February : Circle Acquired Cryptocurrency Exchange Poloniex for $400M

Michael Ippolito | December 26, 2018

The Story

Circle made waves in February of this year with their $400 million acquisition of US-based exchange Poloniex. At one point the largest crypto exchange in the world, Poloniex’s acquisition by the Goldman-backed startup marked the largest purchase to date in the cryptocurrency space.

Initially under the umbrella of Circle Trade, Poloniex was intended to complement Circle’s existing OTC trading desk and bring liquidity to both institutional and retail investors in the global cryptocurrency market.

Said Circle:

"Circle Trade serves institutions and investors as one of the world’s largest providers of crypto asset liquidity; and our forthcoming Circle Invest app enables individuals to tap into crypto asset investment through a simple, seamless, mobile experience. Now Poloniex addresses another key element of Circle’s product foundation: An open global token marketplace.”

10 Months Later…

Circle’s acquisition of Poloniex is interesting not only because of its size and scope, but also what it says about the company’s strategy. Despite being one of the most recognized names in the blockchain space today, Circle is also one of the least understood due to its rapidly growing number of product lines.

The company seems to be involved in a little bit of everything. What started as a product to buy bitcoin became a peer-to-peer payment platform, and is now a sprawling giant involved in everything from running one of the largest OTC trading desks in the space to launching its own stablecoin. With all of its recent activity, it is difficult (but not impossible) to parse out the company’s overall mission.

Let’s begin by taking a quick look at their multiple product segments:

Originally brought in under the umbrella of Circle Trade, Circle has delineated the digital asset exchange into its own product line. Poloniex aims to meet the needs of both institutional and retail traders who would prefer exchange trading to the OTC markets. Circle also offers a suite of trading tools that cater to more sophisticated investors.

Circle Trade
This is Circle’s OTC trading desk, which does over $2B in monthly trading volume and has a minimum order size of $250K. Circle Trade is an important piece of market infrastructure for large-scale or institutional investors who would prefer a less transparent trading space.

Circle Invest
Circle Invest is an on-ramp for retail investors who have never invested in crypto before. Circle has differentiated their platform from competitors with an intuitive user interface, low minimum investment, and a suite of helpful features that you might expect to see in your Fidelity account.

The most recent of these features are Collections — mini-indexes which allow first time investors to buy sub-segments of the market with one easy click. Collections are analogous to an ETF that tracks a specific sector in today’s market, such as AI.

Circle Pay
Circle’s peer-to-peer payment application (think Venmo) that allows users to send and receive crypto or fiat payments anywhere in the world, zero fees attached.

In addition to its primary suite of products, in the last couple of months Circle has launched its USD-backed stablecoin (USDC) in collaboration with Coinbase, built out Circle Research, and acquired SeedInvest, an equity fundraising startup and licensed broker dealer.

Given the breadth of its product lines, how do we begin to connect the dots and discern Circle’s key objectives?

Tokenize Everything

The relationship between Circle’s seemingly separate lines of business becomes a bit more clear by understanding CEO Jeremy Allaire’s vision of a tokenized future.

Said Allaire after Circle’s acquisition of SeedInvest:

“If we zoom out, there’s going to be this tokenization of everything. Eventually, these marketplaces will have tens of thousands, if not hundreds of thousands of assets — so the next piece was broker dealer (SeedInvest).”

Reading between the lines, it appears Circle has taken note of the phenomenal (over $12 billion) amount of capital raised by ICO’s, but wants to take a more cautious, regulated approach to equity fundraising.

Considering Allaire’s view on tokenization, it looks as if Circle is preparing for a world in which capital formation is primarily achieved through a regulated cousin of the ICO. And this extends beyond “digitally native” assets — Allaire believes that most existing assets will be recorded on blockchains as well.

Allaire used the example of Best Buy shares. The “token” in this example would still be backed by Best Buy’s stock, with the same price and underlying value. But the user could unlock other benefits in an actual Best Buy store, or add technology layers called “smart contracts,” that can do things like execute a transaction automatically.

Despite Circle’s advocacy for digital currencies, Allaire believes that customers will still want to transact in “real,” stable forms of currency — enter their Stablecoin, USDC. “The ‘USD Coin’ as it’s called, is not meant to replace the U.S. dollar,” explained Allaire. “It’s a way to take an existing dollar and make it compatible with the cryptocurrency infrastructure, which advocates say is better and faster than existing payment rails.”

Moving Forward
Now that we have a better understanding of Circle’s aims, let’s break the company down by what they are aiming to accomplish rather than their product lines:

  1. Create Crypto-Based Payment Rails: Rather than rely on Visa or Mastercard, Circle is enabling zero-fee, instantly settled payments via their stablecoin and Circle Pay.
  2. Enable New Forms of Capital Formation: This is currently in the works through their acquisition of SeedInvest.
  3. Facilitate Investment in Existing Digital Assets: Through Circle Invest (on-ramp for beginners), Poloniex (exchange for more sophisticated traders) and Circle Trade (OTC desk for lage, institutional players).

Put more simply, Circle is building a “crypto-native” capital markets infrastructure adjacent to the one that exists in the traditional finance space today. The acquisition of Poloniex was only the beginning — it was the first (big) bet that Circle made that a large portion of the future economy will operate on blockchain technology.

It’s a long, uphill road that will inevitably be fraught with regulatory complications and a swath of competitors, but if Circle succeeds in their mission, they stand to become one of (if not the most) influential players in the digitized future.

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Michael Ippolito

Co-Founder of BlockWorks Group