Circle is getting leaner, and not just because of the regulatory climate

Larry Cermak

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Circle announced this week that it laid off 30 employees from finance and product departments representing approximately 10% of its total staff. Jeremy Allaire, co-founder and CEO of Circle, said the layoffs are an attempt to cut costs in “response to new market conditions, most importantly, an increasingly restrictive regulatory climate in the United States.” He added that Circle “remains strong and healthy” and that it will continue working with jurisdictions “that offer forward-looking policies regulating digital asset businesses.” A closer examination of the numbers, however, puts into question the fortitude of Allaire's assertion that the business is strong. 

Poloniex, a cryptocurrency exchange Circle acquired in February 2018 for $400 million, announced on Friday that it will “geofence” nine tokens from U.S. customers due to regulatory uncertainty. Allaire said that the recent guidance from U.S. regulators on which crypto assets would be deemed securities has led to these actions.

Poloniex currently lists 63 coins on its platform. The tokens that will be “geofenced” from U.S. customers in about a week are Ardor, Augur, Bytecoin, Decred, GameCredits, Neo’s GAS, Lisk, NXT and Omni. You’ve most likely never even heard of some of these. And they don’t make up a meaningful share of Poloniex’s total trading volume, representing slightly more than 1% over the last 24 hours.

Based on my rough estimations, Poloniex generated approximately $250 million of revenue in 2018, out of which a maximum of $2 million came from trading these tokens.

In 2017, a year prior to being acquired by Circle, Poloniex was actually a go-to exchange for trading altcoins, commanding 58% of the total cryptocurrency traded volume (although it's impossible to know if it was faked volumes or not). Now, Poloniex captures less than 2% of the total monthly traded volume reported by the exchanges based on reliable data. Ouch.

But the main headwind for Circle isn't even Poloniex's lackluster performance. Circle’s main revenue generator is reportedly its over-the-counter trading (OTC) operation. But as the margins compressed in the last several months and new participants such as multi-dealer platforms enter the market for crypto trading, Circle is capturing less of the OTC revenue than expected.

Moreover, perhaps as the result of the weaker than anticipated performance, sources told The Block that Circle has scaled back its fundraising goal to $150 million, considerably less than its previous target of $250 million from just a couple of months ago. In February, The Block reported that Circle’s private shares were available for sale on SharesPost at a more than 70% discount from its Series E price, which put the company at a $3 billion valuation.

While the regulatory climate in the U.S. certainly played a part in the layoffs, there is more to the story than Allaire is letting on. Circle’s softer-than-expected OTC business, Poloniex’s waning relevancy as well as issues with raising more capital all likely contributed to the decision. Circle is meanwhile getting leaner in anticipation of a boost coming from the bull market winds at its back.