February 26, 2018 / 1:39 PM / 8 months ago

Goldman-backed startup Circle buys major crypto exchange Poloniex

LONDON/NEW YORK (Reuters) - Goldman Sachs-backed cryptocurrency startup Circle has acquired digital token exchange Poloniex, Circle said on Monday, as it aims to cement its position as one of the leading players in the booming market.

Neither of the Boston-based companies disclosed the value of the deal that gives Circle control of a marketplace it said sometimes has daily volumes of more than $2 billion, with around 70 different digital currencies and tokens traded.

Fortune magazine said the deal was worth $400 million, citing a person familiar with the matter.

“We’ve been really impressed with what they have been able to pull off,” Circle co-founder and CEO Jeremy Allaire said.

“They defined what originally people thought of as ‘altcoin’ exchanges,” he told Reuters. The term altcoin describes newer cryptocurrencies than the more established bitcoin and ether.

Circle operates an app-based peer-to-peer payment network using blockchain, the technology which first emerged as the system underpinning cryptocurrency bitcoin. It is also one of the leading players in the over-the-counter market for bitcoin trading, and is soon launching a retail-focused app for buying cryptocurrencies, Circle Invest.

One of the best-funded blockchain startups, its investors include Goldman Sachs Group Inc and Baidu Inc.

Circle’s founders said they had discussed the acquisition with all of their investors, as well as with regulators, and that the deal was closed on Friday.

The value of cryptocurrencies - as well as the number - has ballooned since the start of 2017, when they were worth around $17 billion, according to trade website Coinmarketcap, with their total value topping $800 billion in January before slipping to around $450 billion now.

There are now more than 1,500 digital currencies and tokens, Coinmarketcap said.

REGULATORY SCRUTINY

Poloniex is well-known among cryptocurrency investors because it offers trading on a wide range of digital coins, several of which have been issued through online fundraisers known as “initial coin offerings” (ICOs).

Regulators across the world have been intensifying their scrutiny of ICOs and cryptocurrency exchanges.

The U.S. Securities and Exchange Commission (SEC) in July warned that some of the coins issued in ICOs could be considered securities, meaning trading them would have to comply with federal securities laws.

“We intend to continue playing a leadership role when it comes to national and global regulatory frameworks for this space,” Circle co-founder Sean Neville told Reuters.

“That includes meeting with the SEC as well as obtaining all relevant licensing required for us to support our customers.”

Regulators are also keeping an eye on the anti-money laundering and know-your-customer (KYC) practices of cryptocurrency exchanges.

A Reuters investigation published in September showed that Poloniex had allowed some customers to trade cryptocurrencies and withdraw up to $2,000 worth of digital coins a day by providing only a name, an email address and a country.

Allaire said Poloniex had instituted full KYC checks for new customers, but he could not confirm the exchange had the identities of all existing clients.

“I’m not sure that 100 percent of prior clients have gone through all their identity verification requests. I know they have a huge backlog of clients in their KYC queues,” he said.

“But obviously now that we operate the company we’re going to ensure that the business is compliant in every way it needs to be.”

The exchange is not allowed to accept New York residents because it lacks a state license to operate a cryptocurrency exchange, but the Reuters investigation found two New York residents who had claimed that they lived elsewhere and were able to trade on Poloniex.

“Clearly, people can get around things like IP (internet protocol) restrictions, and other restrictions, and people do it all the time. People evade geo-blocking mechanisms, and it’s difficult to fully police. So it’s possible that some people have snuck through that, and that’s obviously something we take very seriously,” Allaire said.

Circle said that in the coming years, it expected to grow the Poloniex exchange out to include other non-crypto assets, such as physical goods and financial products such as derivatives.

“We look forward to bringing Circle’s experience to increase the scalability and reliability of our platform and operations,” Poloniex said in a statement on its website.

Reporting by Jemima Kelly; Editing by Abhinav Ramnarayan and Robin Pomeroy

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