Circle, a cryptocurrency-focused financial-services firm, will announce today that it is buying crypto exchange Poloniex—a move that immediately makes Circle one of the largest and most influential companies in the industry. Fortune’s Robert Hackett profiles a company that hopes to leverage the technology behind Bitcoin to become the bank of the next century.
On a crisp mid-January morning, I arrive at the Boston headquarters of Circle, a cryptocurrency startup, just as the markets tank. As the day unfolds, virtual coins hemorrhage billions of dollars in value. The price of Bitcoin—along with those of the majority of the top 50 cryptocurrencies—plummets more than 20%. It’s one of the market’s worst one-day routs in a winter full of them. Panicked investors dub the drubbing “Red Tuesday.”
But Circle’s office is unusually tranquil. No managers are throwing a hissy fit. No one is shouting “Sell! Sell!”—or “Buy! Buy!” for that matter—from behind a bank of blinking computer monitors. No subordinates are whimpering. And CEO Jeremy Allaire is the calmest of all. “In this market you have to assume regular 20% swings,” Allaire says with a shrug. The boss, who resembles a softer Steve Ballmer, saunters past a klatch of employees chowing down on Aussie-style meat pies. As we walk past a shuffleboard tabletop to chat in a conference room, he seems … pleased?
After all, whether the markets sink or soar, Circle is set to make a killing. The business operates Circle Trade, one of the world’s biggest “over the counter” trading desks for cryptocurrencies. When big price movements push investors to buy and sell, Circle acts as an intermediary between whales and shoppers. Within Circle’s circle, volatility is a moneymaker. “When things start to get really out of whack really fast, that tends to be good for us,” says Dan, Circle’s fast-talking, South Shore of Boston chief trader, who asks Fortune not to print his last name because he “prefers to keep a low profile” for security reasons.
Circle Trade is the primary reason behind Circle’s profitability. The desk handles more than $2 billion a month in cryptocurrency transactions with a minimum deal size of $250,000. (The biggest deals run as high as $200 million.) Customers tend to fall into a few categories: early investors whose coins have soared in value; coin “mining” operations; and cryptocurrency business ventures, including other exchanges, hedge funds, and projects that have hosted “initial coin offerings.” From November through January, Circle Trade brought in more than $60 million in revenue (including several million just on the day of my visit), according to a source familiar with the company’s financials.
With wild fluctuations in cryptocurrency prices, finding clients hasn’t been hard. Dan Morehead, founder and CEO of Pantera Capital, a hedge fund that specializes in cryptocurrencies, says his firm trades on all the major online exchanges, but will turn to a trading outfit, like Circle’s, when the desk posts prices “at a discount to the market.” “That’s when we’re interested in using them,” he says. Other rivals—and trading partners—of Circle’s desk include Cumberland Mining, a subsidiary of the high-speed trading firm DRW in Chicago; Genesis Trading, a New York–based spinout of SecondMarket, the private-company stock exchange; and Octagon Strategy, in Hong Kong.
Garrett See, CEO of DV Chain, a boutique Chicago firm whose biggest cryptocurrency deals reach $5 million, says early adopters are typically the sources of the largest blocks for trading. As he puts it: “Once a quarter, someone wants to buy a jet.”
But the trading desk is only part of Circle’s vision. The company has a bevy of other products, too. There’s its Venmo-like Circle Pay app, which lets users send money with the ease of a text message. There’s its soon-to-launch Circle Invest app, which aims to encourage small, steady investments in cryptocurrencies the way Robinhood does for stocks. And there’s its Centre protocol, an open-source project designed to make disparate digital wallets—like those from Alipay, PayPal, or, yes, Circle—interoperable with one another.
That’s just the start. Now Circle is preparing to take another major leap forward by tacking on an entirely new business as part of its underlying market infrastructure. On Monday Circle will announce, as Fortune can confirm for the first time, that it has bought Poloniex, one of the world’s most active cryptocurrency exchanges. A person familiar with the terms of the deal who was not authorized to speak about it tells Fortune that the price tag comes in around $400 million.
The acquisition will instantly make Circle a rising threat to Coinbase, the biggest cryptocurrency exchange in the U.S., as well as Bittrex and Kraken, the runner-ups. Counting contributions from Poloniex, Circle’s revenues over the past three months, excluding February, exceeded $250 million, placing the company on an annual run rate greater than $1 billion. Not bad for a 5-year-old upstart.
With the expansion, Circle is laying the groundwork for a day when cryptocurrencies become pervasive, prices grow less volatile, and the utility of digital tokens goes undisputed. If most of the dozens of exchanges competing today are just places to buy and sell coins, Circle has loftier ambitions: It wants to eventually help consumers turn their trading profits into a Tesla, a mortgage, or a portfolio of blue chips. Circle has ample funds, mainstream investors, sophisticated tech, a new network of customers annexed from Poloniex—and, with some luck, a legitimate chance at building the bank of the next century around crypto-finance.
When Jeremy Allaire cofounded Circle in 2013, dark-web markets and criminal activities dominated the discussion about cryptocurrency—and he cut against the grain by resolving to work closely with regulators.
At an early Bitcoin conference in London, Allaire and his cofounder, Sean Neville, Circle’s president, laid out their vision before a rowdy throng of crypto-anarchists and libertarians. One audience member asked whether they, if presented with a subpoena requesting customer information, would hand over data. Allaire didn’t hesitate in his response—Hell yeah, of course! The confab nearly broke out into a brawl, Neville recalls, with one rabble-rouser rushing the stage, pumping his fist, and shouting to the others, “I will go to jail for you!”
Despite the early tumult, Allaire and Neville found support. The duo’s broader, pragmatic vision attracted big investors—including Goldman Sachs, Chinese Internet giant Baidu, and venture capitalist Jim Breyer, one of the earliest backers of Facebook. In its last round of funding, in June 2016, Circle was valued at $480 million. (It’s no doubt worth a lot more now.)
“We’re very stubborn about the overall vision, but really flexible about how to get there,” Neville says. It’s this seemingly contradictory quality that Raj Date, a Circle investor and erstwhile architect of the Consumer Financial Protection Bureau, dubs “paradoxical conservatism”—as demonstrated by Circle’s tightness with regulators. The company was the first startup to be awarded a BitLicense, a certification for virtual currency businesses issued by the New York State Department of Financial Services. It was the first Bitcoin outfit to earn an electronic money license from the UK’s Financial Conduct Authority. And Allaire, since last year, has advised the International Monetary Fund on fintech policy.
Breyer compares Allaire to Mark Zuckerberg in terms of long-term strategic thinking: Just as the Facebook founder “instinctively understood” the need for an overarching, sticky social platform, not just a network for colleges, Allaire has designs on an entirely new financial operating system—not just another bank. “Our vision was always how to fuse the existing financial system with cryptocurrency as a hybrid, digital model,” Allaire says.
The approach has had hiccups though. After Circle debuted its Bitcoin product in May 2014, fraudsters used stolen credit card numbers to make purchases with the speculative cryptocurrency, thus saddling the startup with high fraud-mitigation costs. Circle eventually pulled the plug on the Bitcoin capability within the Circle Pay app, earning the ire of early proponents. “circle stopping what they did best is a travesty and the ceo should be fired,” one user ranted on Reddit at the time. “they just screwed thousands of people, a LOT who were with them from the very beginning (yours included…), and they just decided to hang themselves from the rafters…. good riddance…”
Even so, Circle outlasted the shutdowns, bankruptcies, and arrests that bedeviled the first round of Bitcoin entrepreneurs—thanks to its deep pockets and discretion. Behind the scenes, the company supported Circle Pay with its trading desk, which provided users with liquidity in all sorts of currencies, virtual or otherwise. Beginning in 2016, that desk focused on becoming a cryptocurrency market maker, and it flourished.
“This thing went hockey stick in the last eight months but, like, it’s been around for four years,” says Dan of Circle Trade. While cryptocurrency prices have been spectacularly mercurial over the past few months, a boon for the business, he says he’s not worried about the market settling down. “As this thing becomes a 10x bigger asset class and has volatility on par with gold, we’ll be dealing with larger tickets and smaller movements. That’s how this thing scales.”
Counterintuitively, Circle has hit its stride just as onlookers might have assumed the company had all but abandoned cryptocurrency. Through its trading desk, Circle created a growth engine—one responsible for spinning up the next phase of its expansion. The desk struck a relationship with Poloniex, its Boston neighbor, after Poloniex became one of the earliest exchanges to list Ether, the native coin of Ethereum, the biggest cryptocurrency network next to Bitcoin. Poloniex, which for now trades only digital tokens (about 70 types), needed a way to translate its cryptocurrency exchange fees into fiat money like U.S. dollars—“to buy cookies and milk and pay rent,” as Allaire likes to say. Often Poloniex did so through Circle’s trading desk. And so began a relationship that would culminate in Monday’s acquisition.
Like many of the big cryptocurrency exchanges, Poloniex has struggled to service an influx of customers over the past year, as has been well documented in complaints on online forums. Users have griped about missing deposits, trouble withdrawing funds, locked accounts, and months-long silences on support issues. In a blog post set to go out Monday, a draft of which Fortune reviewed, Circle promised, “First and immediately…to address Poloniex customer support and scale risk, compliance, and technical operations.”
In interviews, Circle’s executives were reluctant to divulge anything at all about the inner workings of Poloniex, including who runs it, and they declined multiple requests for interviews with the exchange’s principals, saying that Poloniex’s leadership wished to remain out of the spotlight. It’s hard to imagine that kind of caginess flying at a public company, but it works in the privately funded world—and especially the enshrouded Wild West of the cryptocurrency industry, where the risk of crime and legal gray areas lead many players to fiercely guard their anonymity.
In past posts on Poloniex’s Twitter account and website, and on a LinkedIn profile page, a man named Tristan D’Agosta has identified himself as Poloniex’s founder and CEO. The LinkedIn page says D’Agosta is a composer who studied music at Rutgers University. Records show that in 2010 he founded another company, Polonius Sheet Music, based in Highland Park, New Jersey, that sold classical sheet music fastened with spiral bindings. (D’Agosta did not respond to a note from Fortune seeking to confirm the details of his biography.)
“Ever have sheet music misbehave while you’re trying to play from it?” says an early version of Polonius’s “about us” page, available as a cached page on the Internet Archive. The publisher’s website now redirects to real estate listings.
If exchanges like Poloniex have helped build the infrastructure for today’s cryptocurrency mania, their relative secrecy and lack of accountability to customers and regulators have helped fuel the backlash to that mania, especially outside the U.S.
Governments have been struggling to bring down the fever for cryptocurrencies overseas. In the fall, the Chinese government clamped down on the frenzy by banning initial coin offerings, or ICOs, and by tightening controls on cryptocurrency exchanges. South Korea put the kibosh on ICOs, too, and has threatened to levy major taxes on exchanges. Earlier this year, when a popular cryptocurrency tracker, CoinMarketCap.com, delisted Korean exchanges from its pricing calculations, the move triggered a massive selloff and market crash.
Circle, eyeing an opening, aims to get in on the action abroad. In the long term, its Centre protocol aspires to string together the world’s digital wallets, no matter their provenance. In the short term, Circle Pay has been gaining steam in Europe, where rival Venmo has no operations. Circle’s Asia Pacific team plans to grow to 100 employees this year. And Asia remains one of Poloniex’s biggest market opportunities: The exchange’s token-to-token business model already fits with Chinese regulations, which prohibits fiat currency, like the renminbi, in cryptocurrency swaps.
While many Western companies have gotten crushed in their attempts to cross the Pacific, Circle’s executives have navigated the waters successfully so far. The company has taken money from strategic Chinese investors, including Fenbushi Capital, China Everbright Investment Management, China International Capital Corporation, and Baidu Ventures. In 2016, Jim Breyer launched a $1 billion China-focused fund in partnership with IDG Capital Ventures, another Circle investor, and he has toured China with Allaire to meet entrepreneurs and government officials on several occasions. “Much of the innovation today in fintech is occurring outside the U.S.,” says Breyer, who has a long history with Allaire’s earlier ventures, including Macromedia, which acquired the eponymous Allaire Corp. for $360 million in 2001, as well as the video service Brightcove, which held a successful IPO in 2012. Few stateside companies “have their pulse on global blockchain innovation in the way that the leaders of Circle do,” Breyer says.
Unlike the U.S., where cryptocurrency believers are eagerly awaiting Wall Street’s entrée, in China, consumers seem ready to embrace new regimes. They’re already accustomed to digital first payment platforms, like Alipay and WeChat. “In Asia people are daring to imagine an entirely new world,” says Jack Liu, Circle Trade’s Asia chief.
Allaire knows this. In the fall of 2016, during one of our first in-person meetings, he invited me to a WeChat channel where Bitcoin miners across the world—many of whom live in China—jabber all day long. Allaire told me that he believes the strange mishmash of Mandarin and English concocted there is likely to become the lingua franca of the future, a prediction that reminded me of what sci-fi enthusiasts might have said about a Japanese-English hybrid in the ‘80s, when the cyberpunk aesthetic of Neuromancer and Blade Runner held sway.
Many of Circle’s top executives have a worldly bent too. Marieke Flament, Circle’s lead in Europe, speaks English, French, Spanish, and Mandarin. Rachel Mayer, head of Circle Invest and an alum of Lehman Brothers and J.P. Morgan, is Venezuelan. And Circle Trade’s Jack Liu, born in China, has lived in Japan, Canada, and the U.S. (He’s now building out the trading desk in Hong Kong.) Circle’s 175-person team expects to roughly double its headcount this year—and its composition reflects the border-smashing promise of the digital currencies it holds dear.
“Incorporating these assets into your wider portfolio is going to become the standard sooner rather than later,” says Mayer in an interview at the company’s WeWork outpost in Manhattan. Formerly the cofounder and CEO of Trigger, a retail investing app, Mayer envisions millennials will become the main market for Circle Invest, while more sophisticated investors will prefer Circle Poloniex—likely to be renamed Circle X in time to come. In any case, crypto assets are here to stay, she says.
The future is already here, as Neuromancer author William Gibson is said to have so eloquently put it. It’s just not very evenly distributed.
To Allaire and Neville, the cryptocurrency boom represents an inevitable transition: money evolving from cloth to code.
Over the next five to 10 years, they say, all sorts of traditional securities will become “tokenized”—divvied up into virtual stakes recorded on blockchains, the shared ledgers that power cryptocurrencies. People will own and trade small digital slices of everything from real estate, to cars, to houses, to patents, to stocks, to artwork—many of which may programmatically pay out dividends via software-defined “smart” contracts. Advocates say this tokenized future will make new asset classes accessible to smaller investors and lower the costs of transacting and investing, across borders as well as within them.
“Often the question we get is, ‘Is this all a speculative bubble? Is there going to be a big shakeout? Or will there be real institutional money from established players coming into this?’” Neville says. His view: It’s not an “either, or,” proposition. Both premises can be true.
“We’re on the cusp of the tokenization of everything,” Allaire says from his seat in Circle’s “Cheddar” conference room in Boston on the day of the market rout. (All of the meeting areas are named after slang for money, like “Benjamins,” Dough,” etc.) In view outside the window, across the street, the white tower of the Boston Fed looms. It looks like a gargantuan cheese grater.
While the cryptocurrency markets ride out their growing pains, Circle’s trading infrastructure is providing the company with a runway for its longer-term goals. Bobby Cho, the head trader at Circle rival Cumberland, predicts that 2018 will be the inflection point when more Wall Street institutions get involved—lured by client enthusiasm and potential upside. For months, rumors have swirled that Goldman Sachs will fire up a cryptocurrency trading desk of its own. “In response to client interest in digital currencies, we are exploring how best to serve them,” a spokesperson tells Fortune. But for now, Goldman’s sole exposure to the industry is through its investment in Circle.
Time will tell whether Wall Street jumps into the fray, as so many cryptocurrency bulls hope and anticipate. I ask Allaire whether he believes the incumbents, atop their loaded coffers, should take the idea of a tokenized market more seriously. Jamie Dimon, the CEO of JPMorgan Chase, the largest retail bank in America, has made no secret of his lack of interest in Bitcoin and its brethren, after all.
“I don’t know who the CEO of Sears was back in the mid-’90s, but I bet that CEO was making remarks about Internet shopping that were pretty dismissive,” Allaire says. “Maybe in 20 years no one will know who Jamie Dimon is.”
A shorter version of this article appears in the March 2018 issue of Fortune with the headline “When a Blockchain Is Your Broker.”