In an article published on Monday, we presented the views of Jeremy Allaire, co-founder and CEO of blockchain-based payments startup Circle on the rationale behind the company’s decision to set up its Asian operations in Hong Kong. Now, in the second part of the interview, we outline the blockchain expert’s thoughts on regulatory issues related to crypto assets, and other topics.
EJ Insight: As Chinese authorities have banned ICOs and crypto trading in the mainland last year, how do you see Circle Trade developing in Hong Kong’s regulatory environment?
Allaire: From a regulatory perspective, the Hong Kong Monetary Authority (HKMA) has been very embracing to fintech, similar to Singapore. We will work closely with the regulators in any market that we may launch the products in, as we have done in the US and Europe.
We are the most regulated, the most licensed company in the crypto market globally; we hold more licenses than any other company in this industry. That’s the same approach we are going to take in major markets in Asia.
HKMA currently does not regulate any cryptocurrencies, I believe they are giving guidance around, like, if you are running an exchange, you need to follow international anti-money laundering (AML) laws, customer laws, etc. There is no specific license today for a crypto or digital currency exchange.
Q: Do you think Hong Kong regulators are going to introduce a registration or licensing system for operators of digital asset exchanges?
A: I can’t predict what Hong Kong government will do. But I would expect eventually the regulatory framework in Hong Kong will be similar to that in Europe and the US.
Q: Can you give us a big idea of the regulatory picture in the US?
A: A lot of people think the crypto industry is not regulated, but they actually are. Five years ago, the US regulator said that if you want to operate an exchange where people can trade fiat currencies versus virtual currencies, you have to register with the federal government and you need to get licenses from every state in the US. And you have to be regulated by collateral laws, AML laws, you have to do that. Other countries like Japan and Korea are going to follow suit, passing similar regulations.
On the Initial Coin Offering (ICO) projects and various tokens created from that, some of them are really tokens that are used as the part of technology systems, which people call it ‘utility token’; and others are just ‘security token’, really just financial securities.
The US government has issued very clear guidelines for ‘security token’: if your token behaves in the following way, it is a security, and you have to register it with the SEC. And if you want to run an exchange where you trade these securities, you will also be regulated as a security exchange under specific laws in the US.
That is something we are very actively evaluating: Do we want to support those types of tokens trading? Because if we want to, we need to have those licenses, I think other people are evaluating that as well.
Q: Recent studies suggest that a high percentage of the ICOs are scams, with Chinese media claiming that 90 percent of ICO projects are illegal fund-raising and intentional fraud.
A: I think it is fair to say that there are scams everywhere; it is not specific to one region I think. And there are other [crypto exchange] platforms like ‘Coin “R” Us’ which will list everything that comes out, ignoring that not many of them are likely filing securities laws in lots of countries around the world, they are also doing their services to investors by launching really, really weak projects.
We have a very high bar in terms of [ICO token] quality, on teams, projects, business models. Something we will be doing in the near future is publishing Circle’s guidelines for token listing. To get a new asset listed in Circle exchange, there will be certain guidelines that will be very clear on the legal requirements, technical, operational [standards], team, and all these different dimensions that are really important. I can’t get into too many details right now but we will absolutely issue the guidelines in this year.
Q: In the US, businesses dealing with cryptos need to apply for a BitLicense from the state government and pay a fee, but it has been criticized for some of its aspects. As the first company to receive a BitLicense in New York, what do you think about the current regulation system?
A: I think the current regulation system which requires licenses from all the US States is very costly. I feel the US market will be much better served if there was some form of national license for this.
Ultimately there needs to be kind of national license for a wide range of crypto-based financial service products, so my hope is there will be sort of a national, or federal license for crypto finance license that extends to payments, banking, securities and other things. But that’s not anything that is realistic in the short term.
Q: How costly is it for a crypto business to get a license for every state? And how about the compliance cost?
A: Very costly, millions of dollars. On compliance, we don’t break out the exact cost, but we have made a lot of investments [on compliance], not just in personnel but also in technology. A lot of investments have been on applying artificial intelligence (AI) and machine learning to handle compliance and risk management tasks. We are able to do it very efficiently, the cost of per customer is quite low, but the quality is quite high.
Q: With a meteoric surge in price, cryptocurrency conquered the financial world in 2017, with investors and large corporations flocking into the field. Do you see it as a bubble?
A: For companies in blockchain hype, it reminds me of the dotcom boom, where big companies announced they have a website, without any commerce strategy, and then the stock goes up.
But I think the bubble has been deflating, as we have seen a 70 percent market correction. I don’t know exactly [which stage] the market is in, but I think we are still at the very early stages of actual expansion, and actual innovation being adopted; there are years and years and years for exciting things to come.
Q: While announcing Circle’s acquisition of Poloniex, you mentioned Circle’s vision as “a robust multi-sided distributed marketplace that can host tokens which represent everything of value.” Could you elaborate more on that?
A: Circle works on things that are built on top of that, including what we think of as market infrastructure, or marketplaces, that allow people to trade different types of assets on these blockchains. These assets could be currency assets, things similar to stocks or securities, eventually, these assets could be loans, or debt, and you can put in these assets with things like property, cars, houses, artworks, diamonds, or any forms of properties.
We love to see more projects to use tokens to represent other forms of assets. Our vision for the tokenized marketplace, and the Poloniex that we acquired, is to create a marketplace where people can launch tokens that represent all kinds of different assets and values.
Eventually, we believe that every stock, every form of financial contract, all types of properties, will become crypto tokens, and will be traded on crypto token marketplaces.
Q: How far are we from the tokenized future?
A: I think the really critical missing piece to enable tokenization of other types of assets, is a widely accepted set of ‘stable coins’ that represent the value of fiat money using crypto assets.
Because you need other assets denominated in a liquid fiat currency, and you really want those [financial] contracts to be executable on public blockchains with real financial value, you need fiat tokens, or stable coins.
Q: With the long-term vision to execute, will we see Circle heading to IPO in the near future?
A: We are definitely not interested in this. We don’t need to go to the public market to access capital, and we don’t need to be ‘prestigious’.
Talking of the downside [of listing], you have a market that focuses on very short-term things and profitability. I think a good company would take ten years plus to build businesses on a long-term perspective.
The top consumer internet companies in the US are private companies, like Uber, Airbnb, they are all private companies. We are not in a hurry.
Q: Where do you see Circle in ten years?
A: We are trying to be the major global consumer internet finance company, I would love to see it as a business that has a billion customers, millions of companies plugged in to what we do, offering a broad range of products and services to users all around the world.
I think that’s achievable in the same way that companies have managed to achieve billions of users for their photo sharing apps, messaging apps, etc. There is no reason why digital finance can’t have a billion users.
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See also: Circle gaining more clients in Asia, says CEO