Circle's sometimes head-scratching deals take shape as a massive, long-term cryptocurrency bet
- The Goldman Sachs-backed start-up bought SeedInvest, a licensed broker dealer, last week as a part of a bet that cryptocurrency fundraising becomes mainstream.
- It also acquired cryptocurrency exchange Poloniex earlier this year and launched what's known as a "stable coin."
- Circle's CEO is preparing for everything from the U.S. dollar to shares of public companies to one day operate on blockchain.
- "It'll make the web look like a cute experiment comparatively speaking in 10 to 15 years," CEO Jeremy Allaire says.
There is a method behind Circle's seemingly random deal-spree.
What started as a peer-to-peer payment company five years ago has fully embraced cryptocurrency. Circle is buying up exchanges and startups in a bet that, despite this year's slump in prices, the crypto economy is here to stay.
Its latest move was acquiring equity-fundraising start-up SeedInvest last week. That company until now had nothing to do with cryptocurrency and didn't seem like an obvious fit for Circle. But Circle founder and CEO Jeremy Allaire explained that it's a cornerstone for his bet that most of the existing financial system is going digital.
"If we zoom out, there's going to be this tokenization of everything," Allaire told CNBC in an interview at the Security Token Academy conference in Manhattan. "Eventually these marketplaces will have tens of thousands, if not hundreds of thousands of assets — so the next piece was a broker dealer," licensed and ready to go.
Allaire's crypto bet has tricky timing. The SeedInvest deal comes just months after Circle bought a crypto exchange called Poloniex and introduced its own dollar-backed stable coin. Yet despite the investing public's enthusiasm for digital currencies — initial coin offerings last year raised the total cryptocurrency market cap to more than $816 billion — the value of these volatile digital tokens has been cut in half this year, according to data from CoinMarketCap.com.
SeedInvest's crowdfunding strategy, as the CEO described it, is a "cousin" to how cryptocurrencies raise money through ICOs. The New York-based company connects fellow start-ups with investors online. Its broker-dealer license was a key reason for the deal, which still needs to be approved by U.S. regulators.
While some ICOs turned out to be frauds, the retail interest was a strong indicator that the crowdfunding method was here to stay, Allaire said. Circle decided to seek out a regulated partner like SeedInvest instead of applying for its own licenses or building one in-house.
"We're chasing a similar vision of changing the way businesses raise capital," said SeedInvest CEO Ryan Feit, who sits on the fintech committee of FINRA, the brokerage industry's regulator. "It's a different form of enabling companies to raise money, and another form of alternative assets for investors."
The crypto craze brought in billions from retail investors last year. That crowdfunding method has ushered in roughly $12 billion this year alone, according to the latest estimates from Autonomous Next.
"It was an incredible experiment in crowdfunding, and tokens and smart contracts as a new capital formation model," Allaire said. "The growth in ICOs were really a pivotal moment for this concept of how can businesses issue digital investment contracts directly over the internet, from all around the world."
Satya Bajpai, who leads blockchain and digital assets investment banking at JMP Securities, said the deal could be an example of what he calls an "acqui-hire," short for "acquisition hiring," that's becoming popular as blockchain M&A picks up. In those cases, a company will buy another start-up to quickly gain employees along with its technology.
"It's hard to get good employees, and even harder to get employees who understand the technology and the business," said Bajpai, who advises technology and blockchain companies.
SeedInvest's CEO disagreed with the "acqui-hire" characterization.
JMP's Bajpai pointed to a natural progression of equity crowd-fundraising going digital and eventually looking more like tokenized securities. In that case, it's possible that SeedInvest would have eventually moved toward the initial coin offering model on its own.
Venture-backed Circle is one of the most highly valued cryptocurrency companies out there. It's profitable, according to Pitchbook, and brought in $110 million in its latest private fundraising round in May, which brought its valuation to $3 billion. Early investors include Goldman Sachs, bitcoin mining giant Bitmain, Breyer Capital, Oak Investment Partners, Accel and Pantera Capital.
Laying the foundation
Boston-based Circle bought cryptocurrency exchange Poloniex in February, which Allaire said it plans to "marry" with the SeedInvest platform to issue tokens to high-net-worth as well as mom-and-pop investors.
The Poloniex deal was more than a play on cryptocurrencies such as bitcoin, Allaire explained. Circle is betting that even existing equities, such as stocks, will be "tokenized," enabling them to operate faster and more efficiently on blockchain technology.
He 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.
"If people can exchange value over the internet without a toll extracted for payments it's pretty dramatic," Allaire said. "It'll make the web look like a cute experiment comparatively speaking in 10 to 15 years."
Despite his bullishness on crypto, Allaire isn't sure that people will buy and sell these equities using bitcoin. He said investors will still rely on regular money — it just needs to be able to operate on the same technology.
So, Circle launched its U.S. dollar-backed "stable coin" in May. Allaire said at the time there were "a number of banks" that were "excited about it and will support it." The "USD Coin" as it's called, is not meant to replace the U.S. dollar, he explained. 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.
The "stable coin" also solves the problem of volatility, which has been a key reason bitcoin hasn't reached mainstream payment adoption and is seen more as a store of value.
Circle announced a new mobile app for Poloniex this week and debuted "Circle Research" to provide users with crypto asset-specific research, overall market research and insights. The new research will start with primers on certain cryptocurrencies and includes a weekly "crypto recap" on Fridays with news and analysis.
In order for Circle's vision to really take hold, regulators need to be on board. The Securities and Exchange Commission has been clear that it sees all cryptocurrencies aside from bitcoin and ethereum (which are commodities) as securities. That distinction made it much easier for Circle to operate and informed some of its deal-making strategy, Allaire said.
"The SEC basically said, yes, this is legitimate, this is a new form of capital formation, but you've got to follow the rules," Allaire said. "At the end of the day, you know, the ideas, the technology and the regulators have just got to meet in the middle."