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Cryptocurrency Finance Government

Will Circle Become a Full-Fledged Bank?

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

The crypto-payments firm Circle has made a big splash recently. In July, it announced that it would become a public company, traded on the New York Stock Exchange, via an Irish-based SPAC. This week, the company announced, sort of, that it intends to become a fully-regulated, chartered bank in the United States. According to its blog post:

Circle intends to become a full-reserve national commercial bank, operating under the supervision and risk management requirements of the Federal Reserve, U.S. Treasury, OCC, and the FDIC. We believe that full-reserve banking, built on digital currency technology, can lead to not just a radically more efficient, but also a safer, more resilient financial system.

This is potentially a big deal. Circle—based in Boston but incorporated in Ireland—operates USDC, one of the largest stablecoins in the world. Circle’s blog post continues:

With USDC at more than $27.5 billion in circulation, and building on our long-standing commitment to trust, transparency and accountability in the dollar-denominated reserves backing USDC, we are setting out to become a U.S. Federally-chartered national commercial bank. 

This vision of a regulated digital currency is highly compelling, and close to unique although, as far as FIN can tell, Circle’s actual applications for this fascinating goal have yet to be filed. Axios’s Felix Salmon argues that “Circle’s USDC stablecoin could become a de facto central bank digital currency….In Circle’s case, the “depositors” would be holders of USDC, and the collateral backing up USDC would be the money on deposit at the Fed. Circle would pocket for itself the interest that the Fed pays on bank reserves.”

It’s crucial to understand just how preliminary and provisional this idea is. There are at least two major reasons to doubt that a Circle bank charter will be approved any time soon.

First, a huge question mark looms over Circle’s much-hyped but quickly dumped acquisition of the crypto exchange market Poloniex. Few commentators on Circle’s imminent public market debut have noted this, but it’s hard not to conclude that Circle’s aborted dance with Poloniex stemmed from a lapse in judgement and/or due diligence. Strong evidence exists that Circle/Poloniex was conducting business in countries that are prohibited by US law, hence the companies’ apparently still-pending negotiations with the US Office of Foreign Assets Control (OFAC), a division of the Treasury Department that deals with trade sanction violations.

Asked about Circle’s questionable due diligence, a company representative said: “We cannot comment on legacy legal matters.” OFAC did not respond to a FIN inquiry for documents pertaining to Poloniex.

So let’s review the Circle-Poloniex timeline as best we can now construct it:

  • December, 2017: The US Securities and Exchange Commission (SEC) files a complaint against Poloniex related to “the trading of cryptocurrencies that may be characterized as securities.” The SEC maintains that even after the agency issued a major rule-establishing report in July 2017, Poloniex “made available for trading…digital assets that were offered and sold as securities as defined by Section 3(a)(10) of the Exchange Act, generating millions of dollars in revenues from transaction fees charged to Users,” without registering with the SEC as legally required.
  • February 26, 2018: Circle announces it has acquired Poloniex “to accelerate the emerging token economy,” for a reported $400 million. (The “token economy” was collapsing at the time.) Circle CEO Jeremy Allaire tells CNBC: “These markets are still in their infancy but they hold enormous promise. Maybe the first $1 trillion company in the world will be created in this space.” (Or maybe not.)
  • April 10, 2018: Just six weeks after Circle’s announced acquisition, OFAC serves Poloniex “with an administrative subpoena requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Iran.” Here’s the crucial question: when Circle was researching the Poloniex purchase, did it not see Iranian accounts as a red flag? Or did it miss them?
  • December 14, 2018: Circle responds to OFAC’s Iran-related subpoena.
  • September 11, 2019: “OFAC serve[s] a second administrative subpoena on Poloniex, LLC requesting documents and information regarding accounts opened and/or closed on the Poloniex digital asset trading platform by persons potentially located in Cuba, Syria, North Korea, Crimea, and Sudan.” Again, a competent compliance department should have detected these legal thorns—what did Circle know, and when did it know it?
  • October 18, 2019: Circle announces it is “excited” to announce a Poloniex spinoff. BUT: “Unfortunately, in order to be competitive in the global market, we will not be able to include US customers in the spin out, so Circle will be winding down operations for US Poloniex customers. Beginning today, US persons will no longer be able to create new accounts on Poloniex.” This seems like an obviously legally required carveout, and leaves US-based Poloniex customers to vent on various complaint sites. Meanwhile, the new owner of Poloniex is Polo Digital Assets, which may or may not be controlled by the Chinese entrepreneur Justin Sun, and which has repeatedly fallen afoul of Canadian regulators.
  • July 2021: Circle announces its intention to go public via a SPAC, noting that it has set aside more than $10 million to deal with the SEC charges against Poloniex.
  • August 9, 2021: The SEC fines Poloniex more than $10 million for security law violations that took place before and during Circle’s ownership of the company. “Poloniex chose increased profits over compliance with the federal securities laws by including digital asset securities on its unregistered exchange,” says Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit.  “Poloniex attempted to circumvent the SEC’s regulatory regime, which applies to any marketplace for bringing together buyers and sellers of securities regardless of the applied technology.” Circle agrees to pay the fines without admitting or denying the SEC charges.

There exist relatively benign interpretations of these events, but the legacy is there and regulators are going to want the full story. And so are potential investors: Circle’s SPAC filings indicate that the company lost $156 million on the Poloniex acquisition, and that’s not even a final number until all the fines are assessed and legal fees paid.

So if you are Biden’s financial regulators, do you really want to give a bank charter to a management team with this track record? And that’s the second reason to doubt this charter will be approved: at least in year 1 of the Biden Administration, there is little reason to think that digital-first “banks” are going to be approved as real-world banks. When acting comptroller of the currency Michael Hsu testified before Congress in May, he was clearly skeptical about the handful of bank charters that went to fintech companies under the Trump Administration. Most legal and regulatory commentators concluded that OCC under Hsu has “hit the brakes” on cryptocurrency. And that’s only one agency; it seems impossible that Circle could be granted a bank charter without the Federal Reserve and FDIC weighing in.

Of course, it’s entirely possible that FIN is misreading this. Maybe Circle’s USDC is now simply too big to ignore. Maybe the new compliance officer that Circle hired in May has made some friendly inroads through Janet Yellen’s working group. Maybe if Circle agrees that USDC is a security and will be regulated as such, that will create a path for the Biden administration to resolve the whole question of how to handle the dramatic growth in stablecoins that regulators have been fretting about in recent months. But don’t bank on it.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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