The world of moving money is changing. And faster is the theme. Domestic real time payment systems are showing up across the planet. Today’s discussion is full of bitcoin, open and permissioned blockchain approaches to speed asset exchange. But the competitive balance between proprietary and open systems is in flux.
The view that moving money is or should be an internet-wide capability is a guiding principle for Jeremy Allaire, founder and CEO of Circle. Take a listen to Jeremy on how Circle is connecting US dollars to British pound sterling, his plans for the euro, and how multiple technologies – blockchain and machine learning among them – enable money movement for Circle’s customers.
Read the transcript below.
George: So welcome, everyone, to another Payments on Fire podcast. It’s my pleasure today to be with the founder and CEO of Circle Internet Financial. Is that right, Jeremy?
Jeremy: That’s right. The corporate name is Circle Internet Financial.
George: Otherwise, Circle.com with Jeremy Allaire. Welcome, Jeremy, glad to have you here.
Jeremy: Thanks so much.
George: The reason I wanted to reach out with you, Jeremy, besides the fact that it’s been a long time since we’ve spoken, is I’ve seen some recent activity around your business that I thought our podcast listeners would benefit from. You’ve really, over the last year or so I’d say, and I’m sure you’ve been planning some of these changes long since, you’ve really made a lot of changes in how Circle goes to market. Is that a fair statement?
Jeremy: Yeah, I mean, when we founded the company 3 years ago, we had a vision that money should work the way that the internet works, and that there would be new services and apps that would emerge that allowed people to use money the same way we’re using Skype right now, or the same way we use email or browse the web – global, instant, free, fun – and that kind of model that’s worked for how media works on the internet, how communications works on the internet, and how content publishing works. Really, we thought that model could come to money and, at the time, there were a number of technologies that we saw that made that possible. Bitcoin and block chain tech was one technology that would be a kind of protocol layer that would be important, the admin of machine learning and artificial intelligence at scale made it possible to automate things that are traditionally done by humans in banks, like risk.
Jeremy: Yeah, everything involved in sort of the movement of money; I’ll come back to the question in a sec. The movement of money is really just synchronizing data in a risk managed fashion. We can have protocols that make the movement of money work the way that content and communications works on the internet, and we need technology like financial AI to deal with intelligence and decision making that goes along with it on the way. Other things like cloud platforms and smart phones becoming viable as payment instruments, all that kind of happening at the same time made us think that we could build a global consumer internet company that really tries to reconceptionalize what consumer spending account is and that made money work the way we experience a lot of other things. That was the vision from day one. Now, in starting the company, in order to build that product, unlike other products that are built that Shawn and I have built in the past, we needed to get permission from the government to do that, from lots of governments to do that. Our vision was always what we called hybrid digital economy, where people use their own currency, but they get all the benefits of digital currency and open platforms and open protocols to move around and transmit value.
George: So that’s really moving away from being a bitcoin exchange and making bitcoin seamless.
Jeremy: Yeah. So if you look at the product we launched in 2014, it was positioned as a consumer payment app. It was positioned as a way to share value and move value the same way that we use email and things like that. We never thought of ourselves at a bitcoin company, any more than Amazon thought of themselves as an HTTP company or Google as an SMTP company. I think what’s critical to understand though is that to actually offer a product that mainstream users would want, we needed to have that fusion between the traditional financial world and this new digital currency world. That required getting licensed across the whole US; that required getting licensed to be an e-money company throughout the European Union.
George: Money service business licenses in 48 states, or something like that?
Jeremy: That’s right. We didn’t just want to go stealth for 2 and a half years. We decided to make a product available that sort of introduced some of the concepts of digital money, but we knew a product that was only interesting to early adopters and early enthusiasts that kind of cared about bitcoin itself, and it was very good for that, but we didn’t really ever market that product. We never broadly tried to promote it for consumer adoption, because it was an early adopter product. Now, with the launch that we did late last year with the US dollar and now with the European launch through the UK first, and eventually across Europe, we’re now really starting to market the product and a lot of that vision of how do you combine all these things together and how do you create new user experiences for how people use money led to where we are today with the social payment app, and it’s doing really well; it’s a product that people really like.
George: Tell us a little bit about how you actually put that into place with the connection of US dollars and pounds to Circle – I think it’s better to put it that way. How does that work?
Jeremy: Yeah, sure. Circle is licensed as an e-money company in the UK, a money transmitter in the US; those licenses give us the ability to hold value on behalf of customers, they give us the ability to handle payments between consumers and between consumers and businesses, they give us the ability to do currency exchange, and the ability to do international or cross-border payments. They don’t give us the ability to directly store central bank money, so we have to synchronize to another database to store central bank money, and they don’t give us the ability to use customer assets for investing and lending and things like that, so we don’t have a charter to do those business activities. We do have a charter to really provide that core consumer spending account payment experience, etc. In order to offer this product in any market – the US or Europe, we need to have those licenses and we need to have an underlying banking partner who provides a segregated client money account where we can synchronize central bank money and store central bank money, and likewise a set of capabilities or infrastructure to access the interbank settlement networks in any given currency zone or market. That’s what Barclays, for example, in the UK is providing to Circle, and that’s at a high level.
George: So you have a pooled account then at Barclays on behalf of your customers. Does Barclays provide the connectivity to the faster payment system in the UK?
Jeremy: Underneath the Circle app is accounts that allow us to settle transactions across the UK banks, whether that’s through card networks or other protocols; so we have access to all those kinds of protocols.
George: Great. So we are tracking here, at Glenbrook, the development of the increasing and expansion of these faster payment systems. Of course, we have a lot of interest happening here in the US, but it strikes me that you’ve got a way for someone here in the States to send money to a friend or family member or I suppose a business in the UK, and actually have that money show up in their bank account in a very short order.
Jeremy: Yeah, it’s a unique thing. We’ve launched something that’s sort of not existed before, which is a seamless experience to send and receive value instantly without fees across currencies, as well as across the block chain. It’s very powerful and useful. It’s important to know that we don’t really make a distinction between a cross-border payment or versus a domestic payment. These are sort of artifacts of the legacy that we live with today. The question I always like to ask is “When’s the last time you sent a cross border email or had an international web browsing session?” These concepts don’t exist, money is data, and movement of value is synchronizing databases. Those databases are administered; banks are regulated database operators, and increasingly, as we move to open protocols for transmitting value and settling transactions, like block chain, we have a way to move value in the same way that we move other kinds of data on the internet. Again, we don’t really make a distinction between that, it falls out of the kind of architecture that we have, we can seamlessly move that value, and there are underlying things we need to do in our own treasury and trading operations to ensure that there’s that instant liquidity, so that when you send dollars, even though it might be coming from your debit card, we don’t get that money from you for days, actually, if not weeks. We’re making an intelligent or AI is actually making a risk decision on are you good for that? Are you who you say you are? Are you likely to be committing fraud? Are you a whole host of other things? We have dollars on hand, of course to handle that, and then likewise, that gets transmitted and we make that sterling available to the recipient instantly – milliseconds basically, and they can cash that out straight away. So we have to have pools of liquidity in all the currencies that we operate in, including digital currency for any transmission you want to make with dollars or sterling over the block chain, we need to always have enough bitcoin on hand just to be able to settle that transaction over the open internet.
George: Got it. Are there new FinTech fraud management tools that you’ve brought in over the last year or so? There’s so much activity and machine learning today.
Jeremy: Yeah. When we built Circle, we built a number of things. What you see as the consumer is sort of the tip of the iceberg in terms of the software we created. We think of ourselves, fundamentally, as some sort of an engineering software company, and the majority of our investments are in creating software. I like to say we’re 90 people with laptops. That’s it, literally, 90 people with laptops, and we create everything as software, we run our entire operation on software, our entire consumer product is software, the way we reach customers, service them, everything we do is through software. That includes a sort of reconceptionalized transaction banking platform that could work with traditional currencies, digital currencies in a multi-currency way that could handle cross-currency settlement really easily. We also developed our own machine learning and AI’s and risk engine from scratch. We certainly use third party data, because we don’t have a database of every government issued ID – that’s not an asset we have as a company. So we use third party data for different things; we take advantage of third party services that pool anonymized data after detecting fraudulent activities, so we can get some network effects from other consumer companies that interact with lots of consumers and have signals that we can share with each other. Fundamentally, we built our own financial AI, it’s a risk decisioning platform, it’s a rules engine, there’s a whole suite of tools that our own risk analysts, the humans that sit behind the machine, can interact with, can make judgments with, and ultimately train that AI. That’s a core part of our intellectual property in how we make all of this work as well.
George: Well you’re taking on risk then on each of these transactions.
George: You’re not charging fees on either end. How does Circle make its money?
Jeremy: On this product, we don’t generate real revenue. I think it’s useful to kind of understand at least the philosophy we have around this. When we look at what we’re building, we think about it in the context of retail banking more broadly, or consumer finance more broadly, and when you look at what retail banks do today, there’s really 2 big buckets. One bucket is a place to store value, supposedly securely, and utilities that they provide to you allow you to move value in and out of that storage. Historically, those have been paper tokens, then it moved to plastic tokens with electronic transmission, now we’re actually moving into an era of actual digital money, but nonetheless, essentially that storage and value transfer mechanism is what we call the payment utility component of retail banking. We think that, for a lot of the reasons that we saw it was possible to do this today, that we can use block chain technology, we can use AI, we can use cloud software, we can use smart phone apps, as all that software powered experience allows us to operate the equivalent of a spending account (a global spending account) at a very low cost. So we do have fees that we consume, and those are variable in nature, and some are fixed and so forth, but we’re able to maintain a customer at a fraction of the cost of a traditional bank would have. So we think that sort of spending account / payment utility, that just becomes a free service on the internet all around the world, not just from Circle, but from lots of other companies. It’s going to be very hard to charge for moving value around, just like it’s hard to charge for moving email or having a video call. That’s sort of a fundamental belief, and so right now the company is focused on scaling out that product and scaling out its adoption and making social payments a more every day behavior as it is today already in China. AliPay and WeChatPay, which are really cutting edge social payment apps, really lit up a whole new consumer behavior that hundreds of millions of people use daily now, and that hasn’t happened in the West, that hasn’t happened in the US, it hasn’t happened in Europe. There aren’t really significant social payment apps that have anywhere close to the scale that you’ve seen in China. Right now we’re just trying to establish a social payment app that is able to provide a great experience for people to exchange value instantly and securely without fees; whether it’s across the table, across the pond, across the planet, and do that in an open way that’s operable with other digital wallets, other merchant services, other financial institutions increasingly that are adopting block chain technology.
George: So that interoperability is really one of the differentiators you’re going to have versus the likes of PayPal, Venmo Property, and Facebook Messenger, which is starting to get into this space now.
Jeremy: I think we’re, as I like to say, we’re in the early days of the internet, where you had online services, and you had AOL, and CompuServe, and Microsoft got in, and these were walled gardens, as we used to say. If you wanted to send an email to someone, if they had an AOL account you could send them an email, and if you wanted to access content, well if they had done a deal with AOL you could get to that content. That’s the equivalent of PayPal today, of Venmo, or any of these others, they are closed networks. The internet and the global network affects you get from the internet, really happen when you have these open protocols. The core, core concept and the fashionable phrase is “public block chains”. We need public block chains, we need public block chains that anyone can plugin to and use, these global trust machines can be used to settle currency transactions, they can be used to settle estate transfers, lots of other use cases for these public block chains. They are really a critical lying infrastructure that we never wanted end consumers to have to see, just like you don’t format your SMTP message headers yourself; you don’t know what that is, but when you send an email, it works. If the person on the other end doesn’t use the same email service as you, it still works. We want to see that kind of experience for value happen, it’s a key, key concept, and certainly, a competitive differentiation. We’re also really the only social payment app that’s multi-currency. There is no other social payment app that’s multi-currency, and not only multi-currency but allows for cross-currency transmission value without fees, which is a break through.
George: I’m hearing that you clearly have got a robust set of APIs for partners to be able to exploit down the line, it wouldn’t just be your user interfaces that are taking advantage. I mean anyone can take advantage of the bitcoin rails, but it’s that machine AI that you talked about and the other risk management functions that you bring that could be of real value to partners.
Jeremy: The instant liquidity across currencies without fees is really helpful. We don’t have an API right now, we’re a consumer company, and so, if we ever do have an API for partners, it would certainly be to integrate Circle in interesting ways into other apps and services, but we always want the Circle customer identity, customer relationship to be important. Twitter has an API and lots of products integrate Twitter in really cool ways, but it all sort of feeds into that core Twitter experience and we’ll explore some of those things over times, probably.
George: Got it. Couple of other questions for you before we wrap up. One of the things I’ve always respected about Circle, you entered this market with an absolutely scrupulous approach to regulatory requirements and transparency, and you were the first firm to actually conform and get a New York state bit license, which I know is no trivial accomplishment. Are there other regulations they have that concern you?
Jeremy: Not so much. We’ve gone through some major milestones in terms of getting regulators comfortable that we can operate this business and manage the risks for consumers, the risks to society, and we do that extremely well. Regulators and our bank partners and our auditors and our insurers, all these kind of institutional fiduciary trust organizations have really pressure tested that, and we’ve built great controls and we manage it well. I think in terms of the road map on regulatory, it’s an interesting time. We spend a lot of time with government agencies here in the US, in the UK, in Japan, and in other countries as well, and you’re really seeing an acceleration in financial regulators in particular to figure out how to, not just how to regulate, but how to embrace FinTech, embrace new software powered companies, AI powered companies that are changing the underlying value proposition in economics, distribution models and financial products, and increasing those as we all discover money is just data and so there’s a lot we can do with software and software technology to really change that. So I think governments are getting savvier, I think you’re going to see more and more regulatory regimes that stand different currency activity, that stand P to P lending, marketplace lending, activity, digital insurance products, all kinds of new kinds of products. They will come under the regulators, but I think that’s all very reasonable, and we had that with digital currency very early on – there are more risks. It’s helpful to have some level of control and have good teams, have sufficient capital, manage financial commerce; all these things are I think important.
George: And reasonable.
Jeremy: And reasonable; yeah. There’s nothing that concerns me; in fact, I think the regulatory environment for financial technology or internet and finance companies is opening up in a really interesting way, and I think there are certainly companies who’s view is do as much as possible without having to deal with regulation or sort of act first ask for permission later. I think that’s a huge mistake in this sector. I think that it’s critical to work with and collaborate with government, because they’re important to making this all happen globally.
George: Well, you are touching someone’s money, which either directly or indirectly, puts you in a fiduciary role, and that stuff really matters. Let me close with one question, which is less to do with Circle and more to do with your thoughts about bitcoin itself. Looking at particularly the governance evolution of the bitcoin protocol, as I look at it, we’ve got a crew of contrary developers who have a philosophical split right now, and it’s impacting even the performance of the bitcoin itself as a transfer capability. Are you seeing that? Do you see any way through and resolution?
Jeremy: Yeah. There’s a few themes there, and we’ve shared some of this publically. I think first, in terms of the operational impact for Circle, there’s really no impact for us. In our system, when you want to send dollars to a block chain address, we instantly convert those dollars into bitcoin behind the scenes. You don’t know that that’s happening, but that’s what’s going on. And then we dynamically set fees based on the real time fee marketplace, what’s happening in terms of clearing and settlement, and we do that on the customer’s behalf, and we actually take that cost ourselves. We typically don’t see an impact, because we’re dynamic and adaptive in terms of how we deal with transaction throughput and setting the right incentives, but that’s not desirable.
George: Have those costs gone up for you in the last few months?
Jeremy: You know, they might spike for a day and then drop. It’s not a generalized issue, it’s sort of specific. There is a real issue to technology wise in terms of creating more scalability, and obviously, the kind of fault line here has really little to do with the technical issue. The technical issue is trivial in my opinion, and there are very straightforward fixes to it which I think would be great. The real issue is a governance issue. If you step back and you look at public block chain technology, bitcoin being the most noteworthy, it’s the public block chain that has the most scale, security, liquidity, et cetera; really, really important stuff. If we wanted to be as foundational as the World Wide Web or as internet email or as voice and video over IP or other things that we just sort of take for granted now, we have to have real governance. So we have to break the type control over the technology away from a small team that is ideologically motivated, and we need to have an actual standards body with an actual standards process, with specifications, with compatibility tests, suites, with real open discussion amongst engineers, computer scientists, academics, others, and iterate the technology and do it in an open way. That’s what’s actually necessary. So I think we’ll get to that place with bitcoin specifically, but the same time, when we think about this over the long run, it’s very likely that in 5 years or 10 years, none of us are using bitcoin or something called bitcoin. It might actually be a derivative of the original bitcoin technology, but how many of us use MCSA Mosaic? The web technology specifications themselves have evolved dramatically over that period of time. So I think we’ll see competing public block chains; Therium is a very compelling, competing public block chain. It’s not proven at scale, it’s not proven in security, it’s not proven in its liquidity – it’s much thinner than bitcoin’s, but it’s very compelling. So I think we’re going to see multiple competing public block chains, and we’ll ultimately see governance models emerge, similar to what we’ve seen for other major internet technologies.
George: Well, if money has become a utility as email has embedded into the internet, without standards as you say, it can’t happen. So I couldn’t agree more
George: Right. Well, Jeremy, first of all, thank you very much; great to catch up. I really appreciate your thoughts and update on Circle. I look forward to talking to you again soon.
Jeremy: Thanks, George. Take care.
George: You too.