockchain designed specifically for cross-border payments between enterprises via stablecoins. It also aims to provide sub-second finality (speed of transaction confirmation) and configurable privacy options, masking confidential payment data of businesses through opt-in privacy features.

By transitioning from a stablecoin issuer to a stablecoin settlement stack operator, Circle aims to build a business model that allows capital to flow in ways that matter to enterprises.

During the testnet phase, Circle's Arc has already established partnerships with over 100 companies, including traditional financial and tech giants such as Blackrock, Amazon Web Services, HSBC, Standard Chartered, and Visa.

Although Arc is still in the testnet phase and will face a series of challenges before it succeeds (which I'll discuss later), I find this move intriguing given its timing and the problems it seeks to solve.

First, charging gas fees (network transaction fees) in native tokens. Arc is designed to charge low, predictable, and US dollar-denominated transaction fees in USDC. This eliminates the need for corporate finance departments to hold ETH, SOL, or any other cryptocurrencies just to pay for transaction fees.

Second, Arc offers sub-second finality and a settlement window that operates 24/7. CFOs may not care about shaving off a few milliseconds like traders do, but they lose sleep if payments can't settle after clicking 'send' due to weekends or cross-border intermediary chains.

Third, and perhaps most importantly, Arc provides configurable privacy. By explicitly offering opt-in privacy features, it bridges the gap between public blockchains' inherent transparency and enterprises' need to keep sensitive information confidential, such as B2B supplier invoices, fund transfers, and payroll settlements.

Most interestingly, none of these features require stakeholders to embrace the ideology of cryptocurrencies. Instead, Arc removes the aspects of crypto that businesses dislike, such as absolute transparency, fee volatility, and uncertain settlement, enabling blockchain usage in mainstream commerce.

But couldn’t Circle have built these features on an existing chain? Why create its own blockchain?

Circle has always been 'renting space.' On someone else’s chain, Circle would be forced to inherit their fee token, compete for network resources leading to congestion, follow their governance rules, and be subject to their network outage risks. It would also lose an entire revenue stream by being unable to charge fees in USDC. Circle has already paid distribution costs to expand USDC coverage on other platforms. By launching its own chain, it hopes to own the 'venue' and earn 'rent' by offering 'space' to everyone using its infrastructure.

However, this is no easy win. Circle has no shortage of competitors eyeing its position.

On the issuer side, Tether remains the largest threat with the highest liquidity globally. It has also launched a regulatory-friendly stablecoin, USAT, to strengthen its presence in the U.S. market.

Apart from issuers, players like Stripe also pose a threat as they are building something similar to what Circle is doing with Arc.

In September 2025, Stripe and Paradigm announced Tempo, a payment-first blockchain built around stablecoins. Tempo’s architecture allows gas fees to be paid using any stablecoin and aims for sub-second finality.

Aside from external threats, Arc itself may encounter numerous issues.

It could face cold-start difficulties in attracting liquidity and developers. Enterprises won’t choose Circle’s Arc just because it looks good on paper. Many businesses are already using traditional payment platforms such as PayPal and will favor platforms that already have counterparties and integrated services.

Arc’s 'configurable privacy' will be a controversial topic. The opt-in feature gives businesses what they want, but it will also draw the attention of regulators. Arc must prove to the market that privacy here means 'auditable business confidentiality,' not just a blind spot that could create new vulnerabilities.

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

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

The second reason is Circle’s payment network.Combined with Arc, it can establish a network of institutions and payment channels to execute real-world transactions within a compliant framework.

Arc may still fail. But does it have other options? With the era of interest rate cuts officially here and likely more cuts in the new year, this is the only reasonable choice for an issuer facing fierce competition.

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