USDC on Arc: A Capital-Efficient Path for Banks

Banks are increasingly exploring stablecoin-based settlement, treasury, and capital markets use cases. But unlike commercial or retail participants, banks must evaluate these opportunities through a prudential risk-management lens from day one. Capital treatment, supervisory classification, and infrastructure risk are not downstream considerations — they are gating factors.

The global standard-setters for banks and financial market infrastructure providers have developed a range of guidance designed to inform both regulators and banks that are considering engagement with digital assets. These include the Basel Committee on Banking Supervision’s (BCBS) prudential guidance for cryptoasset exposures, the Committee on Payments and Market Infrastructures’ (CPMI) principles for stablecoin arrangements, and the International Organization of Securities Commissions’ (IOSCO) digital asset policy recommendations.  

Together, these standards determine whether a bank’s exposure is treated as lower-risk and capital-efficient — or subject to restrictive capital charges and tight limits — and can have major implications for banks touching new technology such as blockchains. Two exposures that appear economically identical can produce very different balance-sheet outcomes if one satisfies these classification conditions and the other does not.

For banks, this means infrastructure design is not a technical footnote, it directly affects:

• How much capital must be held against stablecoin-related exposures
• How quickly activity runs into internal and external risk limits
• Whether a pilot can become a scaled product line

Classification is not driven solely by the asset itself. It depends equally on whether the surrounding infrastructure meets defined expectations for governance, risk management, operational resilience, and settlement finality. 

This is where Arc’s design matters. 

USDC and EURC are fully reserved payment stablecoins and represent the same assets regardless of network. But the prudential treatment a bank can apply is shaped not just by the coin, but also by the rails that process transfers, validate blocks, and deliver settlement finality. 

Arc’s permissioned validator model, defined governance perimeter, and payments-grade deterministic settlement finality are engineered to make supervisory classification clearer and more defensible. By making validator identity and accountability legible and embedding structured governance at the infrastructure layer, Arc gives bank back offices and risk committees a “regulator-ready” risk management story, streamlining infrastructure risk assessment all while maintaining the benefits of a fully open, public blockchain. 

For regulatory frameworks that draw on the Basel Committee’s cryptoasset standard, this can create a clearer path to “Group 1b” treatment for USDC on Arc — supporting more scalable balance-sheet economics and reducing the risk of capital outcomes that constrain growth, as discussed further below.

At the same time, global standard setters such as the CPMI and IOSCO have framed expectations for stablecoin use cases around outcomes that banks already recognize: governance clarity, conflict management, market integrity, custody discipline, operational resilience, and cross-border cooperation. 

Arc is purpose-built to align with these standards, providing banks, asset managers, brokers, and other market players with infrastructure designed for both innovation and supervisory confidence.

Same USDC. Different rails. Clearer prudential outcomes.

Regulators and supervisors have been clear that the critical infrastructure of a stablecoin is not only about reserves and redemption. It also includes whether a bank can credibly understand, diligence, and explain to supervisors the infrastructure that underpins the asset and processes its transactions. In the Basel Committee's framework, that infrastructure question is embedded in its classification conditions that separate more traditional, lower-risk categories of assets with defined risk management and stabilization structures — which it terms “Group 1” cryptoassets — from more volatile and risky assets which fall into the “Group 2” bucket and are assigned a higher capital treatment. 

In order to support a more efficient capital treatment, banks must be able to demonstrate effective operational risk controls, AML/CFT risk management, and governance accountability regardless of whether their regulator strictly applies the Basel Committee standard. Where validating entities are known and the governance perimeter is clearly defined, as they are with Arc, the bank’s ability to document controls and supervisory defensibility improves materially. The “rails” also map to CPMI-IOSCO’s recommendation that banks take an integrated risk and governance assessment that includes things like validation participation and structure. 

As assets with an effective stabilization mechanism, USDC and EURC inherently meet the “Group 1b” classification criteria across all blockchains; however, banks must also take into account certain infrastructure elements, which can make eligibility more subjective. Circle anticipated these considerations in designing Arc to create “terra firma” for bank risk teams that must demonstrate adequate controls and risk management at the infrastructure layer. In practice, that means Arc relies on a permissioned validator set: a bounded group of identified, vetted institutions operating under clearly defined minimum expectations on governance and accountability. This establishes clear lines of responsibility and accountability for timely intervention, directly supporting CPMI principles on governance (Principle 2) and comprehensive risk management (Principle 3) while still offering the reach, composability, and business benefits users expect from a public blockchain.

A “Basel-friendly” architecture: reducing risks that drive regulatory uncertainty

The Basel cryptoasset standards aim to ensure that banks hold capital commensurate with risks that may be difficult to measure or mitigate. For stablecoins, that means supporting assessment criteria across a few key variables in order to more clearly demonstrate treatment as a stablecoin as a Group 1b asset rather than falling into Group 2, which carries newly prescribed significant capital charges.

Arc is architected to demonstrate such outcomes and give banks the tools to effectively monitor and manage blockchain-based settlement infrastructure:

• Known, vetted validators—no “unknown third parties.” Validators on Arc are identified counterparties. For bank due diligence and supervisory documentation, identified validators simplify third-party risk analysis and allow banks to document who is performing core network functions. This tracks with CPMI-IOSCO’s emphasis on incorporating dependencies of validation into comprehensive risk management (Principle 3).
• Easier risk governance narrative facilitates supervisory engagement. A permissioned validator set creates a clearer line of sight for governance: oversight, evidence of controls, incident accountability, and clear governance rules and processes. These are precisely the components bank operational risk, model risk, and compliance functions need in order to answer “who runs the rails,” “who can change the rules,” and “how are disruptions handled.” Together, they support alignment with CPMI-IOSCO’s governance expectations (Principle 2), including clear accountability and the ability to intervene when needed. 
• Deterministic finality for payments-grade settlement. Arc delivers deterministic settlement finality in under a second—reducing the operational uncertainty associated with probabilistic-finality systems by providing clear confirmation of when a transaction is complete and can no longer be reversed. This meets PFMI Principle 8, which defines final settlement as the irrevocable and unconditional transfer/discharge of an obligation, and emphasizes the need to clearly define the point at which settlement is final. 

Avoiding the “1250% risk weight trap”

Why do these design choices translate into a bank value proposition? Because the downside of failing to justify a lower capital treatment or meet certain classification conditions can be steep. If an exposure is treated as Group 2b, banks may have to apply a 1250% risk weight—designed so that minimum regulatory capital is at least equal to the exposure value. Put plainly: holding $1 of a Group 2b cryptoasset exposure can require roughly $1 of capital.¹ That is a balance-sheet killer for any scaled digital asset product.

And the pressure is not only the risk weight; banks may also have to limit total exposure. Basel standards encourage regulators to set Group 2 cryptoasset exposure to not exceed 2% of Tier 1 capital and “should generally be lower than 1%.” If the 2% threshold is breached, Group 2 exposures can become subject to even more punitive treatment, creating cliff effects that make the economics of scaling difficult even if a bank is comfortable piloting small exposures.

Arc’s objective is simple: streamline the compliance and infrastructure profile a priori to give bank risk teams a clear path towards Group 1 treatment, creating a path forward for bank product teams even as regulatory guidance around the use of blockchains continues to evolve.

What capital-efficient rails unlock for bank use cases

When capital treatment is less punitive and the risk story is easier to document, banks can pass the benefits through to customers and the broader market, offering more competitive USDC-based products. In practical terms, a more scalable capital outcome can support:

• Payments and treasury at scale. Larger, more reliable USDC and EURC operating balances for intraday liquidity management, cross-border treasury rebalancing, and 24/7 settlement workflows.
  
• Customer-facing stablecoin products. Stablecoins create new payments optionality for banks that can reach new market segments and offer efficiencies over legacy systems. USDC and EURC on Arc can support meaningful balances without consuming disproportionate Tier 1 capital² headroom.
  
• Liquidity provision and settlement services. USDC and EURC can improve market making, agency settlement, and collateral movement where balance-sheet economics are highly sensitive to risk weights.
  
• Better pricing and higher limits. Lower capital friction can translate into improved pricing, deeper liquidity, and higher transaction limits for end users—especially when combined with deterministic finality that reduces operational buffers.
  
  

A cleaner diligence path for bank risk and compliance teams

For banks, the most difficult part of stablecoin adoption is often not technological integration—it is governance. Before a program launches, multiple internal functions will want evidence that the bank can understand and control the risks involved. Arc’s construct helps provide tangible answers to common questions:

• Operational transparency for “protocols for transfers” and relevant risk events. IOSCO expects disclosures to include protocols for transfers and the treatment of client assets under events such as 51% attacks and hard forks. A permissioned, distributed validator model supports a clearer, documentable description of who validates transactions and how changes and disruptions are handled—inputs banks and service providers can use to produce higher-quality, non-hand-wavy disclosures.
  
• Reducing governance opacity that can undermine disclosure credibility. IOSCO flags conflicts and governance expectations for crypto-asset service providers—requiring effective governance arrangements to identify, manage, and mitigate conflicts (Recommendation 2)  and accurate disclosure of roles and capacities (Recommendation 3).  Arc’s governance perimeter at the validator layer is designed to make “who does what” on the rails more legible—supporting stronger, more defensible disclosures by banks and platforms that offer USDC services.
• Creating an integrated risk narrative. CPMI-IOSCO also highlights that, where multiple interdependent entities contribute to transfer/validation, it can complicate risk management unless the operator takes an integrated view of risks—including those arising from validating node operators. Arc’s permissioned validator perimeter is designed to make that integrated risk analysis more feasible for bank adopters and supervisors.
• Building on USDC’s existing robust prudential management. CPMI-IOSCO states that when a stablecoin is used as a settlement asset, it should have little or no credit or liquidity risk, including during stress. While Arc is the infrastructure layer, USDC’s regulated reserve model and redemption mechanics are the bedrock factors to meeting the asset criteria for this and Basel frameworks. Arc is designed to pair those stablecoin characteristics with rails whose governance, accountability, and settlement properties are more compatible with regulated risk frameworks.

By making these questions easier to answer—and easier to document—Arc helps banks build supervisory confidence and internal alignment, addressing gating factors early in the product lifecycle.

Looking ahead

Arc’s public, permissioned validator construct is designed to deliver the benefits of modern, programmable settlement while aligning more closely with the expectations embedded in global prudential and market-infrastructure standards.

USDC and EURC are the same assets on every chain. But for banks operating under Basel capital rules—and for supervisors evaluating operational resilience, governance, and settlement risk—the rails matter. 

Arc preemptively answers these questions around validator identity, oversight, settlement finality, and accountability—supporting alignment with Basel Committee standards and CPMI-IOSCO principles. That distinction matters. 

As stablecoins move deeper into mainstream finance and capital markets, the winning rails will not be defined only by throughput or composability. They will be defined by whether institutions can scale them responsibly and apply them under globally regulated frameworks. 

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¹A 1250% risk weight converts a $1 exposure into $12.50 of risk-weighted assets. At the Basel 8% minimum capital ratio, this requires $1.00 of capital (12.5 × 8% = 1.0), effectively equating required capital to the full exposure (omitting buffers).

²“Tier 1” capital refers to a bank’s core regulatory capital under the Basel framework, consisting primarily of Common Equity Tier 1 (CET1) and qualifying Additional Tier 1 (AT1) instruments. It represents the highest-quality, most loss-absorbing capital and is measured against risk-weighted assets (RWA) to determine key regulatory capital ratios, making Tier 1 capacity a central constraint in balance-sheet management.

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Disclosures

USDC is issued by regulated affiliates of Circle. See Circle’s list of regulatory authorizations.

EURC is issued by regulated affiliates of Circle. See Circle’s list of regulatory authorizations.

Arc testnet is offered by Circle Technology Services, LLC (“CTS”). CTS is a software provider and does not provide regulated financial or advisory services. You are solely responsible for services you provide to users, including obtaining any necessary licenses or approvals and otherwise complying with applicable laws. Arc has not been reviewed or approved by the New York State Department of Financial Services. The product features described in these materials are for informational purposes only. All product features may be modified, delayed, or cancelled without prior notice, at any time and at the sole discretion of Circle Technology Services, LLC. Nothing herein constitutes a commitment, warranty, guarantee or investment advice.

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