Circle Leaps Into Exchange Business With Poloniex Acquisition

Circle, a mobile payment app company backed by Goldman Sachs, has announced it is buying U.S.-regulated cryptocurrency exchange Poloniex Inc. — a move that will transform Boston-based Circle into one of the biggest players in the industry.

According to Fortune Magazine, Circle paid $400 million for the exchange, which handles a trading volume of around $1.5 million per day.

Up till now, Circle had three main products: Circle Pay, a mobile app that allows users to hold, send, and receive traditional fiat currencies; Circle Trade, a liquidity provider of cryptocurrencies; and an upcoming mobile app dubbed Circle Invest that allows users to invest in cryptocurrency markets.

The purchase of Poloniex, the 14th largest cryptocurrency exchange by 24-hour trading volume, launches Circle into an entirely new realm of business. Circle will now be competing directly with the likes of Coinbase, Bittrex and Kraken.

Poloniex, a company that launched in 2014, appears to headquartered out of Somerville, a town northeast of Boston. Details about its management team are scarce. Its CEO and founder is Tristan D’Agosta, but nobody seems to know much about him, and the company website offers no information about its founders.

ATS Plans

Looking down the road, Circle maybe aiming to “clean up” Poloniex. Right now Poloniex trades several initial coin offering (ICO) tokens. In the past, however, the U.S. Security and Exchange Commission (SEC) stated that it considers most ICO tokens to be unregistered securities.

The SEC has also suggested that crypto-to-crypto exchanges operating in the U.S., like Poloniex, Bittrex and Kraken, that trade those tokens are likely trading unregistered securities, and therefore, going against the law, which requires that securities can only be traded on SEC-registered exchanges.

Under that light, it is easy to see why the Circle acquisition may be a good move for Poloniex. According to a slide from a confidential Circle presentation posted on Twitter by New York Times reporter Nathaniel Popper, it appears the SEC has informally indicated to Circle that regulators would “not pursue any enforcement action for prior activity” if Circle turns Poloniex into a regulated exchange.

As such, it appears Circle has plans to turn Poloniex into a licensed alternative trading system (ATS), along the lines of what Overstock is doing with tZero. According to the slide, after closing the sale, Circle will begin the process of licensing Poloniex with the SEC and Financial Industry Regulatory Authority (FINRA).

Circle also will be growing the business substantially. “Our pro forma operating plan anticipates adding 80-100 personnel to this business line,” Circle states in the slide.

Tether Connection

Currently, Poloniex, does not have fiat trading pairs, which means the only way for a user to cash out into the fiat world is to move digital assets to an exchange like Coinbase, which links directly to a user’s bank account.

Instead, Poloniex has trading pairs with tether (USDT), a stable token  pegged to the U.S. dollar. Some have speculated, if regulators were to step in and shut down Tether — a company owned and operated by the same management team behind the cryptocurrency exchange, Bitfinex — that could lead to the undoing of exchanges that depend on it, like Poloniex, Binance and Bittrex.

Circle may try and change that by connecting Poloniex with the fiat world. The company’s principals Sean Neville and Jeremy Allaire wrote in a blog post that Circle plans to scale Poloniex by “increasing token listings where possible and appropriate, and exploring the fiat USD, EUR and GBP connectivity that Circle already brings to its compliant Pay, Trade and Invest products.”

There are also hints that Circle plans to delve into decentralized exchanges, where users can trade digital assets directly without the involvement of a third party.

In a blog post announcing the merger, Poloniex wrote, “In working closely with the Circle team to formalize our union, we have found a shared vision for a future in which decentralized cryptocurrency protocols create a far more open, inclusive and evenly distributed global economy.”

In the meantime, Poloniex assures its users the transition will be a smooth one, writing that “any updates we make in the course of this transition will be behind-the-scenes and focused on strengthening user experience, platform performance and security.”