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What The Circle/Poloniex Deal Signals to Me

This morning Circle Internet Financial (“Circle”) purchased Poloniex, a Singapore-registered, Boston-based crypto exchange that is popular with traders who trade the most liquid digital assets (BTC, ETH, LTC, etc.), and trade “alt-coins”.  Alt-coins tend to be thinly traded, ICO-launched tokens that have caught the attention of regulators around the globe.  Many alt-coins are would be considered “securities” by regulators once the regulators get around to investigating them.  And generally, securities need to trade on regulated exchanges. 

So, the heat was on Poloniex.  They were justifiably concerned that the SEC in the US would come knocking and shut them down for operating a securities exchange without being regulated as such.  That would be the end of their cash cow, cause a massive settlement to the SEC, and potentially ban the ownership and senior staff from ever working in the regulated financial services industry in the US forever.  

Circle is a Goldman Sachs-backed payments platform that has not had a lot of positive press lately.  They raised a lot of venture capital in their early years, but have seemingly been left behind by PayPal, Venmo, and others in the online payments industry.  I had not seen anything about Circle in the blockchain space, nor in the digital asset space in the press.  The announcement today, and some details that have been leaked, confirm our thoughts of what is next for the digital asset exchange industry:

  1. The next round of growth for these exchanges will be based on improving customer experience.  The massive growth of the existing exchanges was driven by a burning need for retail investors to get in on the Bitcoin craze.  The exchange companies were led by a technology-first mindset of the founders (which makes sense), but the customer experience was terrible.  Account opening processes were a mess, KYC processing took weeks, withdrawal and deposit processes failed, and customer support for these new-to-Bitcoin clients was non-existent.  Circle has specifically stated in their press release they will focus on scaling the business and the customer experience as their priorities for Poloniex.  This is the first move towards the digital asset exchange industry being taken over by the marketers.  We will see experienced financial services operators around the globe come into the space and greatly improve the client experience.  We will see more pull-driven marketing from these operators as the demand for new accounts has slowed with Bitcoin of its December highs.
  2. The big financial services names know they need a piece of digital asset service providers.  They cannot yet take direct steps themselves due to regulators and public sentiment, but Goldman’s implicit backing of this deal is very telling.
  3. Playing nice with the regulators.  Some leaked documents (that we believe to be correct if not authentic) show that Circle has spoken to the SEC in the US and plans to operate Poloniex as an “Alternative Trading System” (“ATS) in the United States under the supervision of the SEC.  ATS exchanges have historically been used for trading of low liquidity assets such as stakes in hedge funds, PE ventures, etc.  Though the digital asset exchange world is still a bit like the Wild West, we know the end result because we saw it with the retail FX & CFD industry since 2006 or so; the regulators will eventually get control and the winners in this game will recognize that early and work with the regulators.  Circle’s move with Poloniex means they are in early with the SEC and will be a significant competitor to Coinbase here in the US and across the globe.

Steve Leahy, Managing Director, ntrd 

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