The company has earned billions of dollars 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 $1 that Circle earns, it pays out approximately 60 cents to USDC partners. As long as the profit margin is large enough, it can afford this expense. But with the advent of a low-interest rate environment, the USDC issuer lost too much profit.

For most of its existence, Circle has only had one product: USDC. In its recently released Q1 2026 earnings report, the USDC issuer announced several initiatives designed to enhance the value within its operational scope. These include: a $222.00 million pre-sale for its native Layer-1 token ARC, with a fully diluted valuation of $3.00 billion; the launch of an artificial intelligence agent infrastructure; and the expansion of its Circle Payments Network, enabling banks to facilitate stablecoin payments by circumventing the volatility of digital assets. And Circle’s achievements in 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 at multiple levels of the payment stack. Today, I will assess whether Circle can leverage vertical integration to offset the shrinking yield business, which is shrinking with each Federal Reserve rate cut.

In Q1 2026, Circle’s total revenue was $694.00 million, up 20% year-over-year. This growth is entirely attributable to the expansion of the circulating stablecoin size, with no improvement in USDC itself. The circulating stablecoin size grew from $235.00 billion in March 2025 to $315.00 billion in March 2026, an increase of more than 30%. During the same period, USDC’s market share declined by 62 basis points.

Circle faces a bigger problem. The era of low interest rates has arrived, with the Federal Reserve rate falling from 4.50% a year ago to 3.75% currently. Although USDC’s average circulation increased by 39% year-over-year as of Q1 2026, Circle’s reserve income only increased by 17% year-over-year, reaching $653.00 million. This is because the average reserve rate fell by 66 basis points year-over-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 USDC supply growth rate has continued to narrow. Circle’s primary source of revenue is not growing proportionally to its circulating stablecoin supply.

This means that the cost per dollar of holding and distributing USDC on the platform exceeds 60 cents. Of the $405.00 million in USDC, Circle paid Coinbase only $330.00 million (approximately 80%) in Q1 2026 as distribution costs. Of the $653.00 million in reserve income for the quarter, Circle paid $405.00 million to partners as distribution and transaction costs. In an industry where new players are constantly expanding and integrating into all levels of the technology stack, this is undoubtedly a huge waste of money.

At this moment, all indications suggest that Circle should face reality. Continued declines in interest rates are leading to a reduction in its reserve income; high distribution costs continue to cause value leakage; and Circle’s core business remains a yield alternative, the value of which is shrinking with each Federal Reserve rate cut. Under the leadership of U.S. President Donald Trump, market expectations for the Federal Reserve to take a dovish stance are growing stronger. What is Circle’s response to this? The answer is: through vertical integration, capture more value throughout the business chain and reduce reliance on interest rate income.

To understand what Circle is building, consider what it has now. The USDC issuer 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, holds U.S. Treasury reserves through BlackRock’s Circle Reserve Fund, manages the 1:1 peg, and handles issuance and redemption through Circle Mint. 94% of its total revenue comes from government bond reserve yields.

Circle then expanded its business to the interoperability layer through its Cross-Chain Transfer Protocol (CCTP), which transfers USDC between blockchains and handles approximately 60% of cross-chain bridging volume. Although this mechanism is responsible for routing USDC between chains, CCTP itself runs on chains owned by others. Therefore, Circle cannot derive significant direct revenue from it. All other layers in the stack are owned by others. The settlement system runs on Ethereum, Solana, and Tron. Every 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 rely primarily on Coinbase, exchanges, and wallets. Circle needs to pay revenue sharing, incentive program fees, and integration costs to get USDC into the hands of 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 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.

On May 11, Circle announced three investment initiatives aimed at vertically integrating different levels of business that it did not previously own. The first is settlement. Circle owns the native Layer-1 blockchain Arc, which aims to capture the fees currently generated by USDC transfers on blockchains such as 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 approximately $0.001. To make its chain more attractive to institutional users, Circle offers configurable privacy protection and quantum-resistant architecture.

The second is distribution. The Circle Payments Network (CPN) helps the USDC issuer reduce its reliance on Coinbase. CPN directly connects financial institutions to Circle’s network, allowing them to mint, redeem, and route USDC without going through an exchange. The network has 136 registered institutions (up 36% month-over-month), annualized transaction volume of $8.30 billion (up 17% month-over-month), and provides fiat currency payment services in more than 50 countries. As a result, the percentage of USDC based on Circle’s own infrastructure has almost tripled, from approximately 6% a year ago to 17.2%.

The third layer is the application layer. Through this third layer, Circle charges small fees for large transactions executed by artificial intelligence agents, thereby capturing continuous value throughout the intelligent agent economy. How big is the market opportunity for agent payments? Last month, Circle’s head of marketing, Peter Schroeder, announced that USDC accounted for 98.6% of the 140.00 million transactions completed by artificial intelligence agents in nine months.

Circle’s expansion into the payment system is not easy. Payment giant Stripe started at the top and then gradually delved 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 5.00 million merchants. Tether uses Plasma, incubated by USDT issuer, as its settlement chain. However, Tether’s regulatory scrutiny is still less than that of USDC. Stripe dominates the peer-to-peer transaction space, while Tether leads in emerging market dollar transactions and cryptocurrency transactions. Therefore, Circle is positioning itself in the institutional settlement and machine transaction space, where regulatory credibility and programmable infrastructure may be more important than the checkout integration that Stripe dominates.

Although Circle raised $222.00 million through the pre-sale of ARC tokens to institutional investors, the initial development funding for ARC actually came from CRCL shareholders. Ironically, the biggest resistance Circle faces may be how to deal with internal resistance. What is the value growth of Arc tokens for a public company? Why would the market recognize or value a native token that can capture 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 will never tolerate this.

How will Circle solve this problem? Does it make sense for Arc to be listed separately? We will only know the answer in the first quarter after the Arc mainnet goes live. Currently, Circle’s long-term goal is to capture as much value as possible by continuously expanding its influence at these levels. Every time USDC is settled 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 be able to charge fees at that level.

[Block unicorn]