Article Compiled By: Block unicorn
The company earned billions in interest income by holding the Treasury reserves backing its stablecoin and paid fees to other platforms for distributing and settling USDC throughout the payments ecosystem. For every dollar Circle earns, it pays about 60 cents to USDC partners. This was sustainable as long as margins were wide. But with low interest rates arriving, the USDC issuer lost too much profit. For most of its history, Circle had only one product: USDC.
In its recently released Q1 2026 earnings report, the USDC issuer announced several initiatives aimed at capturing more value within its operational scope. These included a $222 million presale for its native Layer-1 token ARC at a fully diluted valuation of $3 billion, the launch of AI agent infrastructure, and an expansion of its Circle Payments Network to enable banks to facilitate stablecoin payments by bypassing the volatility of digital assets. The achievements of the past few quarters will change this status quo.
Taken together, these moves signal 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 payments stack.
Today, I'll assess whether Circle can leverage vertical integration to offset the shrinkage of its yield business, which shrinks with each Federal Reserve interest rate cut.
The Disappearing Float
In Q1 2026, Circle's total revenue was $694 million, up 20% year-over-year. This growth was entirely due to an increase in the circulating stablecoin supply, with no improvement in USDC itself. The circulating stablecoin supply grew from $235 billion in March 2025 to $315 billion in March 2026, an increase of over 30%. Over 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 Fed rate dropping from 4.5% a year ago to 3.75% now.
Although the average circulation of USDC increased 39% year-over-year in Q1 2026, Circle's reserve income only grew 17% to $653 million. This is because the average reserve rate fell 66 basis points year-over-year, from 4.16% in Q1 2025 to 3.50% in Q1 2026, significantly offsetting the growth mentioned above.
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 been narrowing continuously.
Circle's primary revenue source is not growing proportionally with its circulating stablecoin supply.
The company also faces a value leakage problem.
The 60 Cent Awakening
This means that for every dollar Circle earns, it pays over 60 cents to platforms that hold and distribute USDC. Of the $405 million in USDC distribution costs in Q1 2026, Circle paid $330 million (about 80%) to Coinbase alone. Out of $653 million in reserve income this quarter, Circle paid $405 million to partners for distribution and transaction costs.
In an industry where new players are constantly expanding and integrating across every layer of the tech stack, this is a significant amount of money left on the table.
All signs point to Circle facing reality. Interest rates keep falling, reducing its reserve income; distribution costs remain high, causing persistent value leakage; and Circle's core business remains a proxy for yield, whose value shrinks with each Fed rate cut. Under President Donald Trump, expectations for a dovish Fed stance have intensified.
What is Circle's response? The answer: vertical integration to capture more value across the business chain and reduce reliance on interest income.
To understand what Circle is building, consider what it currently owns.
The USDC issuer started at the bottom of the stablecoin stack—the issuance layer—and has spent years watching others capture value on every layer above it.
At the issuance layer, Circle issues USDC and EURC, holds US Treasury reserves via the Circl Reserve Fund managed by BlackRock, manages the 1:1 peg, and handles issuance and redemption via Circle Mint. 94% of its total revenue comes from government bond reserve yield.
Subsequently, Circle expanded into the interoperability layer with its Cross-Chain Transfer Protocol (CCTP), which transfers USDC between blockchains and handles about 60% of cross-chain bridging volume. Although this mechanism routes USDC between chains, CCTP itself runs on chains owned by others. Therefore, Circle cannot derive significant direct income from it.
All other layers in the stack belong to 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 must pay revenue shares, incentive program fees, and integration costs to get USDC into users' hands.
Third parties, such as DeFi protocols, fintechs, neobanks, and prediction markets, build the applications and products that use USDC. This means the end customer, whether retail or institutional, never has to interact directly with Circle.
This structure results in Circle keeping only 40 cents of every dollar it earns.
Taking Control of the Stack
On May 11th, Circle announced three investment plans aimed at vertically integrating different layers of the business it did not previously own.
First is settlement. Circle owns the native Layer-1 blockchain Arc, designed to capture fees currently generated when USDC moves on blockchains like Ethereum, Solana, and Tron.
EVM-compatible Arc offers sub-second finality and uses USDC as its native gas fee token, with transaction costs around $0.001. To make its chain more attractive to institutional users, Circle offers configurable privacy and a quantum-resistant architecture. General-purpose chains like Ethereum and Solana are fully transparent and cannot provide the privacy needed for sensitive transactions like institutional payments.
Circle raised $222 million via an ARC token presale at a $3 billion valuation. This round was led by a $75 million funding round from a16z, with other investors including BlackRock, Apollo Global Management, Intercontinental Exchange (parent of NYSE), Standard Chartered, ARK Invest, SBI Group, IDG Capital, Bullish, and Haun Ventures.
Second is distribution. The Circle Payments Network (CPN) helps the USDC issuer reduce its reliance on Coinbase.
CPN connects financial institutions directly 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% quarter-over-quarter), $8.3 billion in annualized transaction volume (up 17% quarter-over-quarter), and facilitates fiat payments in over 50 countries.
Consequently, the proportion of USDC based on Circle's own infrastructure nearly tripled, from about 6% a year ago to 17.2%. Even as reserve yields declined, the RLDC margin (revenue minus distribution and transaction costs as a percentage of revenue) steadily recovered from 38% in Q2 2025 to 41% in Q1 2026.
Circle has not yet commercialized CPN, prioritizing user growth over fees. But once commercialized, each additional dollar of CPN usage will generate usage-based revenue for Circle, independent of interest rates.
Third is the application layer. Through this third layer, Circle aims to capture ongoing value across the agent economy by charging small fees on large transactions executed by AI agents.
Circle is building a full agent economy through products like Agent Wallets, Nanopayments (supporting 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 Circle CLI (accelerating agent onboarding and wallet configuration).
How large is the market opportunity for agent payments? Last month, Circle's Head of Marketing, Peter Schroeder, posted that USDC accounted for 98.6% of the 140 million transactions completed by AI agents within nine months.
The Stack Race
Circle's expansion up the payments stack is not easy. Payments giant Stripe started at the top and gradually went deeper through a series of deals and product launches. Acquiring Bridge gave Stripe control over authorization, custody, forex, and issuing layers. Launching Tempo took Stripe into the settlement layer. Today, Stripe controls all seven payments layers, serving 5 million merchants.
Tether uses Plasma, incubated by the USDT issuer, as its settlement chain. However, Tether's regulatory oversight still lags behind USDC's.
Stripe dominates human-to-human transactions, while Tether leads in dollar transactions in emerging markets and crypto trading. Therefore, Circle is positioning itself in institutional settlement and machine-to-machine transactions, where regulatory credibility and programmable infrastructure may be more important than the checkout integrations Stripe dominates.
CRCL's Retort
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 biggest challenge might be handling internal resistance.
What is the significance of the Arc token's value growth for a public company? I pointed out this issue last November.
"The nature of the native token will create some controversy in public markets. Why should the market acknowledge or value a native token that captures the value created by Arc and CPN, rather than letting that value flow back to Circle's P&L? Why should Circle's surplus fund a cost center that is not expected to return profits to shareholders? Existing shareholders will not tolerate this. Public market investors bought CRCL for its reserve yield. They are unlikely to stand by and watch a new asset absorb the value appreciation of the infrastructure they invested in."
How will Circle resolve this? Is a separate listing for Arc justified? Only in the first quarter after Arc's mainnet launch will we know the answer.
For now, Circle's long-term goal is to capture as much value as possible by expanding its presence across these layers. Every time USDC settles on Arc, Circle earns a settlement fee. When institutions transact via CPN, Circle will retain distribution profits. Finally, when agents transact via Nanopayments on Arc, Circle hopes to charge fees at that layer as well.
