VCs Just Pushed Citadel Securities Toward Crypto with $1.15B Raise
As of January 11, Citadel Securities sold $1.15 billion worth of the company’s stake to Sequoia Capital and Paradigm. Correspondingly, the two Venture Capital (VC) firms have become minority stake holders, raising Citadel Securities valuation to $22 billion.
The current CEO of Citadel Securities is Peng Zhao, while its majority owner and chairman is Kenneth Griffin, a star of multiple congressional hearings in the wake of the GameStop short squeeze saga. Griffin is also the CEO of Citadel LLC, which is a multinational hedge fund worth $43 billion, not to be confused with Citadel Securities, the market maker.
Alfred Lin, Taiwanese-born partner at Sequoia, will join Griffin as a member of the Citadel Securities board. As for Paradigm, the VC firm has close ties with Sequoia Capital. Matt Huang was its former partner and Paradigm’s co-founder and Managing Partner.
Sequoia Capital and Paradigm’s Most Notable Investments
The stake-holder entry of the two VC firms is quite significant as they are both heavily involved in blockchain, social media, and Web3 projects.
- Before Paradigm, Matt Huang developed Hotspots, a social analytics startup acquired by Twitter in 2012.
- Paradigm was the angel investor in ByteDance, a Chinese IT company responsible for the mega-popular TikTok. As of October, ByteDance was valued at around $400 billion.
- Paradigm also invested in Instacart, a North American grocery delivery service via mobile app. Other Paradigm investments include Amplitude, Plangrid, and Benchling, all cutting-edge software solution platforms.
- In the crypto realm, Paradigm contributed a $2.5 billion fund to the growth of Coinbase, FTX, Maker, BlockFi, Sky Mavis (Axie Infinity), and Uniswap.
- On the other hand, Sequoia Capital was an early investor in every major Web2 platform you have heard of: PayPal, Tumblr, WhatsApp, Reddit, Google, Youtube, LinkedIn, Instagram, Zoom, Stripe, GitHub and many others.
- In 2021, Sequoia invested in 21 blockchain projects, which was a quarter of its total investments. One of the biggest was $100 million worth in LayerZero Labs, a cross-chain interoperability protocol.
- Sequoia’s Indian branch is still in talks to invest $50 – $150 million in Polygon (MATIC), an Ethereum layer-2 scalability solution.
- Sequoia was also critical for Robinhood, having led a Series F funding round at $280 million on May 4, 2020. More importantly, the VC firm also led the emergency funding of $1 billion in January 2021.
Overall, Sequoia Capital doesn’t have a head-start as specialized as Andreessen Horowitz (a16z) when it comes to crypto startups, focusing more on Web2 platforms instead.
However, Sequoia’s investment strategy started to shift on October 26, 2021, having announced a greater focus on the blockchain space. Three weeks later, Sequoia invested in a $1 million-plus token fundraising round for Parallel Finance, a DeFi protocol within the Polkadot ecosystem, now featuring $600 million in TVL.
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Will Sequoia Capital and Paradigm Shift Citadel Securities’ Trajectory?
The question is, how will the crypto expertise of Sequoia Capital and Paradigm clash with Citadel Securities? Ken Griffin is known for having a conservative approach, previously stating that Ethereum will replace Bitcoin, for which he claimed there is “no commercial use cases for”:
“I think we are all still trying to understand if we want to hit this world of decentralized finance and want a payment system that is low cost and effective, is it going to be solved by the crypto community? Or is it going to be solved by a digital dollar?”
Furthermore, Griffin stated in October that Citadel Securities doesn’t trade in cryptos due to regulatory uncertainties. He views the very notion of replacing USD with cryptos as a “jihadist call“. In line with this thinking, Griffin prevented ConstitutionDAO from gaining the first-edition copy of the U.S. Constitution at Sotheby’s. He alone paid $43.2 million to outbid the DAO consisting of 17,000 members who crowdfunded just over $40 million.
Given Sequoia’s tight funding relationship with Robinhood, the broker is now also closer to Citadel Securities. This financial intertwining is familiar. If you recall, Citadel LLC, the hedge fund, had a $2 billion stake in Melvin Capital, which suffered significant losses due to its short positions in GameStop (GME).
However, with a raised valuation to $22 billion, this may be an indicator that Citadel Securities plans to follow Robinhood by going the IPO route. Judging by his statement, Paradigm co-founder Matt Huang certainly expects to see global expansion.
“We look forward to partnering with the Citadel Securities team as they extend their technology and expertise to even more markets and asset classes, including crypto,”
Citadel Securities Had a Busy 2021
Thanks to GameStop/AMC’s epic short squeeze saga, Citadel Securities has gained global notoriety. As a key market maker in the US, accounting for 27% equity market volume, it became known as one of the biggest income sources for Robinhood’s Pay for Order Flow (PFOF) business model.
This was a period when the bulk of the GME/AMC short squeeze took place, resulting in various trading restrictions implemented on the stocks from a number of brokers, including Robinhood. Although it was no secret that PFOF is the main reason for the possibility of zero-commission trading, retail traders perceived the Robinhood-Citadel Securities relationship as foul play.
This resulted in a class-action lawsuit that was subsequently dismissed in federal court. However, some legal gains have been made. FINRA awarded 27-year-old Jose Batista $30k as restitution for Robinhood halting his meme-stock trades, representing the first win for retail investors and potentially paving the road for thousands of similar claims.
In the meantime, Citadel Securities was busy tackling none other than the Securities and Exchange Commission (SEC) over the agency’s D-limit order implementation. Initially proposed by the IEX [Investors Exchange], the ‘discretionary order’ places an algorithmic barrier so that market makers with the most powerful computers and bandwidth, such as Citadel Securities, wouldn’t have an unfair advantage in picking up Limit-if-Touched (LIT) orders.
Lastly, Citadel Securities reached a confidential settlement with British hedge fund GSA Capital in June. The latter tried to recruit Vedat Cologlu, a quant researcher and one of very few privy to Citadel’s secretive, $100-million worth ABC Strategy automated trading algorithm.
When Jack Dorsey discussed his dislike of Web3, do you think he was referring to the dominance of half a dozen Venture Capital firms? Let us know in the comments below.