Circle Offers Something That Might Be Worth A Second Look

Circle gave the community an inside look at its payment platform this week and it looks like it may have been worth the wait.

If you’ve somehow made it without having heard of them yet, Circle could best be described as a bitcoin bank that charges no fees. The company announced itself last fall and has spent nearly a year seeking capital and building its platform online.

Circle is not an exchange, so users cannot buy and sell in the same way as they would elsewhere. This is not to say that no trading activity occurs there: the company plans to earn a return for its investors by creating arbitrage opportunities for itself on deposit and withdrawal transactions, much like a normal exchange. So, don’t expect the most favorable exchange rate out there on your account.

Users can deposit either fiat currency or bitcoins into a Circle account. Account balances are quoted in the user’s home currency, but held in bitcoin. Circle is not a bank, legally speaking, so it is not currently subject to most banking regulations. This also means that it must hold 100% of customer funds in reserve (no fractional reserve allowed). The company is a registered money transmitter, so it must still comply with KYC and AML rules.

The company uses two factor authentication to control access to user accounts and boasts “military grade” hardware and encryption. The platform has a few other interesting features that some users may find helpful. One example is an option called “link handler,” that makes Circle the default payer every time a customer sends bitcoin online. Its interface has been described as better looking and easier to use than Coinbase, a platform that is already very clean and easy.

Circle doesn’t seem to be aggressively courting business customers, unlike Coinbase and BitPay, but has scrupulously used the term “free for consumers” in public statements. This may be indicative of a future intent to go head to head in business banking with traditional banks and other bitcoin platforms, though it is not publicly known when (or if) this will occur. For what it’s worth, the company consistently claims to have no intent to charge for its service.

Circle earned the ire of bitcoiners last month by launching under an invitation only system, which the company claimed was to “make sure that all customers have a great experience” (full disclosure: I’m still waiting for my invitation). Most people who preregistered to be notified at launch, including me, thought that sign up would be simple and immediate. This has left more than one would-be customer wondering whether the invitation is actually just a ham fisted way to generate demand by creating artificial scarcity.

To Circle’s credit, the company claims to have subjected itself to extensive stress testing (part of the reason for the delays and staged opening). It must have worked, because I haven’t heard of anyone having a an access related problem with them yet. Circle promises $10 in free bitcoin to new account holders that choose to complete the account setup process once invited.

Circle earned itself a black eye recently when some users reported that their credit card issuer charged a cash advance fee for deposits (though not for direct bank transfers). The fees, which typically range from 2% to 4% (plus a higher interest rate with no grace period), normally apply to direct cash charges at ATMs or using cash advance checks. Though the fee makes sense, given the way that Circle describes its business model, Circle says that this shouldn’t be happening and that it is looking into the problem.

Circle offers something that differentiates itself from its competitors enough to be noticeably different and to draw in non-bitcoin customers. This will be a key advantage to it in the near future. Bitcoin is rapidly approaching a point where the major trading platforms will provide a commodity service that is technically indistinguishable from one another. When that happens, price and processing speed will start to matter more and superficial details less. The ability of the industry to grow will also depend on the rate that new converts can be sold on bitcoin. Circle may be the platform that bridges the gap between hard core bitcoiners and the merely curious.

UPDATE 09/29/14- Circle appears to have opened its platform to all comers.