Goldman and IDG put $50 million to work in a bitcoin company

Nathaniel Popper

Goldman Sachs is becoming the first major bank to make a significant investment in a Bitcoin-focused company, giving a vote of confidence to the embattled virtual currency.

The Wall Street bank announced late Wednesday that it had struck a partnership with a major Chinese investment firm, IDG Capital Partners, to lead a $50 million investment into Circle Internet Financial, a start-up that aims to use the technology underlying Bitcoin to improve consumer payments.

Since first grabbing widespread attention in 2013, Bitcoin has been dented by criminal activity tied to the virtual currency and by flurries of speculative buying and selling. The price of one Bitcoin on Wednesday hovered around $225, far below the high above $1,200 that it hit in late 2013.

Even as public interest has waned, however, major financial institutions have been quietly but seriously examining the opportunities offered by the technology, and particularly the new financial network that hosts the Bitcoin digital tokens and allows them to be sent around the world securely, cheaply and almost instantly.

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A few other Bitcoin companies have recently announced small investments from European banks, and several bank executives have spoken of their interest recently. But Goldman is the first major bank to make such a prominent investment.

"Having a franchise like Goldman Sachs as an investor, who has done due diligence, is a vote of confidence," said Jeremy Allaire, the co-founder and chief executive of Circle.

The investment is coming from Goldman's principal strategic investments group, which generally puts money into projects that could have some relevance for the bank's own business.

Goldman did not comment on the investment beyond a statement from the head of the principal strategic group, Thomas F. Jessop. The statement did not mention Bitcoin, but did say that the firm sees "significant opportunities in companies and solutions that have the promise to transform global markets through technical innovation."

Circle, which does not generate Bitcoin, had previously received investments from venture capital firms like General Catalyst Partners and Breyer Capital.

Unlike most big Bitcoin companies, which have focused on making it easier to buy and sell Bitcoins, Circle is hoping to use the virtual currency primarily as a way to cheaply and quickly move money both domestically and internationally.

Circle customers who want to buy and hold Bitcoin will be able to. But for those who do not want to deal with the volatile price of the virtual currency, Circle is preparing to make it possible for customers to keep balances in dollars in an insured bank account. For these customers, Bitcoin will be used only as a means of moving money, to avoid the fees charged by payment processors and money transmitters.

The network underlying Bitcoin is generally a cheaper alternative because it is powered by a decentralized network of computers rather than a single company, like Visa or PayPal, that can extract fees.

The founders of Circle are aiming to use Bitcoin to move into the burgeoning industry of peer-to-peer payments. The industry is currently led by companies like Venmo, a PayPal-owned application that allows friends to quickly send one another money rather than using a check or a bank transfer, which can take days to go through.

While Circle will, in the near future, offer much the same services as Venmo — including free, instant money transfers — the company hopes that Bitcoin will allow it to move money with same ease across international borders, something Venmo cannot do.

Are regulations a boon or bane for bitcoin?
Are regulations a boon or bane for bitcoin?

The international ambitions should eventually be helped by the participation of IDG Capital, a firm that has backed some of China's biggest start-ups.

Bitcoin gained popularity as a speculative investment in China in late 2013, but the government there shut down much of the excitement by barring payment processors and banks from dealing with Bitcoin companies. Mr. Allaire said that IDG should help Circle navigate the tricky regulatory landscape in China.

While Circle did not provide the size of Goldman's investment, Mr. Allaire said that Goldman and IDG had provided the majority of the $50 million. Circle already had a tie to Goldman through M. Michele Burns, the former chief executive of Mercer who serves on the boards of both companies.

Goldman is one of several banks that have recently written research reports about Bitcoin's potential. A Goldman report in March listed Bitcoin among the four "megatrends" that are likely to transform payments, which it called a $1.2 trillion industry.

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"Although Bitcoin and other crypto-currencies are still in the early stages of development, they could gain traction once clear use cases become more established," the report said.

In the United States, many Bitcoin start-ups have been hampered by the unwillingness of banks to open accounts for virtual currency companies. So far, Silicon Valley Bank has been almost the only American bank willing to deal with companies that hold Bitcoins for customers.

While Goldman will not be Circle's bank, and will not hold any Bitcoins itself, its investment in Circle should help solidify Bitcoin's reputation as a technology that serious financial firms can work with.

Many banks have been waiting for more clarity on how bank regulators view Bitcoin companies. New York state's top financial regulator, Benjamin M. Lawsky, is completing a BitLicense for virtual currency companies that is expected to be out in late May.

Circle intends to apply for a BitLicense, and already holds ordinary money-transmitter licenses from many other states.

"Up until now Bitcoin has really been driven by the speculative value phase," Mr. Allaire said. "We've said it needs to move to the utility value phase."