Is Circle's public blockchain Arc able to allow regulators to view user keys?

Circle, known as the "First Stablecoin Stock," unveiled its latest initiative in the Q2 2025 financial report, a blockchain called Arc, which serves as a Layer1 dedicated to stablecoins. This is a clear parallel to competitors like Tether's Plasma and Stable. Arc is set to launch its public testnet this fall. Let's explore Circle's newest project and its technical highlights.

First and foremost, Arc is a Layer-1 blockchain designed specifically for stablecoin finance and asset tokenization, EVM-compatible, providing a foundational settlement layer for programmable money on the Internet, particularly suitable for global payments, foreign exchange (FX), and capital markets. The goal is to address the obstacles faced by existing public blockchains in enterprise and institutional applications, such as transaction fee volatility, settlement uncertainty, and lack of privacy. Here, we understand that Arc is closely related to payments, and notably, Arc does not seem to be consumer-oriented.

Main Technical Highlights of Arc

Utilizing USDC as the Native Gas and Stable Fee Mechanism

Arc uses USDC as the native asset for paying transaction fees (Gas) and employs a fee market mechanism inspired by Ethereum's EIP-1559. However, it updates the base fee by using an index-weighted moving average of block utilization rates to smooth short-term fluctuations, ensuring transaction costs remain consistently low.

In addition to USDC, Arc also plans to integrate other stablecoins and tokenized fiat currencies for Gas fee payment support through a specialized "Paymaster" (a payment channel).

High Performance

Arc utilizes the "Malachite," a high-performance consensus engine based on the Tendermint BFT protocol. This enables deterministic settlement finality, with transactions confirmed in less than a second and irreversible.

Naturally, there are validators as well. The network is secured by a limited set of licensed geographically distributed well-known institutions as validators. These validators have public identities and must adhere to high standards of accountability and operational assurances, reminiscent of the past Libra initiative.

In a test setup with 20 geographically distributed validation nodes, Arc can process approximately 3,000 transactions per second (TPS) with finality confirmation under 350 milliseconds. With 4 validation nodes, the throughput can exceed 10,000 TPS with finality in less than 100 milliseconds.

Optional Privacy Features

The Arc privacy roadmap begins with the "Confidential Transactions" feature, which can encrypt transaction amounts, making them invisible to the public, while still allowing the addresses of the transaction parties to be visible. This is a very business-to-business (B2B) feature that protects commercially sensitive information.

Another point geared towards compliance, Arc's privacy model allows selective disclosure through mechanisms such as "viewing keys," authorizing third parties (such as auditors or regulatory bodies) to access specific transaction data. Institutions can always fully view their clients' transactions to meet requirements such as transaction monitoring and Travel Rule compliance. In fact, this is quite common in consortium blockchains, often referred to as super nodes that oversee other nodes.

The privacy features are implemented through a modular backend, initially using Trusted Execution Environment (TEE) technology to handle encrypted data, with future plans to integrate more advanced technologies such as Multi-Party Computation (MPC), Fully Homomorphic Encryption (FHE), and Zero-Knowledge Proofs.

MEV Mitigation Roadmap

Arc believes that not all MEV is harmful. It categorizes MEV into "Constructive" (such as arbitrage behavior that aids in stablecoin price discovery) and "Harmful" (such as sandwich attacks).

To address the MEV problem, Arc's roadmap includes implementing an encrypted mempool, batch transaction processing, and multi-proposers technologies to suppress predatory transaction behavior while preserving beneficial arbitrage activities.

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