Circle’s Arc Layer 1 Re-ignites the Open Versus Permissioned Chain Debate – Crypto News

Circle’s newly launched Arc, described as an open Layer 1 blockchain, is dividing experts across the crypto community, with some saying its design undermines the principles of decentralized finance (DeFi) and others calling it a practical step that boosts USDC’s infrastructure.

Announced on Tuesday, Aug. 12, Circle said in a post on X that Arc, built with USDC as its native gas, aims to “drive the next chapter of financial innovation powered by stablecoins.”

USDC currently boasts a market capitalization of $65 billion and is the second-largest stablecoin by circulation, behind Tether’s USDT, per DeFiLlama.

The new L1 is meant to be custom-built for stablecoin payments, with features like a built-in FX engine, sub-second finality, opt-in privacy, and integration with Circle’s platform. The company also revealed it is EVM-compatible and designed to work across multiple blockchain networks.

Not a “True L1”

However, some argue Arc is more akin to a private network than an open blockchain, because it runs on the Malachite consensus mechanism, which relies on a permissioned set of validators, now managed by Circle. Also, the chain’s native gas cryptocurrency is the Circle’s USDC stablecoin, which requires know-your-customer (KYC) and anti-money-laundering (AML) compliance for entities overseeing USDC to USD redemptions.

That’s unlike open and permissionless blockchains like Bitcoin and Ethereum, where anyone can become a node on the network and hold BTC and ETH.

Critics argue Circle’s network functions more like a controlled financial system than a blockchain, which is designed to operate without central authority.

“This isn’t an L1 and it’s offensive to call it such,” Adam Cochran, a partner at Cinneamhain Ventures (CEHV), an activist venture capital firm, wrote on X. “It’s a consortium chain of private pre-approved validators, who even have permission to refund transactions via ‘dispute protocols’.”

Cochran explained that Circle can’t call Arc a true L1 when using USDC as the root token, “because there are never economic incentives to be a faithful validator, and that’s why they have to make it a private consortium.”

He added that this runs counter to the concept of decentralization and likened it to PayPal’s multi-vendor protocol.

“Blockchains exist because exploitative middlemen, like banks and transfer agents, take undue fees and apply undue censorship,” Cochran’s post continued. “This industry was built to fix that in peer-to-peer systems, not by just building new banks.”

Stripe’s Tempo L1

Kevin Lehtiniitty, CEO of Borderless.xyz, a stablecoin payments network, added that if the goal is open finance, another centralized L1 doesn’t move the needle forward and further fragments liquidity.

“If you add in the Tether-focused chain Stable, heavily VC funded upstarts like Codex and Plasma, and soon institutional launches from banks and players like Stripe, you get ever‑thinner liquidity across more silos,” Lehtiniitty told The Defiant.

Earlier this week, Stripe announced it’s developing an in-house L1 blockchain dubbed “Tempo” in partnership with crypto venture capital firm Paradigm. According to a job listing for a product-marketing lead, Tempo is described as “a high-performance, payments-focused blockchain” aimed at Fortune 500 clients.

Lehtiniitty explained that the race to be the “stablecoin chain” brings us back to fragmented payment rails dressed in new branding. “The answer that does push open finance forward in my mind is connectivity and interoperability; not another chain or another token.”

A “Bold” Move

Other experts, however, frame Arc differently and some say that its design anticipates compliance requirements under the GENIUS Act, which was recently passed by the U.S. House of Representatives and signed into law by the U.S. President Donald Trump. The GENIUS Act aims to regulate stablecoins like USDC, and create a clearer landscape for innovation moving forward.

Mitchell DiRaimondo, Lead Project Manager and Founder at Steelwave Digital, emphasized that Arc “isn’t DeFi, and that’s the point.”

“It’s a permissioned, USDC-native chain built for speed, compliance, and predictable settlement. If you’re looking for decentralization and trust minimization, this will feel like a step backwards,” DiRaimondo said. “But if you’re building institutional rails for tokenized treasuries, real-world assets, and cross-border payments, Arc is exactly the kind of controlled environment big capital will plug into.”

He said using USDC as gas reduces the incentives for validators to act independently, but it gives institutions what they want: predictable costs and easy onboarding. “That’s a trade they’ll make all day,” DiRaimondo said.

“Bold? Yes. Terrible? Only if you confuse it with DeFi infrastructure,” DiRaimondo added, noting that this is Circle “staking its claim as the backbone for institutional on-chain markets, not a playground for open-source anarchy.”

Sid Powell, CEO of Maple Finance, echoed DiRaimondo, calling the launch of Arc a “pragmatic move” that strengthens USDC’s infrastructure and expands its role in the crypto landscape.

Powell argued that by centering USDC on an EVM-compatible chain with sub-second settlement and built-in FX capabilities, Circle is fostering an environment to appeal to institutions looking for speed, regulatory alignment, and seamless fiat on- and off-ramps.

“Those that comment on the fragmentation of liquidity are not seeing the larger picture that not one chain will be ideal for all audiences and should consider how early we are in the greater onchain migration,” he said. “As the industry matures, ideal institutional programmability will only accelerate adoption and growth as the most impactful solutions will need to balance performance and compliance with permissionless access and interoperability.”

Is this a good idea?

Dave Weisberger, the former Managing Director at Citigroup and co-founder of CoinRoutes, explained that whether or not Arc is a good initiative will depend on whether Circle can persuade other stablecoin issuers to use it.

He added that how the economics are developed, and if Circle can actually leverage it to become a key player in the banking sector are also determining factors.

“As of now, it seems a worthwhile bet, but it is certainly going to require great execution of their plan,” Weisberger said.