Who will serve as the "Digital Central Bank"? Circle has submitted an application using Arc

Author: David, Deep Tide TechFlow

Translation: @mangojay09, Yujian Web3

August 12th, the same day as the release of the first financial report after going public, Circle dropped a heavy bomb: @arc, a Layer 1 blockchain built specifically for stablecoin finance.

If you only look at the news headlines, you might think this is just another ordinary public chain story.

But when you interpret it within Circle’s seven-year trajectory, you will find:

This is not just a public chain; it’s a territorial declaration about “digital central banks.”

In the traditional sense, central banks have three main functions: issuing currency, managing payment and settlement systems, and setting monetary policy.

Circle is gradually completing a digital replica—first taking control of “minting rights” with USDC, then building a settlement system with Arc, and next, perhaps, formulating digital currency policies.

This is not just about a company; it’s a reallocation of monetary power in the digital age.

Circle’s Central Bank Evolution

In September 2018, when Circle and Coinbase jointly launched USDC, the stablecoin market was still dominated by Tether.

Circle chose a seemingly “clumsy” path at the time: extreme compliance.

First, it proactively challenged the strictest regulatory hurdles, becoming one of the earliest companies to obtain the New York State BitLicense. This license, dubbed “the hardest crypto license in the world,” had a cumbersome application process that deterred many companies.

Second, it did not choose to fight alone but partnered with Coinbase to form the Centre Consortium—sharing regulatory risks and simultaneously accessing Coinbase’s vast user base, allowing USDC to stand on the shoulders of giants from the start.

Third, it pushed transparency to the limit: releasing monthly reserve audit reports by accounting firms, ensuring 100% backing by cash and short-term US Treasuries, avoiding commercial paper or high-risk assets. This “top student” approach was not popular early on—in the wild growth years of 2018 to 2020, USDC was criticized for being “too centralized,” and growth was slow.

The turning point came in 2020.

The DeFi summer explosion caused a surge in stablecoin demand, and more importantly, hedge funds, market makers, and payment companies began entering the space, finally highlighting USDC’s compliance advantages.

From $1 billion in circulation, then $42 billion, and now $65 billion, USDC’s growth curve has been nearly vertical.

In March 2023, Silicon Valley Bank collapsed; Circle had $3.3 billion in reserves stored there, causing USDC to briefly de-peg to $0.87, and panic quickly spread.

The result of this “stress test” was that the U.S. government, for systemic risk control, ultimately guaranteed full deposits for all Silicon Valley Bank customers.

Although not a bailout specifically for Circle, this event made Circle realize that merely being an issuer is not enough; it must control more infrastructure to truly master its destiny.

What truly sparked this sense of control was the dissolution of the Centre Alliance. This exposed Circle’s “worker’s dilemma.”

In August 2023, Circle and Coinbase announced the dissolution of the Centre Alliance, with Circle taking full control of USDC. On the surface, this was a move toward independence for Circle; but at a heavy cost—Coinbase gained a 50% share of USDC reserve income.

What does this mean? In 2024, Coinbase earned $910 million from USDC, a 33% increase year-over-year. Meanwhile, Circle paid over $1 billion in distribution costs that year, most of which went to Coinbase.

In other words, the hard-earned profits from USDC are now split with Coinbase—like a central bank printing money but handing half of the seigniorage to commercial banks.

Additionally, the rise of Tron has opened new profit models for Circle.

In 2024, Tron processed $5.46 trillion in USDT transactions, with over 2 million transfers daily, earning substantial fee income just from providing transfer infrastructure—an upstream, more stable profit model than issuing stablecoins.

Especially with the Fed’s rate cut expectations, traditional stablecoin interest income will shrink, while infrastructure fees can maintain relatively stable growth.

This also serves as a warning to Circle: whoever controls the infrastructure can keep collecting taxes.

Thus, Circle has begun transforming into an infrastructure builder, deploying multiple initiatives:

• Circle Mint allows enterprise clients to directly mint and redeem USDC;

• CCTP (Cross-Chain Transfer Protocol) enables native USDC transfers across different blockchains;

• Circle APIs provide a comprehensive stablecoin integration solution for enterprises.

By 2024, Circle’s revenue reached $1.68 billion, and its revenue structure is shifting—beyond traditional reserve interest, more income now comes from API calls, cross-chain services, and enterprise solutions.

This shift is confirmed in Circle’s latest financial report:

Data shows that in Q2 of this year, subscription and service revenue hit $24 million, about 3.6% of total revenue (mainly from USDC reserve interest), but it grew 252% year-over-year.

From a single interest-earning business, it has evolved into a diversified “rental income” model, giving the business more control.

The debut of Arc is a highlight of this transformation.

USDC as native Gas, no need to hold ETH or other volatile tokens; institutional-grade quote request system supporting 24/7 on-chain settlement; transaction confirmation in less than 1 second, with options for balance and transaction privacy to meet compliance.

These features are more like a technological declaration of monetary sovereignty. Arc is open to all developers, but rules are set by Circle.

At this point, from Centre to Arc, Circle has made a three-level leap:

From issuing banknotes as a private bank, to monopolizing currency issuance rights, to controlling the entire financial system—only faster.

And this “digital central bank dream” is not unique to Circle.

Same Ambitions, Different Paths

By 2025, the stablecoin battle will see several giants harboring “central bank dreams,” but with different approaches.

Circle chose the most difficult but potentially most valuable path: USDC → Arc blockchain → a complete financial ecosystem.

Circle is not content to be just a stablecoin issuer but aims to control the entire value chain—from currency issuance to settlement systems, from payment rails to financial applications.

Arc’s design is full of “central bank thinking”:

First, as a monetary policy tool, USDC as native Gas gives Circle a “benchmark interest rate” style regulatory capability; second, as a settlement monopoly, built-in institutional RFQ forex engine makes on-chain forex settlement must go through its mechanism; finally, rule-making authority—Circle retains control over protocol upgrades, deciding which features go live and what behaviors are permitted.

The hardest part is ecosystem migration—how to persuade users and developers to leave Ethereum?

Circle’s answer is not migration but supplementation. Arc is not meant to replace USDC on Ethereum but to provide solutions for use cases that existing public chains cannot meet, such as enterprise payments requiring privacy, real-time forex settlement, and predictable on-chain costs.

It’s a high-stakes gamble. If successful, Circle will become the “Federal Reserve” of digital finance; if it fails, billions of dollars invested could be wasted.

PayPal’s approach is pragmatic and flexible.

In 2023, PYUSD launched on Ethereum; in 2024, it expanded to Solana; in 2025, it went live on Stellar; recently, it also covered Arbitrum.

PayPal did not build its own blockchain but instead made PYUSD flexible across multiple ecosystems—each chain a potential distribution channel.

In the early stage of stablecoins, distribution channels are more important than infrastructure. When you already have a ready-made network, why build your own?

Occupy user mindshare and use cases first, then consider infrastructure later—after all, PayPal has 20 million merchants.

Tether, on the other hand, is like the de facto “shadow central bank” in crypto.

It rarely intervenes in USDT’s use; once issued, it’s like cash—market determines circulation. Especially in regions and use cases with loose regulation and difficult KYC, USDT becomes the only choice.

Circle founder Paolo Ardoino once said in an interview that USDT mainly serves emerging markets (like Latin America, Africa, Southeast Asia), helping local users bypass inefficient financial infrastructure, acting more like an international stablecoin.

With trading pairs on most exchanges being 3–5 times more numerous than USDC, Tether has built a strong liquidity network effect.

Most interestingly, Tether’s attitude toward new chains is supportive but not proactive. It supports the development of dedicated stablecoin chains like Plasma and Stable. It’s like betting—maintaining a presence across ecosystems at low cost, waiting to see which can succeed.

In 2024, Tether’s profit exceeded $10 billion, surpassing many traditional banks; it does not use these profits to build its own chain but continues buying government bonds and Bitcoin.

Tether’s gamble is that as long as reserves are sufficient and systemic risks are avoided, inertia will keep USDT’s dominant role in stablecoin circulation.

The three models above represent different visions for the future of stablecoins.

PayPal believes in user sovereignty. With 20 million merchants, technology architecture is secondary. That’s the internet mindset.

Tether believes in liquidity sovereignty. As long as USDT remains the foundational currency for trading, everything else is secondary. That’s the exchange mindset.

Circle believes in infrastructure sovereignty. Control the rails, and you control the future. That’s the central bank mindset.

The reason for this choice may be summed up in Circle CEO Jeremy Allaire’s congressional testimony: “The dollar is at a crossroads; monetary competition is now a technological competition.”

Circle sees not just the stablecoin market but also the right to set the standards for the digital dollar. If Arc succeeds, it could become the “Federal Reserve System” of digital dollars. This vision is worth the risk.

2026, a Critical Time Window

The window is closing. Regulation is advancing, competition is intensifying, and when Circle announced Arc would go live on mainnet in 2026, the crypto community’s first reaction was:

Too slow.

In an industry that champions “rapid iteration,” taking nearly a year to go from testnet to mainnet seems like a missed opportunity.

But understanding Circle’s situation reveals that this timing is actually quite good.

On June 17th, the U.S. Senate passed the GENIUS Act. This is the first federal-level stablecoin regulation framework in the U.S.

For Circle, this is a long-awaited “official recognition.” As the most compliant stablecoin issuer, Circle has almost met all the requirements of the GENIUS Act.

By 2026, these regulations will be implemented and the market will have time to adapt. Circle does not want to be the first to take the plunge but also does not want to be too late.

Enterprise clients value certainty most, and Arc offers exactly that—clear regulatory status, predictable technical performance, and a defined business model.

If Arc successfully launches and attracts enough users and liquidity, Circle will establish itself as a leader in stablecoin infrastructure. This could usher in a new era—private companies operating as “central banks” becoming a reality.

If Arc performs poorly or is surpassed by competitors, Circle may have to reconsider its positioning. Perhaps, in the end, stablecoin issuers will only be issuers, not infrastructure dominators.

But regardless of the outcome, Circle’s efforts are pushing the entire industry to confront a fundamental question: in the digital age, who should hold the control over money?

The answer to this question may be revealed early in 2026.