Charles Cascarilla Interview - Paxos Crypto Services, Pax Dollar & Gold, PayPal, Stablecoin Regulations

Charles Cascarilla is the CEO and Co-Founder at Paxos. In this interview we discuss Paxos crypto solutions, Pax Dollar USDP, Pax Gold PAXG, Stablecoin regulations, crypto regulations, bitcoin adoption, NFTs and more.

Transcript

Welcome back to the Thinking Crypto podcast, your home for cryptocurrency news and interviews. With me today is Charles Cascarillo who’s the CEO and co-founder of Paxos. Charles, great to have you on the show.

• Great to be on. Thanks for having me.
• Charles, let’s start with your background. Where you from? Where did you grow up?
• So, I’m from Cleveland originally. Although, I guess, first couple years at Lansing, Michigan, then grew up in Cleveland and… You know, so I’ve been in the Midwest my whole life for basically school and then moved out to New York city.
• And what did you do before founding Paxos? And what led to the founding of Paxos?
• I really spent most of my career as an investor. So, I worked in financial services coming outta school. Did some investment banking and some research work. And then went to the buy side, which is where I always wanted to be, and looked at investing in a lot of different types of businesses. And to me, that was always some of the most exciting things you could do because you had to pull together a wide range of different types of skills. You had to understand market psychology, and fundamentals of companies, and trends of how the economy was doing, and how new products were doing. And so, to me, that was really a synthesis of a lot of different type of skills that I found really appealing. And as an investor, it was mainly investing in financial services companies actually. And so, did that globally, investing across the world, and banks, and brokers, insurance companies, fintech firms, and invested in everything from very early stage companies to large public companies, and everything from debt equity. And actually started my own asset manager in 2005 with a… With my co-founder here at Paxos. And really, I think some of the things that we really looked at and gravitated towards was how markets were changing because of technology, how technology was changing how products could be delivered. And we saw this in the early 2000s with how exchanges changed. You know, they were based on the floor, then they went electronic. They went from being, you know, mutually owned to being private and for-profit institutions. And they created enormous amounts of change, not just at the exchanges, but for firms that were operating. I mean, people are trading now in microseconds, which is hard to believe. It’s so fast. Whereas before it used to be trading, and I remember when people were trading in eights on the floor. I almost took a job there. And so, that’s, you know, one example of technology fundamentally changing how markets operate and how products that could be delivered. And, you know, there’s other examples that we saw. And so, when Bitcoin and blockchain came around, we immediately gravitated towards it as a possible way to fundamentally change how markets worked, but because it changed the infrastructure. And that’s what we saw when we got involved with Bitcoin and blockchain. It was just a three or four cents. There was nothing else about Bitcoin and there was a big debate about whether you could have a blockchain without an asset on it that was tradeable, and that was well before even Ethereum existed interestingly. And so, it was kind of the nature that was very early, but what we gravitated towards was how this could change markets. How it could fundamentally allow assets to move in a different way, in a public way on an open public network. Whereas the way the financial system really works today is on a private closed network. It’s very large, it’s very big, but it’s still private and closed. And being on an open public network will fundamentally drive down costs, create more efficiencies. And importantly, of course, it’s open, that makes it far more inclusive. Huge numbers of people who don’t have access to financial products, even to banking accounts, globally and in the U.S. And so, when we saw this technology, we really gravitated towards it. And that’s what led us to start Paxos, and invest in a number of other companies in the space from very early days. And it’s been an exciting ride.
• Wow. So, you saw Bitcoin and, you know, when it was like you mentioned the pennies. So, you’re an OG. I mean, you’ve seen this thing from, you know, a lot of people got in maybe 2016, 2017, but you’ve seen it from its inception almost.
• Yeah. So, it was May of 2010 actually. And so, we got involved. By the way, we were mining it and we were buying it.
• Wow.
• You know, I think at one point we were over 25% of the mining capacity of the network. So, we’ve been involved for a very long time. And it was not just about Bitcoin. To be honest with you, I thought that the price could rise quite a bit. But I would’ve never imagined that we would be, you know, I guess we’re at 19,000 a day or something. I spent as high as 65 or 70,000. But I really was excited about how you could take a blockchain and move information on it, and be able to move really financial information. Which, at this point in our lives, the infrastructure has become so compromised that it’s not just exacerbating crises like in the great financial crisis. Where in 2007-2008, we saw firsthand how the plumbing of the system exacerbated the crisis. You didn’t know where anything was. You know, you couldn’t settle trades. It was… There was lots of leads and lags and Lehman Brothers failed, like no one knew where anything was. But that wasn’t the fundamental cause of the crisis. It exacerbated, and it really hindered the recovery very significantly. We were, for instance, short subprime through CDS and through commercial CDS, commercial real estate, and you could see how hard it was for people to move collateral around. It was eyeopening. And then coming out of it, when you’re trying to buy distressed mortgages, things had gotten really overdone. You could see how hard it was to solve some of the underlying problems because it was so paper-based and so unclear how the rules were even supposed to work for how to move assets around. And so, really… Really created a mess out of everything. But what I thought was interesting is the GameStop crisis was a moment in time when the plumbing of the system actually made the crisis. So, it didn’t exacerbate it. It actually made it. So, we’ve now gotten to the point where the plumbing, which is COBOL mainframes. We wanna know how every single financial institution works, it’s COBOL mainframes. All the big ones. And I mean, unbelievably archaic. You’re in Latin, basically. You know, Latin for programming. And that’s what we’re depending on for our financial lives. And, you know, that’s not great obviously because it’s creating this instability. But just even worse is that clearly the structure of the economy is shifting to be more and more real time. You know, you can get deliveries from Amazon same day. You can move all types of information, essentially instantaneously, but not your financial information, which is very ironic. You’re moving physical goods same day, but yet you can’t move electronic financial information in real time because it’s all trapped in this private archaic network basically. And that is really it’s baffling if you think about it. Why can’t you move your financial information, which is basically just like an email? It’s very valuable. It’s very regulated. But at the end of the day, it’s like almost like an email. Why can’t you move that immediately anywhere in the world? Well, it’s because we have all the wrong infrastructure for the structure of the economy now to such a point that the financial economy and the financial system is actually holding back the real economy in very, very real, very fundamental ways. You can’t truly have Web3 and have financial information that is working in fast processes, nine to five, five days a week. I mean, it’s like, it’s actually ludicrous. And that’s what excited us about starting Paxos. How could you create an infrastructure layer that would enable this new open financial system to be very trustworthy so that it can operate at the societal wide scale? That’s what Paxos is ultimately trying to do. That’s what I really loved about what Bitcoin could bring about. There’s, of course, other things that Bitcoin brings about too, which I also really like, but that’s not necessarily what Paxos is trying to solve.
• Hmm. So, Charles, I gotta ask because you’ve been here so long, are you a Bitcoin whale? And what are you holding on your crypto portfolio?
• Well, I would describe myself as, in some sense, a Bitcoin maximalist, but I don’t know if I’m like totally religious about that. Maybe I’d be a pragmatic maximalist if there’s such a thing. And, you know, definitely been in the space for a very long time, and… You know, I don’t know what the right definition is for these things. But, you know, I really believe in what crypto is trying to do, and have from the very beginning. And I think of it as two things. One is it’s creating a whole new asset class, a whole new way to be able to be part of communities. And that’s from Bitcoin all the way through crypto, other cryptos. And I think they all have their place and, you know, some of them will succeed and some of them won’t. But it’s really interesting. And then the second thing is, how is it changing the infrastructure so that any asset can move like a crypto? So, then you have a totally different financial system. So, I look at it as two things, and that’s what excites me about this early on, why I’ve been involved for, you know, really since the very beginning.
• So, tell us about Paxos as a company and the services you provide. You’ve got quite a few services, you know, the stablecoin, PAX Gold. You also have institutional services. Tell us about that.
• I would think of our products as falling into two categories. One is the platform. So, we have a platform that enables institutions to build off of us. And so, those institutions today are some of the biggest in the world. They’re PayPal and Venmo, but also Interactive Brokers, or Mercado Libre, or Nubank, Bank of America, Credit Suisse, Soc Gen. It’s that all very large, you know, big companies, traditional institutions, fintechs in the U.S., outside the U.S. And the reason we have this platform by the way is, with about 650 million end users are the total of all of our customers that could receive products that Paxos builds through these partnerships. 650 million. That’s great, that’s big, and it’s continuing to grow. The pipeline is really… Actually, has not slowed down at all. So, I look at it and think, “Well, this platform is really great. It’s enabling a lot of firms to be able to get access to either new products or upgrade existing products.” And so, what is the platform enabling is the second thing, which is the type of assets that we’re able to bring to these customers who are building off of us. One is crypto assets. The other one is tokenized assets, like tokenized dollars, tokenized gold. We’ve been working on tokenizing equities, and there’s no end in our mind to assets that should be tokenized. So, how do we basically create a platform that enables our customers to buy, sell, hold, lend, receive, and transfer any type of asset? And that’s both crypto assets and non crypto assets that have been tokenized so they can move on a blockchain. So, it’s two components here. Build the platform, and then make as many assets as possible available to our customers, including assets that we are tokenizing ourselves, and we’re doing it in a way that’s highly regulated. So, you’re creating the platform and you’re enabling assets and creating assets that are on a blockchain, and you’re doing it in a regulated way. And the reason that’s important is not because, you know, I think regulation is an end in itself. It’s a means to an end. And what we’re trying to achieve here is re-platforming the financial system. How can we change the entire financial system for everybody to be able to access it in a totally different way? And I don’t think you can do that without regulation. I could be wrong, by the way. We’ll see. But I suspect that it’s gonna be very hard to hit societal-wide scale, and we’ve already seen that now. You get to a certain size, and then the regulation really starts to hinder what can be done if you wanna get much larger. And so, and by the way, the crypto industry has gotten pretty big. You’re at a trillion dollars of assets or something. So, that’s big. But there are $700 trillion of assets in the world.
• Yeah.
• Right? So, if you wanna go from 1 trillion to 700 trillion, my suspicion is it’s gonna be hard to get much bigger and maybe the P crypto is 3 trillion, but it’s gonna be hard to get much bigger than that, and pulling all these other assets of tokenize them without regulation. And so, the way we think about it is, how do you build a platform that brings as many people in as possible? How do you make as much assets available? And how do you do it in a regulated way?
• Hmm. So… You have the different moving parts and components here. What blockchain are you using for tokenization for these different institutions?
• So, today, we’re tokenizing on Ethereum. And we are really tokenizing Ethereum for a couple reasons. One is because it’s the biggest community, the biggest network effect. But as we all know, it also has a lot of cost to it. You know, there’s so many people on it that, you know, you pay a lot of fees here to be able to use Ethereum. On the other hand, we wanna add additional chains. But because we’re regulated and all of our tokens themselves are regulated, we need to get approvals in order to be on additional chains. And so, that’s important for us to get. And so, we’re regulated in the state of New York. We created a trust company in May of 2015, the first financial institution, anywhere in the country, or even the world that was approved to operating crypto on blockchain. Big deal. May of 2015. We have a national trust that we’re going to be launching in the next month or two. De novo that we have built with the OCC, and been working on that over the last 18 months. This will be the first de novo trust. And then that we’ve also been approved in Singapore. We are the first real institution to be approved in Singapore with the payment services license. And so, with those different regulatory approvals, we can hopefully be able to launch onto additional chains, which we wanna do. So, it’s really been the fact that we have to operate in a regulated way and the token itself is regulated and overseen by, in this case, our regulator, the New York Department of Financial Services, but we’re gonna add additional regulators. And I think we’re gonna be able to then really be able to unlock putting assets on a lot of other chains.
• That’s exciting, and I know you mentioned Ethereum, and obviously they just had the merge. But there are also layer 2 solutions like, you know, like Polygon and so forth, which, you know, a lot of folks are tokenizing on. So, would you look at those layer 2 solutions first for Ethereum?
• Well, I think of it as two categories. There’s layer 2 like Polygon and Avalanche. And by the way, I think, you know, Lightning Network and some of the things that are being built on it, you know, Stacks and other things, are interesting. I’m not sure it’s quite ready for tokenization, but I think it holds a lot of promise, and there’s a lot of elegance to having it based off of the most secure chain. Really, the most reliable. But then there’s other layer 1s as well. There’s… Solana is a huge community amongst others. And there’s a lot of other L1s that are being built that have a lot of promise like Aptos, which, you know, we’re involved in. So, we don’t really know as an infrastructure provider which chain might win if there’s such a thing as winning. And we don’t know which chains will, you know… There could be many chains that win. And it could be that there are some chains that exist today that, you know, that kind of fade away. We’ve kind of seen that continuously over the last five years or so, like, you know, lots of different ones kind of become influential. And then for whatever reason, kind of fade a little bit, or just can’t hit the promise that they were looking for. So, whether it’s other layer 1s or layer 2s, we’re open to it. What we’re looking for is interest from our customers and the clear, you know, usage by the community because then you have some sense that it makes sense. Of course, you know, we also think about where do we think that the space is gonna go over time too. So, I think it’s really exciting how many different possibilities there are. But, you know, we have a constraint which is that we’re regulated, and so we need to make sure that the regulators also view these as safe and sound chains that we can have assets recorded on and used.
• Yeah, absolutely. I mean, and we’re in the middle of, you know, crypto regulations being put forth in the United States. We got the White House putting out reports. There’s also a lot of talks of stablecoin regulations coming. And you mentioned you guys are regulated. You mentioned New York. It sounds like you have a BitLicense, which is a coveted license to get. So, how are you guys preparing for potential stablecoin regulations with PAX dollar?
• So, we have actually a trust company. So, we predate the BitLicense, believe it or not. So, we got our trust in May of 2015 in New York. And I forget exactly when the BitLicense came out, but so we predate it and supersede it. And so, you know, we have to follow everything that the BitLicense requires, but it’s much more than that because we’re actually a financial institution, not just a money transmitter or have a money transmission license in state. And so, that’s been critical for us. The reason we did that is because we wanted to create a lot of confidence in our customers that they can rely on us as infrastructure. And historically in the U.S., trust companies that have been used as infrastructure. Because it’s kind of like a bank, but safer. So, with a bank, you put money in a bank. You, of course, have FDIC insurance. But if something goes wrong, you’re a creditor of the bank. And eventually, the FDIC will pay you back. But if you got more than a limit of $250,000, you’re a creditor. You’ve made a loan to the bank and they go use that money. In a trust company, if you put money into, say, Paxos, we hold all of the assets fully separated, fully segregated, fully bankruptcy-remote. So, if anything happens to the Paxos, you immediately can get your money back. We can’t use your money. You know, we’re not using it to go make loans or do anything else. This is purely money held in trust. And this really fits with what our business model is, which we wanna take assets and put them on the blockchain. What I wanna do is take assets and become a bank. I don’t wanna take assets and, you know, kind of create some type of new financial product. We’re trying to upgrade how assets move by changing the rails, and using blockchain rails and making that, making assets available on them. That’s different from, say, taking an asset and turning it into a product. There’s nothing wrong with that. And we make products available to our customers. We just don’t want to be in the business of taking balance sheet risk for our customers. And so, that’s really important background for how do our stablecoins work. So, you send us a 1,000 dollars. We take a 1,000 dollars. We go by T-Bills, or we put the cash in the bank, or it’s overnight repo. And we have, you know, private insurance or FDIC insurance, so the money is cash. If the money isn’t, like, we went and had a commercial loan, and then we tokenized it, it’s that you actually have something that has a cash and cash equivalent under U.S. accounting, and we’ve taken it and put it on a blockchain. So, there’s no question that that tokenized dollar that we are representing here, either our own dollar, which is a PAX dollar, or the Binance dollar, which we also do all the work on, and it’s fully regulated in maintain by us, that is a dollar and it’s… It basically looks like anything that’s cash and cash equivalent. It’s not a commercial loan. It’s not real estate. We didn’t do anything else on it. We’re not like trying to generate some yield. It’s we hold what would be a T-Bill. And we’ve now put it on a blockchain and you can now send us that 1,000 dollars. We give you a 1,000 dollars tokens, and you can withdraw it and send it to anybody else. You know, they can come, open account at Paxos, and we can then send them dollars somewhere else that they wanna redeem them. That is a fundamentally very specific type of product. And what are we trying to do there? Our goal is, “How do you get dollars to move at the speed of the internet?” How do you get dollars to move 24/7 instantaneously, programmatically for anyone that does not require a bank account, but yet is trustworthy and safe? That’s the idea of a stablecoin. And so, for us, what was important is that we did it in the trust structure. That’s fundamentally different than doing a money transmission license. If your money is in a money transmitter and the money transmitter fails, your money is not segregated and bankruptcy-protected, bankruptcy-remote. And so, that’s a big deal. The second thing is if you’re in a money transmitter, they don’t have to just hold the dollars in T-Bills. They could hold it in government bonds or other things. They can change whatever they want to hold it in within the parameters of a money transmission license. That means it’s not just cash that has been tokenized, it could be a private liability, not just a short term government liability. And the valuation could fluctuate. So, we’re trying to be very safe by segregating and being regulated, and including if something was to happen to us. And this is really critical because the point should be, “How do we create financial innovation?” Not financial innovation that masquerades as financial instability. And we saw that, of course, with the Luna dollar when it failed, but we could see that with stablecoins that look like they’re backed, but aren’t held in the right regulatory structures and that’s been critical for us. So, the Department of Financial Services oversees are stablecoins. It’s a regulated token, and we’re regulated. That’s just fundamentally different. We have a primary regulator that oversees us. That’s not like anyone else, you know? And so, that’s different from, for instance, Tyler. That’s different from Circle.
• Hmm. It’s really great that you have all the bells and whistles here with the regulatory item and building that trust. ‘Cause to your point, I think there’s a lot of companies that… They wanna dabble. They wanna, you know, utilize stablecoins, but there’s just a lot of uncertainty, especially with the likes of like a Tether and so forth. So, really great to hear that you guys have all these regulatory frameworks in place.
• Yeah. I mean, it was, look, there was a lot of effort to get them, and I feel like I’m maybe paying for sins in a past life here in some ways with getting all of these different regulatory approvals and creating these different entities. But the point for us has always been trying to create societal-wide change, and you have to do that by creating trust. There’s lots of ways to create trust. There’s not only one way. But being regulated does create trust because you’re creating oversight, independent oversight. You don’t have to just trust us. You know, because we say something. You know, know there’s lots of other independent and external parties that are looking at what we’re doing every single day. And that ultimately is what’s going to be able to bring so many other institutions into using blockchain rails and people using blockchain rails. So, I think it’s been fantastic what firms have done to create adoption to this point. And you know, I’ve been, as you’re pointing out when we were talking about, I’ve been in the industry for a very long time. So, I think it’s fantastic how much the industry has been able to expand, how much adoption it’s been able to create to get here. That’s been a real community effort. But we also have to think about, “How do you go from this early adopter stage to full mainstream adoption?” And that is where the river hits the ocean, and there’s gonna be some complexities to that, and we’re starting to see it. We’ve seen some examples where products have failed. We’ve seen examples of where, you know, it’s certain products that have been capped out in terms of where they could maybe get to because they aren’t built in a scalable way, truly like societal scalable way. And that’s what we really focused on. And I think we’re starting to hit some of the most exciting times in the space, but it’s gonna take some more effort to really break out from where we’re at now into, you know, a real game-changing project and product.
• Tell us about PAX gold and how that works. Is it similar tokenized gold, of course, on the Ethereum blockchain? And you have, once again, a separate custodian, or how, the dynamic of that, how is that set up?
• Yeah. It’s, in some sense, similar to a dollar stablecoin, which is we have a primary regulator. In this case, the New York Department of Financial Services. We hold the gold in our trust. It’s in vaults in London actually. And we are making sure that the token, one token equals one ounce of gold. And it’s the actual ounce of gold. So, anyone who owns the token has legal title to the gold in London, to the bar. And you can actually see the serial number on your token that it relates to of the bar in London. If you have 400 ounces, which is what a more or less what a bar is. It fluctuates a little bit. Each bar is different. It’s unique. You can withdraw the bar. So, we’ve actually had customers who have accumulated enough gold, and four ounce is a lot, by the way. You know, I don’t know what the number is now. I guess, it’s maybe $700,000 or something. It fluctuates with the price obviously, but it’s called roughly 700. We’ve had people redeem multiple bars actually. So, you own the gold and can redeem it. So, in this case, if you sent $1,700, let’s just say, to Paxos, we will give you a gold token. You could withdraw it. You could send to anybody in the world and they could come to us, and they could withdraw, redeem it for cash. If they’ve accumulated enough tokens, they could redeem the bar. And so, I think what’s critical about this product is, first of all, it’s a regulated gold token. So, not only are we regulated, but the token itself is. But what’s interesting is you’ve now made gold be able to move 24/7 instantaneously anywhere in the world. People own gold all the time, but it’s very hard. If you wanna go today, for instance, to buy physical gold, you wanna buy a one ounce coin. This is, you know, a kind of interesting. Right now, it costs you a 5% to 10% premium to buy one ounce of gold. That’s how hard it is to get physical gold that has minted. Even bars are trading at a seller percent premium. You can come to Paxos today, and for a much less premium, actually get your gold token. Now, some people feel like, you know, I wanna have my own physical gold token and bury it in my backyard. I know it’s safe. Of course, this is not gold buried in your backyard. This is in a Brink’s vault in London. But on the other hand, you now have the capacity to send at 24/7 instantaneously, programmatically anywhere. And that is something that you… That has never existed before in the history of gold. If you wanted to be able to hold gold ETFs, they only trade nine to five, and you have a chain of intermediaries. You don’t actually own the physical gold.
• Right.
• Or you can own gold futures. And again, it only trades when futures trade. You can’t take that future and, like, you know, move it around off the exchange. They only trade on the exchanges. This is fully tradeable actual real gold. And by the way, there’s no reason why we have to just stop with gold. You could do silver and platinum and palladium and any asset. And eventually, this is what you would do with art and real estate and all real physical assets. So, it’s a real template. You know, just like let’s stick dollars on a blockchain. Let’s stick gold on a blockchain. You should stick everything on a blockchain. Equities on a blockchain. Why is equities only trade, you know, from 9:30 to 4:00? You know, five days a week, mostly, right? I mean, why can’t it trade 24/7? I mean, crypto does. Why can’t you trade fractional shares? I mean, there’s, it’s, you know, it’s really about backwards infrastructure. And when you start to upgrade thing instead of watching, you can suddenly really change fundamentally how the system works. And you can also know who owns what when. There’s no debate. Someone fails. You’re like, “Well, that’s the assets on the blockchain.” You know, this is how it works. And you know, we’ve… You know, I think probably one of the most interesting things coming out of the last several months is how strong DeFi has held up relative to CeFi institutions. So, you know, when you have a CeFi institution where they’re taking transformation risk and balance sheet risk, you couldn’t really tell what was going on. Of course, most of the them are unregulated. And so, there wasn’t oversight. But inside DeFi, you know, for the protocols held up, you can see the assets in there and the prices move around, and they made it through much better than all the CeFi lenders.
• Hmm. I wanna ask you about itBit, if I’m saying that right. It’s a crypto exchange. Is this for retail and institutional? And can folks go on there and get PAX gold and as well as PAX dollar?
• Yeah. I mean, itBit is part of our platform. And so, the point of the platform is, you know, you can be able to send and receive assets and hold assets and buy and sell assets, and eventually lend and borrow assets. We haven’t done that yet. And so, itBit is basically the brand of the… Of being able to buy and sell assets on our platform. And this is actually the first part of the platform that we built going all the way back to the early days of, “How do you build a platform where you gotta start with something?” And we started with a crypto exchange. And as time has gone by, we’ve started to add all these other components to it, but we’ve always left it open to retail. It’s not a big retail trading platform by any means, but it is used by all of our institutional customers that have come on. And we enable them to trade on our platform and also to route trades out. So, it’s not all of the volume from our platform, but it’s a component of it where you can come and have, you know, a really regulated, transparent place to trade. You know, we’re not market making on the exchange. These are fair prices. You know, we’re not profiting ourselves different from most crypto exchanges. And if there’s a better price somewhere else, you know, we can send the price elsewhere when you’re an institution and you turn that on. So, itBit is part of the platform. It’s just a branded part of the platform.
• Hmm. So, I noticed, and you mentioned it earlier before, you guys are a partner with PayPal. Obviously, huge payments company. Tell us how you’re working with them. And you know, are they using like PAX dollar? Or what type of infrastructure are you providing?
• So, today, you know, PayPal also has some other brands, Venmo, most notably. And we’re helping PayPal, both the U.S. and some international jurisdictions as well. And what we’re powering for them is crypto buy, crypto sell, crypto hold.
• Wow.
• And of course, also crypto now, which is, I think, you know, really exciting. They’ve been able to send and receive. And so, that means that anytime you go into your PayPal app or your Venmo app, that’s Paxos in the background. We’re where the crypto’s held. We’re where the orders are being routed to. And if you wanna be able to send out to other people, we’re managing that, the compliance, and all of the operational and technology behind that, and something we’re really proud of. It’s a great partnership that we’ve been working on with them for quite many years here. And, you know, I know they have a roadmap and they wanna continue to expand beyond just crypto buy, sell, hold, send, and receive to more things. And I’m very hopeful that we’ll be that partner that they will use. This has been something we’re really proud of. And I think it’s made a big difference to the space in terms of creating ubiquity and accessibility on a big, wide basis. I think they have over 300 million end users globally. Now, they haven’t turned on every single jurisdiction, but they that’s still, you know, really significant number of people that they are helping every single day. And I think there are top five most trusted brand in financial services in the U.S.. I’m not sure if it’s U.S. or global, but it’s, you know, clearly very widespread and understood. And that includes our merchant services. We also help power to those where merchants can accept crypto. There was just some news about the state of Colorado being able to accept taxes in crypto form. You know, these are all really powerful things. Sometimes, it’s not well known how we’re helping to really power the space in some fundamental ways to make this more widely, you know, something that can be utilized. And, you know, the thing I maybe mentioned briefly earlier was around the send, receive capability. So, there was a lot of talk around large institutions coming into the space and only enabling buy and sell and hold. Which by the way is interesting. Of course, that’s great. But in some sense, it’s more like a casino offering as opposed to a crypto offering because you can’t take that asset yourself and be able to use it for other things. So, it’s only a speculative asset when it’s buy, sell, hold as opposed to something that you can utilize. And so, I think, fundamentally, very powerful now that there can be a send or receive from some institution as large as PayPal. You know, they are now allowing their customers to interact with the blockchain. And I know they have more that they’re working on, and there’ll be other big companies that are coming in. And the idea that, you know, people are not just going to be constrained, keeping it into a private closed network, but really take advantage of the public network that the blockchain really is. I think that is something that maybe should be talked about a lot more because that is the fundamental shift that I think we’re all excited about.
• Yeah. I mean, such a huge partnership. Really, really awesome job that you guys were able to get that situated and you’re powering PayPal’s ability to buy, sell, and like you said, transfer as well. Are there other institutional partnerships you wanna highlight similar to PayPal? You know, how you guys are supporting them that buy and sell option?
• Yeah, I mean, there’s a couple. We have a lot of customers outside the U.S. I think maybe a majority of our customers are outside the U.S. And so, a couple really large companies in Latin America that we’ve been powering is Mercado Libre, which… And we do that in Brazil and there’s other jurisdictions that we are launching them in as well. And that’s been something that’s very exciting because they have a ubiquitous brand. They are, in some sense, like an Amazon meets PayPal in Latin America. I think it’s 150 or 160 million and users. Wow. Just, I mean, enormous. And then potentially, I think the the largest neobank in the world is Nubank. Also in Brazil. And I think, it must be 50 or 60 million. We also, another one we power is PicPay in Peru, which is not as, maybe quite as well known, but another really big company. I’m sorry, they’re in Brazil, and another really big brand as well. And so, you’re starting to get to the point where you’re bringing in people from all over the world to be able to buy, sell, holds, and receive. And in the case of like, say Mercado Libre and others, they’re enabling the dollar token as well. So, they’re making dollars available to their customers. And they’re… One of the most powerful things around the world is people want dollars.
• Yeah.
• You know, and by the way, you know, we have inflation here. We think it’s a lot. It’s 8% for the year. And that is a lot for us. But you know, you’re like 8% a month in, like, certain places like Argentina, right? I mean, like, really high. That’s not an exaggeration, that’s something like the accurate number. I think they have a 100% inflation this year. I mean, just crazy levels of inflation outside the U.S. People want us dollars. It’s ubiquitous. It’s widely used. You know, and as an infrastructure provider, we wanna make dollars available. People wanna hold dollars. Great. They wanna hold crypto? We make that available to them too. You know, they wanna be able to have gold. They want other, all kinds of assets, we wanna make it available. And so, you’re now creating the capacity for people outside the U.S. to have access to dollars they couldn’t before. You can’t get a dollar bank account. It’s very difficult. You know, you’re in Asia, you want dollars. I mean, that’s part of the reason why Tether’s been so successful. They made dollars available to anybody without having to have a bank account. You can’t get bank accounts. You might not have the IDs. As an example, in China, I think only like 10% of people have identification that would qualify to even consider getting a U.S. bank account. Most of the time they have like these, you know, basically work IDs in Chinese. You can’t get an account, what is considered a conventional bank account, you know. But so, they want dollars. They wanna be able to, you know, protect their savings. They wanna be able to move them around immediately and not be constricted. And that’s just one country. I mean, you could go all over the place and look at it, and see the way in which not having access to a fair financial system has, you know, really cost people, in many cases, their life savings. You know, it’s not an exaggeration, you know. People lose their life savings regularly because of this. This is a really, and it’s something we’re really proud of that helped make this be larger, more global. And of course, in the U.S., we even have Interactive Brokers, which is a large broker dealer. And I think that, you know, aside from Robinhood, they’re really the only broker dealer that, you know, of real scale that has turned on crypto, underlying crypto trading for their customers. I know many more will do that and they’re looking at it. But that’s also something that’s really another example of regulated firms in the U.S. coming to us and using us because we’re regulated. We’re providing them the type of product and service that enable them to… be able to create new product access, or upgrade products that they already have. Meaning, like, everyone has dollars in some sense that they make available. How do you make it available on a blockchain?
• Hmm. I noticed you guys are focusing on Latin America. There was a recent report that was put out and you mentioned some of the countries, you know, different institutions you’re working with, and it seems that market is prime for adoption, and we’ll see a lot of benefits from crypto and stablecoins. And an example will be El Salvador and what they’re doing. So, are you kind of focusing on that market right now? Given that, you know, they could use the technology for sure.
• Definitely. I mean… I mean, Latin America’s been a really important market for us. And in some ways, I would describe it as more embracing from both a regulatory perspective and from a traditional financial institution perspective than even in the United States. And I think it’s because they see, like, their customers want these products.
• Right.
• And they want these products for a lot of the reasons we were just discussing. They live in a high inflation regimes. A lot of them have dollars, but they’re like physical dollars under their mattress, or they hold the dollars offshore and they can’t really use them. They wanna have access to crypto. They wanna have access to tokenized, real assets, gold, whatever might be where today they don’t. And that is what I think surprise us is not just the fintechs and the neobanks that are making this available, but there’s a lot of enthusiasm from traditional banking institutions. And, you know, if you look at El Salvador, there’s an example of an entire country deciding they wanna adopt crypto, including the traditional financial system. It’s small. You know, it’s obviously… But on the other hand, it makes sense. You know, a lot of times change starts from places that are small and, you know, really expands over time. And I think that when we look at all of Latin America, you have, it’s quite a big market overall, and… You know, there’s a lot of disruption that’s happening, and it makes sense that crypto would be a part of that disruption.
• For sure. So, I know we’ve covered a lot about what you guys are doing. Is there anything else on the roadmap for the remainder of 2022? And maybe any hints as to what we can expect in 2023?
• Well, you know, I think we have a couple really exciting launches that’ll happen both this year, and, you know, many next year. You know, I think that we tried to position ourselves to be a great partner for large firms, and that’s really paying off. It’s paying off because they are continuing to move into the space. They haven’t really slowed down, even though there has been this winter that’s happened. I mean, ultimately, the price of crypto is up massively in the last two years or so. So, even though it’s gone down a lot from the peak, which we always feel, if you look over the last two years or the last five years, this is up really, really significantly. And I think that means that institutions are not slowed down or deterred by what’s going on. And… But part of being a good partner is we like to tease out some of the things that we might be able to launch, but we wanna really hold that for our partners to be able to make as much of a, you know, press impact is possible. And there’s going to be a bunch out there. I think you’re gonna be surprised that some of the largest financial institutions in the U.S. and the world are coming into the space, and they’re gonna come into the space with more crypto offerings, with stablecoins offerings, and with additional assets. And so, we’re working really hard to bring these things to bear. Maybe one of the things that will be really exciting for us next year is being able to potentially get equities onto a blockchain, U.S. equities. So, a lot to be done here. The process of transforming 700 trillion of assets onto a blockchain is not an overnight process, and maybe it’s a 20-year process. But on the other hand, if you look out, and we do this regularly and look out, what is it gonna look like in three years or five years? You don’t know exactly, but I’ve never had more conviction about how we can fundamentally shift the system and create huge potential for the real economy as a result. And the whole point is, how does the financial system enable the real economy, not hinder it? How does it create the ability to innovate as opposed to be kind of stuck and hindered? And, you know, part of that is making sure that there’s the right infrastructure in place. It’s kind of like, you know, what would the internet look like if you didn’t have cloud? Or other infrastructure pieces? There’s some of these basic things that got put into place and it enabled an enormous unleashing of creativity and innovation, but you have to get that infrastructure in place. That’s what we’re excited to be a part of.
• Yeah. I mean, and you guys… based on, you know, what we discussed, you have such an amazing solution and service and, you know. I could just see real estate companies coming to you to want to tokenize real estate on the blockchain, and you have the infrastructure to help them do that. I want to jump to crypto regulations because there’s a lot going on there. I know we kind of touched on a few things, but we had the White House release reports. We had the Biden crypto, excuse me, Biden crypto executive order earlier this year. The CFTC and the SEC are kind of trying to divide and conquer here as far as who owns what. You had Senator Lummis and Gillibrand bill. You have the ripple lawsuit. You know, what are your thoughts? Do you think we’re moving in the right direction?
• I think that we’re definitely moving forward, which is positive. And by moving forward, I mean, we’re having a public dialogue around this. There’s lots of different perspectives. And, you know, people are getting smarter. And I don’t know that we’ve gotten to the point yet where we’ve coalesced around the solutions. But when I have conversation with policy makers, when I have conversations with regulators, I feel a much different place. You know, if you, again, you have to, like, kind of look at these things on time scales. What was the conversation like two or three years ago versus where they are today? I mean, it’s a far more educated place. On the other hand, do I think that the industry has a certainty it needs to succeed right now? Absolutely not. I don’t think that there is the right level of certainty around how stablecoin are created, the right standards. I think that there is an attempt to push stablecoin directly into the banking system, which makes sense if it’s a bank. But if you’re not a bank, there should be other mechanisms for you to be able to enable stablecoin. And we’ve certainly done it through a trust structure, which I think should be part of having the right standards. And we don’t wanna be part of the fractional banking system and make loans. We wanna be part of the innovation system here, and that’s about being infrastructure. And then also on the crypto side, you know, very hard to understand how to operate. We’ve been pretty conservative because we weren’t sure where things were securities or not securities. And we’ve also been conservative because we wanna make sure that, you know, we’re really enabling trusted assets for our customers. And we continue to expand that. If I think we had, like, a clear regulatory regime that could be applied, you know, to each asset as opposed to, I think a lot of art is used now. The Howey test and Reves test are not as clear as they should be, and that’s what’s used to determine something’s security. It makes it cumbersome, makes it very difficult to create innovation, and I think that’s hindering the U.S.’s position. I think there’s a possibility that with the wrong legislation, you could push stablecoins overseas.
• Sure.
• And I think with the wrong legislation, you could push crypto trading overseas. And by the way, this is not like… People are always like, “Well, is it really gonna go overseas?” You know, it sounds like something people just threaten. But I think the there’s a couple of different dynamics here. First of all, there’s historical precedent for that. If you look at the U.S. dollar in the 60s, JFK put on capital controls and limitations on trading dollars, and it all moved to London. And it’s called the Euro dollar market. The number one place where dollars are traded in the U.S., or sorry, in the world, is not in the U.S. It’s in London. And that’s why it’s called the Euro dollar market. And it hasn’t come back. Even once you got rid of the capital controls, markets form up and it happens. And so, that’s where trades. It trades in London. So, you can actually end up with a stablecoin industry, and the number one stablecoin issuer is outside the U.S. It’s Tether. And it could be that stablecoin innovation happens outside of the U.S. I think that’s a very, very real possibility, especially if legislation comes out that forces everything through bank holding companies, which to me really will stifle innovation. I think it’s actually… It is actually an existential issue for the U.S. I don’t know whether or not it’s going to go that direction, but it could very well end up being a big problem. The second thing is without clear regulation on whether something is secured or not, people are operating outside the United States. The largest exchanges are outside the United States today. It’s not Coinbase. It’s, you know, they’re non-U.S. exchanges. And that’s because this is an open public system. It’s an open public system. And so, by the way, also some of the biggest blowups have happened outside the U.S. If you look at Terra and other things, where did they… Where were they regulated? Well, nowhere. They were operating outside the United States.
• Right.
• So, you know what I mean? Like regulation creates safety, but it can also prevent innovation. You know, if you wanna have zero losses and you wanna have zero risks, you end up with zero innovation. So, you wanna be somewhere on that curve. How do you decide where you want to be? I don’t think that we figured that out yet, but I am optimistic that we’ll get to the right place. But, you know, there’s definitely a chance that we don’t. I mean, I wish it was really clear that we were moving in the right direction, but I don’t think that the cake is baked yet.
• I’m hoping that they get, the United States gets it right the same way they did with the internet. And I know there’s more and more members of Congress, bipartisan support now waking up to crypto, in support of crypto, so hopefully they get it right.
• Yeah. I definitely feel like people cross, this is a nonpartisan issue. That’s the thing that makes me optimistic, but, you know, I definitely think that, you know, we haven’t seen the type of frameworks and taxonomy and even… You know, the right building blocks put into place from regulators, the administration, and Congress yet.
• Hmm. I wanna get your thoughts here on NFTs. What are your thoughts on the NFT market, the boom, the tokenization of course? Is Paxos looking to integrate NFTs in any way? You know, maybe it’s not artwork, but Bank of America comes to you and says, “Hey, we wanna issue these types of forms or…” I don’t know. Whatever it may be on the blockchain.
• Well, I think NFTs are two things. One is that I think it was like kind of a very giant speculative bubble and also something that changes everything and, you know. And so, it can be both of those things. And I think it certainly was, and a lot of the errors come out. But you know, people trade shoes, and people trade, you know, baseball cards. You know, if you wanna trade, you know, whatever it is and NFTs, that’s fine too. And they go up and down in value. I think that’s like, you know, a perfectly reasonable thing for people to experiment with. Who are we to say when things are gonna work and when they’re tulip bulbs? We don’t know. But I think the underlying technology is what is critical here.
• Yeah.
• The idea that you can take information that’s digitally native, it’s not a crypto asset, but it’s digitally native and be able to move it around as ownership of say some type of IP, or art, or a real asset is absolutely foundational. We will absolutely make NFTs available. There’s a lot of things. You know, what is an NFT? You know, it’s ultimately a non-fungible token as opposed to a fungible token. Our dollar stablecoins, our gold tokens, those are fungible tokens. But there’s no reason why, you know. And so NFT is a loaded word because, you know, it could be a parcel or land as an NFT. Out 100% is absolutely a critical innovation and a way in which you’re going to be able to change the system. And also, as the economy becomes more and more digital, that’s really how I think about what Web3 means. It’s just more digital. You’re gonna need more ability to move digitally native information around in a way that you can own it and you can transfer it. Because really, everything from your email to your identity, that’s all assets.
• Sure.
• You know, we define something as a financial asset when it basically gets to a certain level of value or as a certain specific thing. But actually, like, you know, your personal information is an asset. If it wasn’t an asset, then Google wouldn’t be giving away things for free to you. And, you know, then selling it to an advertiser. There’s nothing nefarious about it. But that’s just the fact it’s an asset. Why is that not regulated, but other financial information is regulated? You know, there’s different choices on it. But ultimately, all this stuff should be able to be contained, and that’s why there’s decentralized identity efforts underway that are really exciting in NFT formats. So, we will really look closely at how we can enable that in the future. Our partners want it. I think it’s exciting. It’s where the economy’s going. And at the same time, you know, buy or beware.
• Hmm. So, I got some wrap up questions here for you. First, rapid fire. Favorite food.
• Oh, Lebanese food.
• Favorite musician or band.
• Grateful Dead.
• Favorite movie.
• Blade Runner.
• Favorite book.
• I Am That.
• When you’re not working at Paxos, what are you doing for fun as a hobby?
• Well, my hobbies have gotten narrowed down. Sorry for not giving know rapid answer. I got kids. So, playing with my kids.
• Yeah. I know how that is. And finally, if you could create your own metaverse, what would the theme be?
• I don’t know. That is an interesting question. TBD. Let me think about that.
• Where would Charles escape to, you know, putting on your oculus or something?
• Oh, I don’t know. Somewhere in South India.
• Charles, pleasure chatting with you. I’m so excited to see the new updates around Paxos and the things that are coming this year and next year. But thank you so much for joining me today.
• Yeah. Awesome. Great to be on with you.