Spacs and crypto: Circle IPO sinks into the maelstrom of the crypto crisis
The operator of the USD stablecoin wanted to go public through a front company. But the tough market environment has now led to the deal breaking up
The crypto market is simply not going to calm down. Now stablecoin group Circle has scrapped plans for a $9 billion IPO via what it calls a spac, showing how badly the crypto sector has been hit by back-to-back crises.
The proposed IPO, initially forged during the July 2021 crypto bull market and expanded earlier this year, was targeting a valuation of $7.65 billion to $9 billion. Circle and Concord Acquisition, the US-listed ad hoc company of former Barclays CEO Bob Diamond, said on Monday it had “amicably” ended merger plans.
Creation of a shell company listed within a Spac. Spac’s objective is to take over a company within two years, in this case Circle. Spac will then become a normal listed company. The instrument was particularly popular in times of low interest rates, paving the way for companies to go public much faster.
Spacs and crypto suffer at the same time
However, the failure of the circle deal now joins a series of negative reports about spacs and crypto. Since interest rates have risen, the number of Spac IPOs has declined rapidly. In addition, digital currencies such as Bitcoin, Ether & Co. are under increasing pressure. This is partly due to a series of crypto exchange bankruptcies that have fueled investor fears. The most recent example is the collapse of the FTX stock exchange, which caused a stir around the world.
Although Circle Spac’s failure is less dramatic than FTX’s, it is an example of the industry’s major problems. Concord had until December 10 to complete its acquisition of Circle, which would have involved an IPO in New York.
“We are disappointed that the planned transaction did not materialize. However, the IPO is part of Circle’s core strategy to increase trust and transparency, which has never been more important,” said Circle CEO Jeremy Allaire. Diamond added that he will remain committed to the business as it grows.
Great importance of stablecoins
The Circle USD coin is the second largest stablecoin in the crypto market, with a valuation of around $43 billion. Stablecoins play a key role in connecting traditional and crypto markets, with most tracking the value of a major currency like the dollar. Crypto traders use them like money to place bets. Stablecoin operators typically earn interest on the traditional assets underlying their tokens, with a higher supply in circulation increasing revenue. The group said on Monday it had net income of $43 million on revenue and interest income of $274 million for the third quarter of this year.
Stablecoins made headlines as early as May. It was then that the Terra/Luna system collapsed. The Luna cryptocurrency was pegged to its own TerraUSD token. As clients withdrew more and more money from the system, the Terra token came under pressure. The fluctuations should actually be compensated by an algorithm, but the system has reached its limits due to the bank run. However, Circle’s USD coin promises to be more secure here: unlike Terra/Luna, the token must be fully backed by US dollars – i.e. regular fiat currency, not crypto -currency (own or other). This is one of the reasons why experts consider the effects after the SPAC burst to be weak for the time being.
Bankruptcies and rapid price losses this year
Many publicly traded companies in the crypto industry have come under severe pressure this year. Shares of US stock exchange Coinbase have fallen 80% in 2022, and shares of Mike Novogratz’s Galaxy Digital investment group have fallen 81%. The market turmoil has also affected other major players in the crypto industry, including broker Genesis, which halted withdrawals from its lending system last month, and lending platform BlockFi, which followed the bankruptcy of FTX.
Days after FTX went bankrupt, Circle said it had minimal exposure to FTX and sister company Alameda Research. In early 2021, the company invested $10 million in FTX and $600,000 in FTX US.
© The Financial Times Limited 2022