Circle CEO: Markets Have Been Oversold and Some Core Assets Are Undervalued

Siamak Masnavi

On Thursday (January 10th), Jeremy Allaire and Sean Neville, the two co-founders of Circle, the Boston-headquartered FinTech startup backed by (among others) Goldman Sachs, Bitmain, Baidu, and IDG Capital, talked during a Reddit Ask Me Anything (AMA) session about the interaction of Circle with financial regulators, Circle's contributions to open source projects, fake exchange volumes, privacy coins, over-the-counter (OTC) trading, security token offerings (STOs), the USDC stablecoin, mainstream adoption of crypto, and the current bear market.

Jeremy Allaire is the CEO of Circle (while Sean Neville is the President of Product and Operations). Circle was launched in October 2013 as a peer-to-peer (P2P) payments technology company, and initially onlly had one product: "Circle Pay", a way to "move money between currencies, countries and friends." The Circle Pay mobile app made paying friends "as easy as texting." Currently, Circle Pay "is available in 29 countries in British pounds, US dollars and euros."

Jeremy Allaire and Sean Neville started the AMA session by offering this quick recap of Circle's involvement with crypto in 2018:

"2018 was a particularly eventful year in Circle’s six year history as a crypto finance company. We acquired Poloniex and committed significant resources to restoring it as one of the premier crypto exchanges. We launched Circle Invest for anyone looking to seamlessly invest in crypto. In partnership with Coinbase, we founded the CENTRE Consortium and introduced the USDC stablecoin, which has already reached a market cap of over $345M and has support from almost 100 exchanges, protocols, platforms, applications, and wallets. Lastly, we announced our intention to acquire SeedInvest, which is pending FINRA approval.

In addition to new endeavors, we saw impressive growth from our existing products - Circle Pay and Circle Trade. Despite a tumultuous year for crypto markets, our crypto OTC desk Circle Trade, executed over 10,000 trades representing $24 billion in notional value. We also launched Circle Research to provide institutional-grade analysis for the market and our counterparties. Circle Pay continued to enable seamless money transfers for millions of users across the UK, EU and US and is well positioned to deliver a more crypto-native experience in the future."

Other members of the Circle team that took part in this AMA were

  • Robert Bench, the Chief Compliance Officer and Head Regulatory Counsel;
  • Rachel Mayer, Product Manager for Circle Pay and Circle Invest;
  • Christina ("Official Poloniex Rep");
  • Joao ("Official Circle Rep");
  • Dan ("Official Circle Rep):
  • Pete ("Official Circle Rep");
  • Patrick ("Official Circle Rep"); and
  • Max ("Official Circle Rep")

Q: What Is Circle Doing to Educate Regulators?

Jeremy Allaire:

"We invest an enormous amount in educating regulators, and have since our founding in 2013. This includes a global regulatory and government relations team with decades of experience in working with financial regulators and policy makers. We have teams located in the US, Europe and Asia that focus on this.

This includes meeting regularly with banking/payments, securities and markets, and central bank supervisors, as well as policy makers (congressional officers), etc.

In general, regulators are keen to learn, and we spend a lot of our time trying to get them to understand the benefits of crypto, how it actually works, etc.

I think the biggest and most immediate regulatory hurdle we face is the lack of specific guidance from the SEC on how to classify various crypto assets. We believe many are clearly currencies and commodities, and there needs to be more specificity on what are really securities. This can unlock a lot of market activity, and also clearly enable the growth of a market for crypto-based securities."

Q: Any Plans to Work With the IRS to Improve Tax Law for Crypto?

Jeremy Allaire:

"This is an issue we care about and are pushing this in DC. We believe there should be different tax treatment for crypto to crypto, especially for smaller payments oriented transactions. The leading government on this issue right now is France, where they are soon passing a low where there will be zero taxes on crypto-to-crypto transactions."

Q: Do You Inform Other Countries Tax Collection Agencies of Your User’s Activity?

Patrick:

"Hello! Patrick here, Head of Treasury. If I correctly understand your question, you're asking about countries outside of the US. We continue to monitor for all tax reporting requirements for both US and non-US customers, and will comply with those requirements if and when they arise. Currently, we are not aware of any tax reporting requirements for non-US customers."

Q: Any Plans to Bring Back the Poloniex Trollbox?

Christina:

"Like so many of Poloniex’s long time customers, we love the trollbox, too. Now that we’ve staffed up our customer support team and gotten our support queues under control, it’s something we’re actively exploring. Stay tuned for news about the trollbox in the coming months."

Q: What Is Circle Doing to Contribute to Open Source?

Joao:

"We often contribute to open source projects used by our platform services, and have made contributions to crypto projects as well. We have also made monetary contributions to teams producing open source software since Circle was founded. As a founding member of CENTRE, we have contributed a lot of code to the fiat token smart contract infrastructure used by USDC, which is all open source (https://github.com/centrehq). We're definitely committed to the open source ethos and plan on contributing more in the future."

Q: Is There Any Crypto Industry Best Standards Group That Defines Best Exchange Practices?

Robert Bench: 

"With regards to industry standards, there is a great amount of communication between certain exchanges on best practices, particularly with regards to AML, securities laws, and market manipulation. I think we'll see more coordination, and more formalized standards, at least within certain jurisdictions (such as has already occurred in South Korea and Japan)."

Q: What Do You Think About Fake Exchange Volumes?

Dan:

"Fake volumes definitely extremely prevalent. That being said we've seen that most of the abusers of this sort of practice aren't venues we would be using for liquidity anyway so we sort of just ignore those exchanges when internally gauging liquidity and pricing for an asset. But it's dangerous to the novice or amateur trader who may get a false sense of liquidity from this practice.

It's definitely a black eye on the industry because of this activity but I'm not sure a standards group would be effective in preventing this activity, the reality is there's not a huge barrier to entry to start a crypto exchange especially if you exist purely in crypto, no banking and licensing, and lower volume exchange are always going to try and get attention and bootstrap liquidity by pumping out fake volumes, standards group could say thats bad but the issue is inevitably going to have to fall on the trader."

Q: Has There Been an Increase in Law Enforcement Requests to Monitor Crypto Transactions? Does Listing Privacy Coins Pose a Regulatory Threat to Your Exchange?

Robert Bench:

"Great question.

  1. Absolutely. The law enforcement community (both U.S. and globally) understands that crypto, like any means of value, can be used to facilitate or fund crime. As they get smarter every day in this space, they'll request information from firms like Circle where they think such transactions may have occurred on the platform.
  2. There's a great deal of valuable conversation around privacy coins, and what they mean from a regulatory & enforcement perspective. One of our jobs is to educate the use for these coins (and there is certainly legitimate use cases for privacy), and on the other side build robust tools to know our customers and what they're doing on our platforms."

Q: Would You Be Able to Share Regulatory Insights Regarding Privacy Coins?

Robert Bench:

"Privacy coins get a great deal of regulatory and law enforcement attention, and rightfully so, as both Privacy and AML are two very hot topics at the moment. In short, no rules or laws have been drafted in the U.S. regarding the privacy coins, and there remains a great deal of education in the space with our partners in government on the use cases for these coins."

"The use of privacy coins is one factor that we may use in the risk assessment of our customers, and their use may require enhanced due diligence from our risk and compliance teams. While these blockchains are opaque now, I wouldn't underestimate the ability of smart industry and government participants to find solutions to provide transparency on these coins."

Q: Can You Articulate the OTC Process?

Dan:

"OTC process is actually pretty simple which is why I think a lot of counterparties choose that route for liquidity.

Step 1 is obviously onboarding but assuming thats been done you'll be connected with the desk via chat, generally skype, bbm, some people actually phone in, where you can request a quote. Quotes are all in meaning there's no additional fees tacked on top. So if you buy 100 BTC for 4k a piece, quoted price, you get 100 BTC when we get the 400K.

Big thing to note here is you face Circle for the transaction and doesn't matter where the other side of that trade may land, we may bleed it on screens aka exchanges, find another otc trade to match it, put it up for sale on ebay, worlds our oyster but all you need to care about is that we're good for that transaction once we agree on mechanics.

Circle does require safe settlement on our end which means counterparty sends first. Your guarantee that we don't steal the funds is that we operate this business at significant scale and compliant which can be seen by our exhaustive licensing https://www.circle.com/cn/legal/us-licenses"

Q: What Affects the Amount of OTC Trading Volume?

Dan:

"OTC transaction volumes mirror exchange volumes it's by no means in a vaccum. Think of OTC as a subset of everything you see trading on public exchanges.

In terms of drivers of OTC trading activity verse what moves retail exchange volume most OTC trading activity tends to have a longer time horizen and thesis behind it but the same factors that go into putting on or taking off an investment are largely the same for both groups.

There's also a large subset of OTC trading activity that's not speculative it's purely balance sheet management for larger corporates that have a crypto component to their business.

Institutions are just as prone to FOMO as everyone else its just bigger numbers."

Q: Can We As Investors See Any Stats From the OTC Market? MVIS Shows Spot Stats on an Index Level but What About Stats From the OTC Market Makers?

Dan:

"OTC markets mirror exchanges so thats a great proxy, remember most otc desks are also high volume traders on exchanges since it's unlikely to match all your flows in just OTC activity.

We don't ever wanna leak any activity of our counterparties activities as they often span days or weeks putting or taking off positions, for that reason we will likely not ever release any material information about our flows."

Q: Is There a Future for STOs?

Robert Bench:

"We believe that there's a great use case for STOs. For regulators to draft rules for this activity, both they, and us, need to get to a better understanding on how this will work, and how the protections created by regulators like the SEC in the past would continue to apply with this technology. Firms like Circle, and industry groups like the Blockchain Association, are working closely with regulators to understand how we can both innovate, incentivize capital formation, and protect investors."

Jeremy Allaire:

"We are huge believers in tokenized investment contracts aka. crypto securities / digital securities / security tokens, etc. We are making major bets in this space (acquisition of SeedInvest -- https://blog.circle.com/2018/10/05/circle-announces-acquisition-of-seedinvest/), and ultimately want to create services that allow businesses of all sizes to issue and raise capital using digital securities, and to create and support secondary trading markets for these. We're also excited more broadly about the tokenization of other forms of illiquid value and assets and property.

There absolutely needs to be more regulatory clarity to really make this fly -- in particular around who can issue these, how they can be stored and transmitted, and what markets can allow their trading. There's a lot of attention on this and we absolutely expect to see these issues resolved and for far more real world experiments to hit the markets this year."

Q: Do You Have Plans for Retailers to Accept USDC as a Means of Payment ?

Jeremy Allaire:

"The vision behind Centre (http://centre.io) has always been that we need open protocols and standards for fiat money on the internet, and that such standards would enable people and businesses to exchange value directly and efficiently the same way that we can share content or communicate over open and inter-operable networks (SMTP, VOIP, SMS, HTTP, etc.). Centre's initial release of the USDC smart contract and scheme relies on ERC-20 tokens, which right now means that there's a bit of a burden on the end-user to have wallets where they pay gas fees and the like. We believe that we need Layer 2 approaches that can radically scale the throughput and lower the cost to closer to zero for USDC payments, combined with much much better consumer payment UX than what you see in crypto wallets today. We think both of those things are on the horizon in 2019, and we hope to help solve some of those problems.

Specifically, in terms of retailer acceptance, we think that USDC will be very attractive, and because it's an open standard, any retailer will be able to use any standard digital wallet to accept payments from a growing number of wallets that support USDC. We also expect to see merchant acquirers and payment processors add support for USDC and other fiat tokens that Centre supports. Already, BitPay provides this service."

Q: In Future, Do You See Cryptocurrency As More of a Store of Value or a Means of Exchange?

Jeremy Allaire:

"Our view is that crypto assets will continue to proliferate in all their forms -- currency assets that are designed as stores of value with deep privacy features, fiat currency assets and stablecoins that are used for payments and settlements broadly, commodity assets that act as fuel for utilizing protocols, networks and applications, and also an explosion in tokenized property and investment contract assets. Like the internet of content and e-commerce, we ultimately expect there to be millions of different crypto assets. So the short-answer is that we thing SOV assets like Bitcoin will become much much larger and more broadly adopted, and that other crypto assets will be used in an incredibly broad array of everyday transactions."

Q: Re USDC, What Is the Demand Like? Do ERC-20 Tokens Really Follow KYC Rules?

Joao (Official Circle Rep):

"Indeed, demand for USDC has grown steadily, particularly in the last 4 weeks. As you know, a USDC token is only minted after a corresponding US Dollar is deposited by the interested customer on a reserve bank account. We've built systems that bridge fiat-to-crypto operations for years at this point and have experience scaling those.

To your second question, Centre fiat token issuers (such as Circle) have specific obligations when it comes to KYC and AML given they are licensed in their jurisdictions. A customer issuing or redeeming USDC with any Centre network member has to go through those checks."

Jeremy Allaire:

"Just to add to Joao's comments, we're seeing rapid adoption of USDC and it's in particular driven by market makers and large traders who have learned that keeping their treasuries in USDC allows them the ability to move fiat across major trading markets (Poloniex, Binance, Coinbase) to execute trading strategies much faster, while still having seamless connectivity to reliable on and off ramps with the global banking system. These benefits obviously also are there for retail or smaller individual investors and traders, but the major volume increases are coming from major trading players in the market."

Q: Will You Enable Us to Buy USDC Using Credit Cards?

Rachel Mayer:

"We are exploring various options for connecting traditional fiat rails to crypto rails, especially to USDC, so that consumers can securely, and instantly transfer from both cards and banks globally into digital money. This of course requires a lot of regulatory guidance as well as improving our own internal risk and fraud modeling. We already support card transactions in Circle Pay and instant deposits when available in Circle Invest — and hope to expand on our existing capabilities in 2019."

Q: In Your Research, Have You Considered to Launch USDC on Stellar Network?

Joao:

"The CENTRE network and its fiat token principles are chain agnostic. When confronted with design options, we tend to look for interoperable standards, developer support and reliability, amongst other things. At this point it makes sense to use Ethereum and ERC-20 given the broad exchange support, availability of wallets, developer ecosystem, etc. But we would support other chains as demand arises."

Q: Why Did You Choose Ethereum As the Platform for USDC?

Pete:

"Hi this is Pete and I am CIO at Circle. Given the broad support for ERC-20 tokens at exchanges, institutions and wallets, we believe an Ethereum based token provides the best path to adoption of USDC. However, we are chain agnostic and would support USDC on other chains as demand arises."

Q: Do You Get Interest on the Real Dollars That Are Deposited in Exchange for USDC Tokens? If So Are They Being Passed Down to the Customers?

"Hello! Patrick here, Head of Treasury. Great question, we do receive interest on USDC reserve dollars. We think sharing the interest would be a really positive development for the product and our customers and are actively discussing ways to do so. It's hard to say when or how this may be rolled out, but safe to say it's on our collective minds."

Q: What Are Some of the Biggest Barriers to Entry in the Crypto Market Today?

Rachel:

"We’ve come a long way in 10 years but there are still barriers to entry for consumers. First, there should be seamless, instant, secure and affordable ways to go from regular fiat to cryptocurrency globally in a number of different apps and services, not just in standalone products. Second, we need to BUIDL better consumer products that feel like familiar internet apps so that you can use crypto seamlessly (outside of speculative investing). Finally, it is our responsibility to continue to educate not only regulators but your friends, family and acquittances of why blockchain technology is here to stay and the value it will unlock for them and the rest of the world."

Q: Does Circle have plans to educate merchants on the benefits of crypto?

Rachel:

"Being able to load USDC seamlessly onto a wallet and encourage use of USDC as well as other crypto assets is top of mind for us this year. 2018 was all about us making that first purchase of crypto accessible and helping consumers learn about crypto through our educational content on Circle Invest and Circle Research. We've also spent a large part of our time rebuilding our payments infrastructure on top of crypto (USDC) and improvements to our core wallets infrastructure in Poloniex. This year, we'd like to work to help connect our seamless fiat rails to this improved infrastructure and help bring value to consumers and eventually merchants through using, safeguarding and transacting these crypto assets all around the world."

Q: Do You Believe That Crypto Will Play a Role in Defeating Online Censorship?

Jeremy Allaire:

"Clearly one of the more significant things that's emerging are censorship-resistent blockchains that can store richer and more robust forms of data. We are not far away from a world where it will be possible to "print" text and rich media into forms that can't be censored. This represents a pretty radical form of human liberty and something that society and governments have never had to face. So, yes, I absolutely believe that crypto will play a role in defeating online censorship, but I also believe there are serious and challenging social governance questions that emerge in a world such as this and they are non-trivial."

Q: What Are Some Exciting Developments in Crypto You Are Hearing About That People Are Not Talking About?

Max:

"Max here, product manager for crypto projects at Circle. Great question - the pace of infrastructure and consumer products being built in this industry is certainly accelerating. We actually have an interdisciplinary committee of employees tasked with keeping up with the latest developments in the space and exploring opportunities around crypto assets and decentralized networks.

Generalized mining is one of the fascinating developments that this team tracks. In generalized mining, some type of computational work or service is contributed to decentralized networks by service-providers in exchange for incentives by the protocol. This development is becoming more prevalent amid the growing number of blockchain platforms moving towards stake-based consensus mechanisms. There are interesting opportunities for service-providers to pool assets together and participate in generalized mining, which strengthens and secures decentralized networks while passing the incentives down to individuals that custody their funds with the provider. Exchanges are well-suited to act as this kind of service-provider, and it’s possible that we see an increasing number of exchanges in 2019 provide greater utility to decentralized networks beyond the traditional functions of liquidity and price discovery."

Q: Have We Seen ‘The Bottom’ of This Bear Market?

Jeremy Allaire:

"My general perception is that the markets have been oversold and that some core assets have decoupled from their usage, which suggests they are undervalued. We look at things like hashrate health, on-chain activity, as key indicators of usage and adoption and underlying unit economic support. We also believe that many assets have traded in a tight correlation to BTC, which is irrational. As the markets mature, we expect less correlated trading as investors better understand the value, utility and adoption of specific crypto assets and networks. The significant increase in quality information about different assets (such as Circle Research -- http://www.circle.com/research, Messari, etc.) helps the market better understand the differences in crypto assets."

Q: Do You See Bitcoin Being Usurped As the Highest Valued Cryptocurrency at Any Point in the Future?

Jeremy Alaire:

"It's incredibly early in the development of crypto asset markets. It's quite possible that new assets and chains will emerge for private digital cash that are superior to Bitcoin. Recent efforts with MimbleWimble for example hold promise to deliver things that Bitcoin didn't deliver. Similarly, Platform Tokens (ETH, NEO, ADA, etc.) hold enormous promise as fuel for new forms of apps and services, and they are still in the very early stages of adoption. It's certainly conceivable that a massively adopted Platform Token could achieve a higher valuation than a SOV digital cash token. Again, we're in the very early stages of the development of crypto assets, and I suspect 10-20 years from now the mix and market caps of assets will surprise all of us."

 

Featured Image Courtesy of Circle