Multiple transformations, setbacks in entering China, the capital landscape behind the USDC issuer

This article is sourced from Deep Tide TechFlow, authored by Moon.

The greatest fortune in a person's life is to discover the mission of their life in the middle of their journey, at the peak of their youth.

Stefan Zweig wrote this in "The Stars Shine Down on Humanity."

Everyone must cross several mountains and wade through several rivers in their lifetime to find the mission that accompanies them for life, and the same goes for companies.

On July 8, 2021, Circle, the issuer of USDC, announced its plan to merge with a special purpose acquisition company (SPAC), valuing the company at $4.5 billion.

Looking back at Circle's development since its founding in 2013, it has been a bumpy road, having ventured into wallet payments, OTC, cryptocurrency exchanges, stablecoins… It has paid a heavy price, with its valuation dropping by 75% during the bear market, significant layoffs, and the forced sale of core assets, but it finally found its long-term mission and direction—USDC.

Circle is fortunate; in times of crisis, there are always benefactors to help, such as Jim Breyer, General Catalyst, and IDG Capital, who have supported Circle to this day.

This is a story of growth and capital in the blockchain world.

Entrepreneurs Embrace Bitcoin

In 2013, Jeremy Allaire and Adobe's chief scientist Sean Neville co-founded Circle, headquartered in Boston, marking Allaire's third formal entrepreneurial venture.

Before this, he founded two publicly traded companies, the software company Allaire in 1995 and the online video platform Brightcove in 2012, accumulating a wealth of connections.

At its inception, Circle secured $9 million in Series A funding, setting a record for the highest funding amount ever for a cryptocurrency company at that time.

Investors included Jim Breyer, Accel Partners, and General Catalyst, all of whom were investors in Allaire's previous company, Brightcove. Rather than investing in Circle as a company, they were essentially investing in Jeremy Allaire as a person.

At that time, Circle was hailed as the "American version of Alipay."

Circle's initial product was a digital currency wallet, primarily offering storage for cryptocurrencies (Bitcoin) and fiat currency exchange services, enabling quick fund transfers using Bitcoin.

For instance, international transfers using SWIFT require 3-5 business days for confirmation, but with Circle, transfers can be made quickly through the "cash------Bitcoin------cash" pathway, where Bitcoin serves as the intermediary.

At this time, Allaire was a staunch believer in Bitcoin, believing that establishing a cross-border payment system was only a matter of time. He wanted users to transfer payments as easily as sending emails or text messages, without too many obstacles.

Subsequently, Circle soared.

In August 2015, Circle secured $50 million in funding led by Goldman Sachs and IDG Capital, marking IDG Capital as a "benefactor" in Circle's growth journey.

Why Did IDG Capital Lead the Investment in Circle?

This is closely related to Circle's early investor Jim Breyer, known for his early investment in Facebook, who also serves as an investment partner for IDG in the U.S. Under Breyer's recommendation, IDG Capital invested in Circle.

In September, Circle received the first digital currency license, BitLicense, issued by the New York Department of Financial Services, allowing Circle to legally provide digital currency services in New York State.

Also in that year, the mobile payment market in China was ablaze, with WeChat rapidly capturing market share from Alipay through WeChat red envelopes. Circle, across the ocean, did not merely observe but also launched social payments by the end of the year.

At the time, this was seen as a bold innovation attempt, but in hindsight, it may have stemmed from unclear positioning, laying the groundwork for multiple transformations later on.

Entering China

2016 was a turning point year for Circle.

In April, Circle obtained an electronic payment license from the UK's Financial Services Authority, marking the first time a UK regulatory body issued a license to a company operating in cryptocurrency and digital asset businesses.

In June, under the blazing sun, Circle successfully partnered with Chinese capital, announcing the completion of a $60 million Series D funding round, with IDG Capital continuing to lead the round, alongside investments from Baidu, Everbright, Yixin, Wanxiang, and CICC.

IDG Capital led both Circle's Series C and D rounds and joined its board of directors. IDG Capital's founding partner, Xiong Xiaoge, commented on this investment:

Currently, domestic investments in internet companies are mostly in applications rather than technology. One important reason is that there are relatively more innovations in business models domestically, while technological innovations are relatively few. The American technologies that IDG Capital invests in, such as Circle's Bitcoin blockchain technology, are essentially of the type that "the U.S. can do, but China currently cannot, or does not do as well as the U.S."

However, although the technology is invested abroad, IDG Capital's original intention is still to one day bring cutting-edge technology to China and achieve substantial development, which is our "Chinese perspective" when investing in an American company.

Circle's introduction of numerous top Chinese capital investors was related to its plan to enter China at that time.

In early 2016, Circle established an independently operated Circle China, known as Shike China, with its main entity being Tianjin Shike Technology Co., Ltd., meaning "payments that can be used worldwide." The CEO of the company was Li Tong, an EIR (Entrepreneur in Residence) at IDG Capital, while Wanxiang Group's Xiao Feng served as a director.

From left: Shike China CEO Li Tong, Circle founder Jeremy Allaire, IDG Capital founding partner Xiong Xiaoge

Founder Allaire stated that Circle would operate under China's regulatory framework and would not launch products without government permission.

Additionally, Circle has been communicating and sharing information with Chinese regulators, banks, and other institutions. However, given China's high emphasis on financial security, conducting payment business domestically requires a third-party payment license, resulting in Circle's business in China being stagnant for a long time, existing in name only.

According to information from Qichacha, on August 15, 2020, Tianjin Shike Technology Co., Ltd. applied for simple cancellation and was officially deregistered on September 7, exiting China.

Interestingly, Circle did not conduct actual business in China but once influenced the stock prices of A-share listed companies.

Perhaps due to IDG's significant influence on Circle, in 2018, rumors circulated in the A-share market that IDG would inject Circle into its controlled listed company "Sichuan Shuangma," prompting the Shenzhen Stock Exchange to issue an inquiry letter, and Sichuan Shuangma had to clarify that this was a baseless speculation, and the company had no plans to develop blockchain business.

Transformation: Exchange and Stablecoin

In 2016, as the Bitcoin fork and scaling debate intensified, Allaire gradually became dissatisfied with Bitcoin's stagnation, stating, "Three years have passed, and the development speed of Bitcoin has slowed significantly."

On December 7, Circle announced that it would "abandon its Bitcoin business," retaining the transfer services for Bitcoin and fiat currencies, but users would not be able to buy or sell Bitcoin, stating, "Circle will shift its business focus to social payments."

However, in reality, Circle's overall development strategy shifted from payments to trading, "Allaire downplayed the role of Bitcoin (payments) in Circle's business and began to focus more on making money," Coindesk reported.

In the cryptocurrency field, what business is the most profitable? Exchanges.

In 2017, Circle stated that although it canceled the direct buy and sell function of Bitcoin in its app, it continued to provide market-making for large exchanges and launched Circle Trade to offer OTC services for institutional clients.

In February 2018, Circle announced the acquisition of the cryptocurrency exchange Poloniex for $400 million, officially entering the cryptocurrency exchange sector, with the financing for this acquisition led by its major shareholder IDG Capital.

In May, Circle continued to announce financing news, stating it had secured $110 million in funding, led by Bitmain, with IDG Capital, Breyer Capital, and other existing shareholders participating.

Notably, the leading investor Bitmain was also invested by IDG Capital. According to Deep Tide TechFlow, it was IDG Capital that facilitated the partnership, leading to Bitmain's investment, and at this time, IDG had become Circle's largest institutional shareholder.

This investment was significant for Circle; on one hand, it was financing at an extremely high valuation of $3 billion post-investment, and less than a year later, its valuation dropped by 75%.

On the other hand, the second half of 2018 was about to face a brutal bear market, and both Circle and Bitmain would face life-and-death tests. Having this funding helped Circle weather the storm to some extent.

With the capital injection, Circle began to venture out, attempting to expand comprehensively.

In July 2018, Circle launched the USDC, a stablecoin pegged to the U.S. dollar. In hindsight, this was undoubtedly a historic moment, as Circle made the most important decision for itself.

In addition to its core exchange and stablecoin business, Circle's layout began to extend outward.

In October 2018, Circle acquired the equity crowdfunding platform SeedInvest and established Circle Research to provide cryptocurrency industry news and reports.

Thus, driven by capital, Circle became a diversified cryptocurrency group: Circle Pay for transfers; SeedInvest for fundraising; Circle Trade for OTC services; Poloniex for trading; and USDC as the U.S. dollar stablecoin.

Everything seemed beautiful, but little did they know, the winter had arrived.

Gray 2019, Severing to Survive

2019 was a gray year for Circle.

In February, Cointelegraph Japan first reported that Circle's valuation on the SharesPost stock trading platform was $705 million. Nine months prior, after receiving a $110 million investment from Bitmain, Circle's valuation had soared to $3 billion, but in less than a year, it plummeted by 75%.

In May, Coindesk reported that Circle had laid off 30 employees, about 10% of its total workforce, followed by the departure of three executives.

But perhaps the most troubling issue for Allaire was the Waterloo faced by the heavily acquired Poloniex.

On May 13, 2019, Poloniex announced it would delist nine cryptocurrencies from the pages of U.S. users. According to U.S. law, these tokens were close to the concept of securities, but they had not been registered with the SEC, posing a risk of violation. In October, it delisted another six cryptocurrencies, resulting in significant profit losses.

For this reason, Allaire publicly expressed dissatisfaction with U.S. regulators multiple times, yet he was helpless and could only transfer Poloniex's business entity to Bermuda, where the regulatory environment was more lenient. On July 23, Circle announced that Poloniex would obtain a digital asset business license in Bermuda.

However, this still could not prevent Poloniex from continuously losing market share, dropping from nearly 60% market share in 2017 (among compliant exchanges) to just 1% by September 2019.

Valuation plummeting, core business setbacks, talent loss… Circle once again stood at a crossroads of fate. At this critical moment, Circle chose to sever non-core businesses to survive, focusing on the stablecoin USDC.

In June, Circle announced that starting July 8, it would gradually discontinue support for user payments and fees for Circle Pay, ultimately fully discontinuing all support for Circle Pay by September 30.

On September 25, Circle announced the suspension of the Circle Research project.

In October, to everyone's astonishment, Circle sold its exchange business Poloniex to "Polo Digital Assets," operated by an Asian investment company, with the involvement of Tron founder Justin Sun.

According to the latest SPAC documents, Circle lost over $156 million in the process of acquiring and subsequently selling Poloniex.

On December 17, Circle sold its OTC service Circle Trade to the exchange Kraken.

By 2020, Circle's cryptocurrency investment trading app Circle Invest was sold to Voyager Digital in an equity deal.

Thus, after a series of downsizing, Circle transformed from a diversified cryptocurrency group into a stablecoin issuer focused on USDC, directly challenging Tether.

Finally Finding the Mission------USDC

In the stablecoin arena, USDT has long held an unshakable dominant position, but by 2021, the situation began to change slightly.

According to data from TheBlock, from the beginning of the year to now, the entire stablecoin market grew from $28.9 billion to $109.4 billion, an increase of over 300%.

Among them, the total issuance of USDT grew from $21.6 billion to $64.2 billion, an increase of 296%, while the total issuance of USDC grew from $4.2 billion to $25.8 billion, an increase of 614%.

Under the impact of USDC, USDT's stablecoin market share dropped from 74% at the beginning of the year to 58% now, while USDC's market share increased from 15% to 23%.

From the market's perspective, this is a victory for compliance and DeFi.

According to cryptocurrency expert Ryan Watkins, a major reason for Tether's decline is that DeFi protocols are increasingly adopting USDC, allowing users to earn high yields by interacting with DeFi protocols using USDC.

This year, Circle launched a DeFi API, enabling institutional users to access various DeFi protocols through the API, thus becoming a bridge connecting traditional financial markets and DeFi.

Compound and Coinbase successively launched USDC savings yield products, with yields around 4%, far exceeding traditional financial market dollar yields.

All of this is attributed to USDC's compliance and transparency, which founder Allaire takes pride in:

USDC is both regulated and audited. This is important to ensure that the stablecoin is pegged to the dollar on a one-to-one basis. Therefore, we have monthly reports from the world's largest accounting firms, ensuring that the circulating funds are backed one-to-one by dollar reserves, and we store these dollar assets in an independent account at one of the largest dollar banking institutions in the world. Thus, it can provide great confidence to USDC holders. Another difference is that you can convert it to dollars at Circle and Coinbase at any time.

Currently, over $25 billion of USDC is in circulation, and Allaire believes that by the end of 2023, there will be $190 billion of USDC in circulation.

Issuing stablecoins is just the first step; Circle's ambition is to leverage the popularity of USDC to establish a financial services system based on USDC, for which USDC will take more proactive actions in the future.

(1) Multi-chain Expansion.

On June 30, Circle released a draft announcement stating that it expects to issue USDC on Avalanche, Celo, Flow, Hedera, Kava, Nervos, Polkadot, Stacks, Tezos, and Tron in the coming months, which will greatly enhance the transfer efficiency of USDC while reducing costs.

(2) Expanding Commercial Applications.

According to Allaire, the fastest-growing use of USDC is as a lending asset; additionally, USDC is also being used in digital gaming, online gaming, e-commerce, and other markets. In March 2021, credit card company Visa announced that it would allow USDC to settle transactions on its payment network, indicating that USDC is on the path to mainstream adoption.

In May 2021, Circle announced the completion of $440 million in funding, attracting participation from institutions such as Fidelity, FTX, DCG, Marshall Wace, Valor Capital Group, Pillar VC, Intersection Fintech Ventures, Atlas Merchant Capital, and Willett Advisors.

At this point, Circle was already preparing for its SPAC listing, waiting for the final bell to ring.

Conclusion

Unlike Coinbase, which firmly established its mission and direction from the beginning, Circle has undergone a series of explorations in the digital finance world, taking detours, paying heavy prices, and even standing on the brink of life-and-death decisions, ultimately finding its mission at its "peak of youth."

On the thorny path of exploration, Circle should be grateful for its benefactors.

Jim Breyer, Accel Partners, and General Catalyst have supported Jeremy Allaire and Circle from start to finish. It was also due to Jim Breyer's recommendation that IDG Capital partnered with Circle and became a steadfast supporter on its growth journey.

IDG Capital's multiple investments not only made it Circle's largest institutional shareholder but also provided crucial assistance at critical moments, helping to acquire Poloniex and attract Chinese capital investment… In a sense, without IDG, there would be no Circle today.

Of course, all of this may also be inseparable from Jeremy Allaire's successful entrepreneurial track record and personal charisma, as ultimately, investment is still about investing in people.