Arc-Circle is going all in on a high-stakes gamble they can't afford to lose.

Author: Prathik Desai; Translation: BitpushNews

2026 is here, and when we're making video calls with people around the world, the delay is at most a second or two, with marginal costs practically zero. However, when it comes to transferring funds between institutions, countries, or systems, we still face deadlines, exorbitant fees, and reliance on settlement windows that close on weekends.

Cryptocurrencies have promised to solve this problem with stablecoins, which have been around for over a decade.

However, despite the significant, quantifiable savings that stablecoins offer, businesses and commercial institutions have not fully embraced them for fund transfers. We've discussed this issue before, and how inherent privacy concerns in public blockchains can be a hindrance here. We also listed privacy infrastructure as a top cryptocurrency topic to watch in 2026. Stablecoin issuer Circle has seized this opportunity to address the industry's need for privacy and stablecoin infrastructure with its Layer 1 blockchain, Arc. In this in-depth analysis, I will explain why Circle is now building an L1 blockchain, what its biggest challenges are, and how this move could potentially transform 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 channel distribution. This has become clearer since its listing last June, through public reports from USDC issuers. As I mentioned last year: In the third quarter, despite USDC's circulating supply growing by over 100% year-over-year, reserve income only increased by 66% to $711 million. The remainder was offset by the Federal Reserve's interest rate cuts. A 96 basis point decrease in average yield resulted in a $122 million reduction in Circle's reserve income. Circle spends over 60 cents on distribution and transaction costs for every $1 of reserve revenue it earns in the third quarter, including wallet integration, exchange listings, incentive programs, and revenue sharing. The Federal Reserve has begun cutting interest rates. In December 2025, it will lower the effective interest rate by 25 basis points to 3.50%–3.75%. The central bank also announced that it will stop quantitative tightening on December 1st. Recently, the US economy has also been signaling to policymakers that it's time to soften its stance in response to disappointing data. The Institute for Supply Management's manufacturing purchasing managers' index for December 2025 was 47.9 (below 50 indicates contraction), marking the 10th consecutive month of contraction. The December jobs report will be released later today, but data over the past few months has been lackluster. When you put all of this together, it explains why Circle is desperately shifting to a new business model. The publisher hopes to reduce its reliance on short- to medium-term interest rate cuts while building a second engine that can rely on a broader, more diversified distribution channel. Arc's Transformation Arc is precisely the direction Circle is relying on for transformation. Circle is building Arc as an open, Layer 1 blockchain designed specifically for cross-border payments between businesses via stablecoins. It also aims to provide sub-second finality (the speed of final transaction confirmation) and configurable privacy options, shielding businesses' confidential payment data by allowing them to choose to enable privacy features. By transforming itself from a stablecoin issuer into a stablecoin settlement stack operator, Circle aims to establish its business model that allows funds to flow in a way that businesses care about. During its testnet phase, Circle's Arc has already partnered with over 100 companies, including traditional financial and technology giants such as BlackRock, Amazon Web Services, HSBC, Standard Chartered, and Visa. While Arc is still in its testnet phase and will face a number of challenges before achieving success (which I will discuss later), I find the timing of its launch and the problems it aims to solve very interesting. First, Arc charges gas fees (network fees) in its native token. Arc is designed to charge low, predictable, and dollar-denominated transaction fees in USDC. This eliminates the need for corporate finance departments to hold ETH, SOL, or any other cryptocurrency solely to pay transaction fees. Second, Arc offers sub-second finality and a 24/7 open settlement window. CFOs won't care about cutting milliseconds like traders do, but they'll lose sleep if a payment can't be settled after clicking "send" due to a weekend or a cross-border intermediary chain. Third, and perhaps most importantly, Arc offers configurable privacy. By explicitly providing optional privacy features, it bridges the gap between the built-in transparency of public chains and the confidentiality needs of businesses to ensure sensitive information such as B2B supplier invoices, fund transfers, and payroll settlements. Most interestingly, none of these features require stakeholders to accept the ideology of cryptocurrency. Instead, Arc removes cryptographic features that businesses dislike, such as absolute transparency, fluctuating fees, and uncertain settlements, making blockchain usable in mainstream business. But couldn't Circle build these features on an existing chain? Why build its own blockchain? Circle has always been "renting space." On other people's chains, Circle is forced to inherit their fee tokens, face congestion due to competition for network resources with other participants, follow their governance rules, and be subject to their network outage risks. It also loses an entire revenue stream because it can't collect fees in USDC. Circle has already paid distribution costs for expanding 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 game to win. Circle faces fierce competition. On the issuer side, Tether remains the biggest threat, boasting the highest liquidity globally. It has also launched the regulatory-friendly stablecoin USAT to strengthen its presence in the US market. Besides issuers, players like Stripe also pose a threat, 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 is also designed to achieve sub-second finality. In addition to external threats, Arc itself may also face numerous problems. It may encounter cold-start difficulties in attracting liquidity and developers. Businesses won't choose Circle's Arc simply because it looks best on paper. Many businesses already use traditional payment platforms like PayPal and will prefer those with established counterparties and integration services. Arc's "configurable privacy" will be a controversial topic. The optional feature gives businesses what they want, but it will also attract regulatory attention. Arc must prove to the market that privacy here means "auditable trade secrets," not just a blind spot that could create new vulnerabilities. Despite these hurdles, I'm optimistic about Circle's chances for two reasons. First, its distribution channels and reputation. Circle doesn't need to prove to the market that USDC is a genuine US dollar token. It's already embedded in countless exchanges, wallets, fintech processes, and increasingly entering institutional pipelines. Now that Circle is a publicly traded company, its actions look unlike any other crypto company. Its public reputation lends credibility to its products. This also compels Circle to build Arc in a way that can be clearly explained to the compliance and finance teams on its board. The second is the Circle Payments Network. Combined with Arc, it can create a network of institutions and payment channels to execute real-world transactions within a compliant framework. Arc could still fail. But does it have other options? With the era of interest rate cuts officially underway, and more cuts likely in the new year, this is the only reasonable option for an issuer facing fierce competition.