(Bloomberg) — Citadel Securities LLC’s pursuit of Silicon Valley funding may be as much about billionaire Ken Griffin’s firm finally embracing cryptocurrencies as it is about raising money.
The Chicago-based electronic market maker revealed a $1.15 billion investment from Sequoia Capital and Paradigm, two venture capital firms with extensive interests in crypto, hinting at Citadel Securities’ potential entry into the space via firms that can help it gain expertise.
San Francisco-based Paradigm announced in November that it is launching a record $2.5 billion venture-capital fund aimed at crypto companies and protocols, while co-founder Matt Huang was formerly a partner at Sequoia Capital and Fred Ehrsam, another co-founder, helped start crypto exchange Coinbase Global Inc.
With the investment, Huang said Paradigm looks forward to “partnering with the Citadel Securities team as they extend their technology and expertise to even more markets and asset classes, including crypto,” according to a statement on Tuesday. Sequoia Capital is also leaping into the crypto space, bankrolling a bevy of startups focused on the its ecosystem and the underlying technology. The cash injection could lead to an eventual initial public offering, according to people with knowledge of their plans.
Read more: Griffin Sets Citadel Securities on IPO Path With Tech Backers
Some of Wall Street’s trading giants, including Jump Trading, Jane Street, and Hudson River Trading, have already been active players in crypto trading in the past few years, as they apply their quantitative approach to a nascent market full of volatility and inefficiencies. Jump, for instance, powers Robinhood Markets Inc. customers’ free crypto trades and has expanded its crypto arm as it positions itself a major player in digital assets.
Coming Around
Griffin, however, has been a skeptic of the asset class, equating it in October to “a jihadist call” by those who don’t believe in the dollar and that he is not a fan of the resources allocated to the digital assets. Still, he said his firm would trade cryptocurrencies if they were properly regulated and praised Securities and Exchange Commission Chair Gary Gensler for applying greater scrutiny to cryptocurrencies. Not moving on crypto could be costly, and executives at the firm are monitoring whether digital assets and related technology could eventually disrupt aspects of its core trading business, according to a person familiar with the matter.
Citadel Securities already faces regulatory pressure stemming from concerns over payment-for-order-flow practices that watchdogs say may hurt investors. A move into crypto would only increase oversight, though the firm does have deep experience dealing with Washington regulators, said James Angel, an associate professor of finance at Georgetown University.
“Citadel Securities already has a good Washington presence. They’ve hired a lot of former government officials, they know what they’re doing in Washington and by moving into crypto they can actually use their regulatory expertise to stay out of trouble and actually make money in the crypto space,” Angel said. “You could argue that their regulatory situation actually gives them an advantage getting into crypto because they know what to avoid. They know what it’s like to live under the SEC microscope.”
In November, Griffin outbid a group of crypto investors under the name of ConstitutionDAO for a copy of the U.S. Constitution. He gave credit to the group for raising more than $40 million, and said digital assets “speak to the desire to change America.” He has also recently come around on Ethereum, saying Bitcoin would be replaced “conceptually” by Ethereum’s blockchain.
“The train is, in some sense, still in the station,” Griffin said at a DealBook conference last year as he explained he isn’t worried he missed out on crypto. Tuesday’s announcement suggests he may be ready to get on board.
Crypto Expertise
Paradigm stands out from other investment firms by providing technical expertise in the crypto space, and it’s capable of coding or auditing the codes of its portfolio companies, its co-founder Huang said in December during Bloomberg’s Odd Lots podcast. Paradigm’s head of research, Dan Robinson, is one of the co-authors of the white paper for Uniswap V3, a major automated market maker in crypto.
Stripe Inc. recently added Huang to its board of directors as the payment company explores product-development work in connection with its recently-formed crypto team.
Ryan Selkis, founder and CEO at Messari, a crypto data and research platform, said it’s notable that a crypto fund is making a sizable investment in a traditional financial company. It’s a reversal from earlier investment trends that may become a big theme this year. “As soon as legacy investors are able to make money from the crypto market, they will be more inclined to view these markets positively, and not want them heavily regulated or cracked down upon,” he said.
From Citadel Securities’ perspective, the deal may help it “get more competitive in a market that Jump and Jane Street have dominated historically,” Selkis said.
The fast-growing cryptocurrency industry has led to some an explosion in wealth for industry pioneers. Binance founder Changpeng Zhao is estimated to be worth $96 billion, a little more than four years after he founded the cryptocurrency exchange, according to the Bloomberg Billionaires Index. In comparison, Ken Griffin, a longtime financier, has an estimated net worth of $21 billion.
(Updates with context on Paradigm, more on Citadel Securities and additional commentary.)
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