Circle was supposed to be the well-behaved alternative to Tether. A stablecoin issuer that embraced regulation, parked customer funds in the banking system, and dutifully followed the rules governing money transmitters. But the collapse of Silicon Valley Bank in 2023 — which briefly knocked USDC off its peg, compromising $3.3bn of reserves — forced an uncomfortable realization. Banks bear counterparty risk.
That raised an obvious question for many stablecoin users: What exactly is the point of a crypto-based stablecoin if, in a crisis, it ends up being just as exposed to the fragilities of the traditional financial system it claims to bypass?
Circle has effectively swapped direct exposure to the banking system for exposure to the asset-management complex.
Circle’s latest 10-K, released Monday, suggests the company has spent the past two years quietly reengineering its model to address that question, mostly by reducing its reliance on the banking system, while still remaining compliant. The outcome is a capital-market-oriented structure that has enabled the group to become a major force in the U.S. government debt repo markets.
That shift, however, has not necessarily translated into the kind of profits some of its rivals enjoy. It also appears that compliance comes at a high cost. Like all stablecoin issuers, Circle derives its core revenue from interest income on the reserves that back its primary stablecoin.
But in the same year that Tether delivered a $10 billion net profit, Circle reported a net loss of $70 million on revenues of roughly $2.7 billion in 2025. These were up 60 percent on the year. However, IPO costs, alongside the substantial revenue share the group pays to distribution partners that host USDC balances and help generate liquidity and demand for the tokens, ensured much less bang for its buck.
So-called “revenue less distribution costs” (RLDC) at the group is currently split 39 percent for Circle and 61 percent for partners, chief of which is Coinbase.
But the much bigger trend revealed by the filings is that Circle has systematically moved away from a model reliant on bank deposits and toward one that looks far more like a classic money-market fund structure.
As of December 31, 2025, roughly 88 per cent of the $66 billion of reserves backing USDC were held inside the Circle Reserve Fund, a government money-market fund managed by BlackRock and custodied by BNY Mellon. Thus, only a small portion of the reserves now sits as direct bank cash, largely with globally systemically important banks.
In other words, Circle has effectively swapped direct exposure to the banking system for exposure to the asset-management complex. While that may still constitute regulated infrastructure, it nonetheless represents a different kind of infrastructure. As the filing notes, BlackRock is not obligated to provide financial support to the fund in the event of losses. The backstop, in other words, is market structure rather than balance-sheet guarantees.
What matters even more is what the fund actually invests in.
The reserve portfolio is dominated by short-dated U.S. Treasuries and Treasury-backed repurchase agreements. And crucially, repo now accounts for the majority of the assets. Breaking down the figures, about $31.4bn of the $57.9bn invested in the Circle Reserve Fund is deployed in overnight Treasury repo transactions. In other words, roughly $31 billion of the dollars sitting behind USDC are being recycled nightly into the repo market, lending cash to dealers against Treasury collateral.
This structure is not unusual in itself. Government money-market funds have long relied heavily on repo for liquidity management. The difference is that, in Circle’s case, the liabilities of the fund are circulating as digital tokens rather than conventional fund shares. The stablecoin, therefore, functions as a sort of tokenized liability layered on top of a traditional money-market portfolio.
In many ways, this is not that different from what happens elsewhere in fintech. Services such as Wise also sweep customer balances into BlackRock money-market funds, albeit they pass on the interest back to holders. Behind much of modern fintech “float”, eventually, sits a government MMF invested in Treasuries and repo.
What Circle has done is extend that model into crypto markets.
And it has done so just as collateral itself is becoming the central battleground of digital finance. The 10-K notes, for example, that market participants have already begun shifting collateral practices toward tokenized money-market funds, which can provide yield while still serving as margin or settlement collateral.
Circle’s response has been to push into this space directly through Hashnote USYC, a tokenized Treasury money-market fund designed to function as on-chain collateral.
The intended architecture is straightforward enough. Institutions hold yield-bearing collateral tokens such as USYC, but can convert them into USDC when settling trades. Circle is also building infrastructure to support such collateral frameworks — including its Circle Payments Network and StableFX systems — both of which aim to facilitate conversion between collateral and settlement tokens.
But is it compliant?
Thanks to the GENIUS Act, which passed last July, stablecoin reserves can be held in a wide set of safe assets, including Treasury bills, Treasury-backed repo, reverse repo and government money-market funds. It even contemplates tokenized versions of these instruments. In other words, U.S. policy effectively recognises a capital-market model for stablecoin reserves.
Other jurisdictions have taken a more restrictive approach. Under Europe’s MiCA framework, large stablecoin issuers must hold a substantial portion of reserves as bank deposits. The result is effectively a protective ring around the banking system rather than a push toward capital-market collateral structures. The Bank of England is still working through its own approach, but has suggested limits on how much of a stablecoin’s reserves could be invested in government securities relative to bank deposits.
The inspiration for Europe’s more cautious approach, however, may actually lie in China. More than a decade ago, Jack Ma pursued a similar model through Alipay’s Yu’e Bao fund, which swept unused payment balances into a money-market fund that rapidly became the largest in the world. The structure effectively allowed payment-system float to flow into funding markets, creating a form of price discovery that had been suppressed elsewhere in China’s banking system.
The People’s Bank of China eventually stepped in, requiring payment firms to hold customer balances in centralized custodial accounts at the central bank — largely eliminating the yield-generating arbitrage that had powered Yu’e Bao’s growth. It seems eurocrats are eager to repeat that maneuver.
What is clear is that Circle’s new reserve model suggests the United States is taking the opposite path. Rather than shutting the arbitrage down, it is allowing stablecoin issuers to build it into the financial architecture, and in the process, for stablecoins to become major sources of collateral and liquidity for repo markets.
With repo now sitting at the heart of those reserves, the end result looks less like a simple payments innovation and more like the gradual emergence of a new, tokenized layer in the global collateral system.
