Circle Internet Group, Inc. (CRCL) Earnings Call Transcript & Summary

I think it's 9:00, so we can get started with the first session. Welcome, everyone, to the 11th Annual Future of Commerce Conference. My name is Ken Suchoski. I'm the analyst on the payments team at Autonomous Research. We're excited to have Jeremy Allaire, Co-Founder, Chairman and CEO of Circle. Jeremy has spent the last 13 years building Circle and its stablecoin USDC. He's been very instrumental in the development of stablecoins as a category and stablecoin legislation more recently. So Jeremy, welcome. Thanks for coming today.

Thanks, Ken.

I prepared a list of questions. I think we're going to open it up to the audience at the end of the session. So if anyone has questions for Jeremy, feel free to raise your hand, and we'll get those answered. So with that, let's get started.

Jeremy, you and the team have been very busy lately launching Arc. You did announce the Tazapay acquisition a couple of weeks ago. Maybe we'll start with Arc. Arc mainnet went live a week ago today. Talk to us about the first week of Arc, what's happening and what should people be watching for?

Yes. Thank you. As I shared, and you can watch the launch event if you're more curious than what I'll say here. But Arc is by far the most significant platform launch in the company's history. My view is this is ultimately an opportunity as large or larger than USDC. The ability for the world to move more and more of its economic activity onto the Internet to have the financial activity, the contractual activity, the agentic activity running in software machines on the Internet is an enormous opportunity, potentially as large as clouds themselves. And so these -- this infrastructure is just a tremendous opportunity. And as an economic operating system, we really take a very, very broad horizontal view as to what this will ultimately become. I think we're very proud of what we've been able to achieve with the launch. I think several key highlights. I think the first is -- this is a network. This is the first time a major operating system like this has been stood up and is being operated by the world's leading financial infrastructure companies. This is not a network run by Circle. This is a network run by Circle, by Visa, by Mastercard, by the DTCC, by BlackRock, by global systemically important banks and other leaders in digital assets. It is a network with stakeholders from those firms, and it is a network where we will all share in the economics as this scales. So the cohort of firms that are running this infrastructure is very unique. And this is also one of the very first blockchain operating systems that is designed to meet the requirements of the regulated financial sector. It meets the requirements of central banks, of securities and markets regulators that oversee exchanges. And this is critical. If we're actually going through a phase where we're going away from kind of early adopters trading cryptocurrencies to actual money markets, currencies and financial contracts running on the Internet, you have to have a network that is held to those standards. So it is running to those standards that is very, very unique. Also, we launched this network with extraordinary support across the global digital asset ecosystem. Every major exchange, every consumer wallet, every custodian, most of the major market makers and trading firms, the leading apps that are deployed on other protocols, most of those all launching day 1. So basically, this is lit up and is available and is already integrated into almost every platform that is out there. So that is tremendous. I think in terms of total value on the network, I think we're already approaching $1 billion of value on the network. That's one of the fastest deployments of capital into a network in the history of blockchain launches. Now day 1, week 1 is still incredibly early. The right way to think about this is like when a new operating system launches, do you have great apps? Do you have good developers? Are the developers building apps? Are those apps getting traction? Are there repeat users? And in an ecosystem like this, what you need to be focused on is, is transaction volume growing? Is the value of assets deployed on the network growing? Is usage and liquidity and is capital markets functions growing? Those are really the critical things, and the team is very, very focused on seeing those things be realized in the coming weeks and months.

Exciting times, lots to follow there. Let's take an example of BlackRock deploying its money market funds on Arc or the DTCC tokenizing equities on it. What does Circle earn for these deployments? Is it a per transaction fee, a validator fee, some percentage of AUM? And I guess the question that we've gotten is just how does the revenue mix and model evolve over time?

A couple of things. I think the first is the way we look at our business is as a kind of comprehensive kind of full stack platform. But each of the pillars, the operating system pillar, the digital asset pillar, which is anchored in USDC and the payments pillar, those are -- they have their own internal network effects and flywheels, but they also have flywheels that roll against each other. And so Arc adoption drives USDC adoption as an example. And so when we think about monetization and we think about traction, we look at this across the influence that these have across the board. But each one needs to obviously have -- stand on its own. So let me talk about that with respect to Arc. I think -- the first is Arc today, the most recent value -- fully diluted value on the network is $3 billion. Obviously, we believe that this is a network that has the potential to be valued much, much higher. Circle is a 25% stakeholder in that, and that stake will generate economic rewards to Circle based on the activity on the network. And so that's really key, which is basically -- think of it as if you were able to have a stake in the revenue of AWS, what would that be worth? As more people build applications and deploy applications onto a cloud or something like this, the more applications that are deployed, the more traffic, the more usage, the more underlying demand on the volume, the more that, that generates value for the stake itself, it would be like owning a piece of AWS and the transactional revenue stream. And so in the first week of Arc, Arc network generated about $0.5 million of transaction fees in USDC. And obviously, we will -- that's all public. You can see it in real time. There's a burst at the launch, but we'll see how that sustains over time. Circle, obviously, as one of the largest operators, receives those fees, and we will receive -- those fees will ultimately accrue also to ARC Token over time and the company's stake in that as well. So fee revenue is one and very significant, staking rewards is another when the network moves through the stake. But then secondarily, if you look at what we've launched with Arc, there's the actual kind of core network operating infrastructure. And then there's layers of other kits and protocols and services that we've built on top of it. And those themselves also have monetization in -- fee-based monetization in them. And so the kind of layers of services that we also provide all providing incremental fee-based monetization opportunities for us. So the question about what value comes from a BlackRock or a DTCC or other companies launching things like tokenized commodities, equities, other things. I mean, really, the important thing there is twofold. I think one is all of these securities as they come on chain, the purchasing and subscription and redemption and trading is all going to be done in USDC. And so it intrinsically drives demand for USDC. And you see that today, where on different venues that are offering tokenized instruments for trading, USDC is the dominant currency that's being used there. And so what do you have to believe? You have to believe that tokenization grows, regulated tokenized instruments grow. As those grow, that drives fundamental demand for digital cash, for subscription redemption trading, collateral, et cetera. And so these are just fundamentally demand drivers on USDC as well. I think the second is that it's also just very, very valuable. As these tokenized instruments come on chain, we can help drive and create interest rate markets, lending markets, credit markets on these instruments as well, which also then effectively the borrower demand creates liquid demand for USDC as well. And so the maturation of -- it's sort of like securities lending, but essentially the maturation and marrying of tokenized securities with on-chain lending markets is an enormous opportunity. And that's historically been a major growth driver for USDC, which is basically USDC is -- sort of has an enormous amount of demand as the borrowed asset for people in the on-chain economy, and we expect that to be an important driver as well.

Great. You just announced the acquisition of Tazapay, which brings, I think it's 60-plus partners, 100 different payout markets into your ecosystem. How does buying payments infrastructure like licenses and regulatory approvals change your competitive positioning? And why was this the right asset to purchase at this time to achieve that outcome?

Yes. I think as we've shared in prior earnings calls, CPN went from a concept and an initial launch to now maturing into a network that has real flywheels on it. The growth in financial institutions joining the network, the growth in the TPV volumes that are flowing across the network, the growth in the number of markets that you can both originate and distribute to and then the use cases themselves. So we've seen that growth and have shared that. I think a couple of things that we really have seen in terms of how do we accelerate this. I think one is an enormous amount of the demand for using this kind of infrastructure is in emerging markets. It's emerging market to emerging market. It's also developed market to emerging market. And a lot of those flows are Asia-anchored and both within Asia and Southeast Asia, but also between Asia and other markets. And so from our perspective, we really want to make sure that CPN has the best infrastructure possible for people who want to both originate and distribute in those markets. Tazapay has done a very good job. It's a young company. It's not like a long-term company, young company, fantastic product execution, operational execution, technical execution. They've built great relationships into financial institutions in these markets and licensing as well. And so I think this is accelerative to product. It's accelerative to our -- to what I'll broadly call operations, providing the operational support in these markets for the businesses and the payment service providers that operate in these places is really key. And so scaling that capability. And then effectively like lighting up the quality of service in some of these destinations -- is very important. Tazapay checked kind of all of those boxes. Obviously, it's a transaction that has not closed because it is subject to closing conditions in particular regulatory approval. So we have to go through the change of control efforts with regulators. Obviously, our expectation is that this will close, but that is ahead of us. Ultimately, once it does close, we will talk to the Street about what the shape of this is on a number of metrics. And obviously, we'll continue to be sharing progress on CPN every quarter.

Great. How has the mix of overall interest in USDC and stablecoins more broadly surprised you versus, say, when you were going public more than a year ago, are you seeing a use case or an industry group that's pushing harder and faster than you expected? And where do you think there's more room for growth there?

Yes. I mean, look, I think if you -- just to put this in perspective, 1.5 years ago, I would guess most of the people in this room didn't really know much about stablecoins or what this was. It was not closely followed. Obviously, Circle's IPO brought a lot of attention to this. And then the passage of the GENIUS Act obviously brought a lot of attention to this. And all of a sudden, the world sort of said, oh, wow, this is like -- this looks like a very large exciting opportunity, et cetera, et cetera. Now a year ago or over a year ago now, the passage of the GENIUS Act was a very important milestone and it obviously created kind of some euphoria in the market. What's important about that, though, is that, that was, in some respects, to the marketplace, a very clear signal, whether it's financial institutions or major corporations or governments around the world is a major signal that this is going to be part of the global financial system, and it's going to be hardened to the standards of federal banking regulation. And effectively, we now need to figure this out. And so everybody sort of said, okay, we now need to figure this out and we're going to -- are we going to have our own stablecoin, we're going to make a consortium stablecoin. We're going to try do all this stuff. Everyone is just like running around like chickens with their heads cut off. trying to figure it out. Fast forward, okay, now where are we? People have absolutely begun to better understand this. And we're now approaching a really critical milestone. What is that milestone? January 17, 2027. The GENIUS Act goes effective. It's not just a law that was passed, it is actually effective. Legal digital dollars will exist in the U.S. federation in the global financial system. What will also happen then? FASB rules. Why are accounting rules so exciting and s***? I never knew that. They really are. FASB rules that classify stablecoins that are issued under these laws as cash and cash equivalents. Why does that matter? It means every public company in the world, every financial institution in the world can hold these and report their financials cleanly. But also from a compliance and risk perspective, everyone will understand what these look like. Third, Circle National Trust. Circle regulated as a National Trust Bank and integrating USDC operations into that National Trust Bank. Why does that matter? It means that counterparties, banks, capital markets participants, large public companies can face essentially an infrastructure bank that meets all of these requirements. And so all of those things are really, really important because that is the basis for unlocking all of the utility of this. And that's a long-winded answer to get to the short part of the answer, which is, I think, what you're looking for, which is essentially as these things progress and as they move forward, what I would say is we are seeing the world's leading banks, the world's leading capital markets companies, the world's leading securities issuers, the world's leading payments companies, the world's leading technology companies and the world's leading commerce firms, all looking at how they're going to implement and support legal digital dollars in their products in 2027. So I have never seen more interest from the world's leading companies in this than I have today. And so the use cases are broad. What I just described is about reaching a point where this is generalizable, general purpose digital dollar money that can be used in the Internet financial system. That is arriving, obviously, as we go through that. So it's -- to me, it's shaping up to be a very exciting 2027. And obviously, I can't forecast what that means in terms of growth in any explicit way. But when analysts step back and say, hey, we think this is going to be trillions of dollars, you actually need it to be legal money, legal digital money, if you want it to be trillions of dollars. That's not going to happen until you have that. That's a milestone that we're coming up on.

Yes. So it seems like more of an inflection point as we get into January, next year.

Passing the law, Circle IPO, interest in the space was an inflection point. But actually, the hardening of this technologically, operationally, legally, fiduciarily, such a word. The hardening of this is, in my opinion, the real inflection point.

Totally. One thing we thought was interesting was the USDC transaction volume continues to ramp despite circulation holding fairly stable over the last few quarters. I guess as we get closer to the finalization of the GENIUS rules, the potential passage of CLARITY, I mean, how are you thinking about the relationship between circulation and volume?

I mean, look, there's a few things here. I think there's one, which is a fairly generic thing, which is -- if you look at the global financial system and you look at money aggregates, electronic money aggregates, physical money aggregates, $120 trillion of money aggregates, about $60 trillion of noninterest-bearing demand deposits or cash. So there's a huge amount of kind of working capital money that is out there. And so what do you have to believe? You have to believe that digital dollars in this form will be superior as a working capital money and that it will eat into that share over time. So that's a general purpose generalized view. I think the second piece to this, though, is that one of the things that's obviously important and very valuable about this new infrastructure is that there's a commoditization that takes place in payment utility. And I've long said that this kind of digital currency will drive the cost of payments towards 0. And so there is a commoditization in payment utility that will take place. And a corollary of that is that the marginal cost of storing and moving value approaches 0. So we don't think about the marginal cost of sending an e-mail or browsing a website or doing a video call because effectively, data has compressed towards 0. Money movement is similar. And so the point here is that the money stock has a higher velocity than in other parts of the financial system because the marginal cost of moving and storing it is so low. And so you're going to see -- and we don't have a strong view as to what this looks like over 3 to 5 years, but it's very important, which is that the velocity and usage of the money is going to be far higher than the velocity and usage of, say, bank electronic money or certainly physical cash. But -- and so transaction volumes can scale and the turnover and use of that money can scale on that same monetary base. However, people still need to hold working capital and payment money. And so those aggregates also grow. The utility of that aggregate grows as well.

Okay. Great. One of the questions that's become increasingly topical and central to the story is reserve economics. Maybe take us into the room and help us understand how these partnership discussions work across the long tail of distribution agreements that you guys have?

Yes. So a few things I'd say, and we obviously -- we talk about this often in our earnings cycles and others, which is we have been over the past several years, leaning into distribution. We want to make sure that the world's leading platforms are [indiscernible] and driving USDC. And we are in the early stages of the development of this market. No one would say a $300 billion or $350 billion market is that big, right? This is a multitrillion dollar market. We want to win determinatively in terms of not just circulation, network effects and utility. We absolutely want to win. This is a winner take most market structure. We are currently, by far, the leading regulated player. We want to cement that. And as we go into this phase where this goes from something that was primarily servicing the digital assets market and trading markets into a broad-based usage, we want to make sure that the biggest players in the world are committing in significant ways to drive USDC. And so obviously, we will structure economics on our own or together with Coinbase in some instances, we will structure the economics to make sure that USDC wins. There are network effects that come from that. Those network effects spill out into all holders of USDC and grows this pool of what we call unincentivized USDC as well. And so that unincentivized USDC is the highest margin component of this for us. And I think if we're marching towards hundreds of billions and ultimately trillions, I think the kind of -- what I'll kind of call like the permanent seniorage that we can get from that can be extraordinary. And as we've also said, and it's very important, is that activity in USDC does not drive OpEx, okay, nor does the amount outstanding drive OpEx. And so we can scale distribution, we can scale usage and growth, and that can still be essentially very high contribution margins to us, right? And so it's a law of large numbers answer there. But maybe just a little bit more specifically, we prioritize building very strong partnerships with the world's leading platforms. Not all deals are created equal, right? We announced yesterday this significant expansion of our partnership with Binance. It's a new 5-year deal. They invested $100 million into the company. Just so people understand today, Binance is the world's largest Internet financial super app. They have approaching 400 million users. They are -- their product is used all around the world for people who are saving, investing and storing value and making payments. We estimate that 70% of the dollar stablecoin payment volume is run through wallets that are from Binance, Binance Wallet and Trust Wallet. And so they are -- when you think about real-world adoption of stablecoins today, they are the tip of the spear. Right now, I think there's approaching $30 billion of Tether on Binance. We see an enormous opportunity for market share shift there. And we expect that, that platform will grow. They have the potential to be 1 billion user platform. We want to make sure that we're the winning asset there. We want to make sure that the largest company in this industry that is expanding in all these markets, this is not just about crypto trading. In fact, huge amounts of the volume on Binance now are tokenized stocks. People are getting access to saving and investing in a wider array of things. So it's a huge opportunity. And of course, we're going to build a great set of win-win economics there that drives and grows the network.

Great. Okay. So it seems like -- I was going to ask about Binance, but it sounds...

Related.

Yes. So I guess in terms of what's changed -- I mean, it sounds like you're incentivizing them more. There's obviously this $30 billion opportunity on their platform. That's really...

And growth.

And growth.

And growth. Yes. I mean we're not sitting here assuming like the total value that's there is only ever going to be that and that no one is going to grow, right? Binance is an incredibly competitive company and has an enormous user franchise, has their own intrinsic network effects. I don't think people quite realize. I think mostly people are like, Binance is an exchange. They're really a financial super app and most of their users in all of these markets really view this as their primary financial account. They view it as a substitute for banking, for brokerage, for payments. It really is the financial account. And this is -- it's an Internet utility that people can access with software in all these markets around the world. And I think as we've said, emerging markets are where the billions of users are going to come into this new digital financial system. They're the leading platform in those markets right now.