Paxos's Charles Cascarilla: How Blockchain Tech Could Prevent Another GameStop/Robinhood - Ep.214

Transcript

Hi everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to youtube.com/c/unchainedpodcast and subscribe today. Crypto.com is giving away four Teslas. To enter the lucky draw, download the Crypto.com app and buy $100 of Bitcoin or more. New Crypto.com app users get 0% credit and debit card fees in their first 30 days. Download the Crypto.com app now.

Building a web application to sell products or services? Integrate with Square's robust and secure APIs to easily take payments. Learn more at square.com/go/unchained. Today's guest is Chad Cascarilla, CEO and co-founder of Paxos. Welcome, Chad. Hi. Good to be on here, Laura. You got started in Bitcoin super early. Why don't you tell us your background before Bitcoin and then also how you got into Bitcoin? Yeah, sure. So, um background is really uh almost entirely in financial services and um uh I started uh working at Goldman Sachs and Bank of America uh really covering financial services

companies uh uh from the sell side and then I went to the buy side, I was an investor. And then I started my own asset manager in 2005 with a co-founder, Miguel Vias, and that specialized just investing in financial services companies. And we came across Bitcoin after going through the financial crisis and getting a lot of things right about it. And uh saw Bitcoin at three or four cents and was immediately intrigued uh by the technology. Um certainly would never imagine we'd be at uh you know, high 40,000 uh price of Bitcoin here, which is um obviously really exciting for everybody. But, we really thought the technology could be transformative, not just Bitcoin, and that got us to start Paxos about 7 years ago now.

And so, I've also heard you say that what you saw in the financial crisis got you interested in Bitcoin. So, why don't you connect the dots for us there? Yeah so um I think some of the key themes that we captured as investors was how the electronification of markets changed price discovery. It changed how you traded in a really fundamental way. And um you went from basically being on the floor to microseconds in about 10 years. Huge amounts innovation. And in that same time, you basically went from T plus five to T plus three settlement.

So, almost nothing changed in the middle and back office, but everything changed in the front end. And so, when we came across uh Bitcoin and blockchain, we immediately recognized a possible way to solve those problems in a new way. And in a way that could really fix the infrastructure and the plumbing, which um you know, very desperately needs it. And we've seen that in Lehman Brothers, you've seen it with GameStop, and frankly, we're going to see it in the next financial crisis if we haven't upgraded, that the plumbing is actually really exacerbating the crises and in certain cases actually creating them.

And um Bitcoin and blockchain offer path forward because you're getting real-time movements of assets, not real lags in them. And um so, coming out of the financial crisis, when we saw this technology, we immediately thought, here is a way to know who owns what when. And that's not possible in today's financial system. I know that kind of shocks everybody, but you don't really know who owns what when. I mean, it's a fairly basic concept. But, financial markets were set up from an infrastructural standpoint to promote liquidity and trading, not to promote clear ownership and chain of title because of lots of weights of history going back 50 years. And that's what really fascinated us about this technology is that we could see a way to

change fundamentally how the financial system would operate and to make it fairer and safer. Yeah, so we're going to tie together a lot of the strands that you just mentioned on plus some new ones because there are so many things going on right now in the markets that I think really make everything that you just discussed kind of illustrate the importance of all that. But one other thing that I wanted to ask you about was in the early days, as you mentioned, you got that New York State Trust Company Charter and you received it in May 2015, but you started the process of trying to get it in 2012. I once heard you say it was May 2012. So, can you describe what it was like working in the Bitcoin

industry at that time and compare it to the Bitcoin industry right now? Uh well, I don't know. It's like we were wandering in the desert, I felt like in some sense. You know, you go back to 2012, there wasn't even Ethereum. So, we really were believing that this could fundamentally alter the financial system in a profound way from very, very early days when, you know, it was really, in some sense, a bit crack pottery to believe that. And and, you know, catching things early is really exciting because you can see how things evolve. And I mean, it really evolved a lot. I mean, it was very early community, very, I would say, cyberpunky. It was

really not hugely financially literate in a sophisticated sense. It was really much more about being technolo- technologically literate. And and there's so many exciting things when you're that early to see something evolve into what it is now. And it's gone through a number of different stages, you know, from really the absolute cutting edge, like kind of cyberpunks and hard libertarians and, you know people who are really deeply into cryptography into decentralization. It was such a new field back then.

And I'm not a technologist. So I definitely you know enjoy talking with them but I was completely out of out of my depth because I don't know those things on a native basis and I remember you know after about five clicks you would be through all of the information about Bitcoin when you first started you had like the white paper you had like you know three websites and you had like one chat board and that was about it and to now get to the point where you know the torrent of interest and the many many different types communities that are evolving so rapidly you can't even keep up with it.

I mean it's bewildering almost and that's awesome to see because the reason we got involved so early was because we thought it could get this big. And that wasn't obvious but it was something we really believed had potential. Yeah and you know I was just trying to think back I think the price around then was am I right that it was either in the single digits or the low double digits? That sounds definitely right like I think it was probably somewhere around 10 or 20 dollars when we started wanting to work on the trust you know it was really kind of surprising you know how much the price started to move in in very unusual ways and the technology itself was less of a focus and so you went

through a number of these stages where it would be about the technology or be about Bitcoin or be about the technology or be about Bitcoin and so at that time it really was still a lot about Bitcoin starting to move up and so when we were applying for the trust a lot of people were like why are you so focused on on this Bitcoin thing you know it seems like it's just for money launderers or for you know the dark web you know we kept trying to point out that actually the technology and Bitcoin while they might be separate are allowing the same thing, which is more financial freedom and more financial access. And that um they're going to play a common part together.

And it just wasn't so obvious for people who are familiar with financial markets that Bitcoin could make sense. And then people who are really familiar with technology said, "Oh, yes, I understand Bitcoin, but you know, I don't understand how the plumbing works and why this technology could be so fundamental." And that's what we've actually bridged at Paxos for so long is on one sense traditional markets and the problems they have and what this technology can solve versus the insurgent nature of Bitcoin, which we also believed in in terms of how it can really fundamentally alter a lot of the financial um services market as well. So, there's so much to go on between both of them.

Yeah. Yeah, something that's really interesting is I I'm pretty sure that right around that time that you started that process of trying to get the trust charter is right around when Brian Armstrong of Coinbase was starting his Y Combinator program. And so, it's just interesting. So, Paxos and Coinbase, I think, kind of got their start roughly around the same time. And yeah, and I think what's also so fascinating is that you know, with your traditional financial services background, you know, Goldman and everything that you saw the potential and could see where this was going at a time when I just feel like a lot of people with your background really did not. So, you know,

cuz I feel like 2012 era was when you started seeing more of the entrepreneurs, like the Wences Casareses of the world, kind of start to get into it. Although, you know, it's it's yeah, he did actually convince some people on on Wall Street. So, He did. So, yeah. And I would also say like what really fascinated us was because I had spent so long as an investor, you know, there's lots of different ways to invest. But, one of the fundamental ways we invested was being contrarians. Which is, you know, trying to find non-consensus ways of looking at problems, and what could be very, um, huge optionality out of them.

So, we looked for that a number of different times in our career. I think we caught some of them. Some of them we were wrong on, because you're never going to be right on all of those. But, we caught a number of them investing in exchanges and clearing corps when they're really trading below the value of the buildings that they were housed in. You know, I mean, and then they suddenly are trading at 15 times revenue. It's huge opportunity. Uh, we were short subprime mortgages and commercial real estate mortgages. Then we were long distressed mortgages coming out of the crisis. Uh, we had a number of other positions. Those are some of the more notable ones. And then coming across Bitcoin at three or four cents in like kind of, you know, really having fun with it and, um, looking at the technology. But, constantly trying to

think of what is the problem, and what is the best way to potentially have real upside in that problem being solved. Uh, that's what really kind of lent lent us to understanding this opportunity, but also why it was actually important for us to be in financial services in order to see that. You know, if we hadn't gone through the crisis, if we hadn't seen the problem in the plumbing of the system, if we hadn't understood all of those things, I think it would have been really hard for us, uh, to get it. And because we lived there, which is still different than most people on Wall Street, you know, living in those types of uh areas um, of the markets, it it made us really understand, I think, on a native basis what the problem was and why this was

able to solve it. And have conviction around it. To continue to hold it and not just be like, "Oh, it's hit 200, it's time to sell." Or it's hit, you know, 1,000, it's time to sell. Because otherwise you would, I think, uh, from our backgrounds. Right. Right. No, for sure. I feel like the more tradery type of people, you know, tend to um not have that conviction and and want to sell when they think the price is high. Um so, one other thing that I wanted to ask about just because you do have such a long history in this space, and I feel like, you know, during that time, you were kind of gathering all these different elements that have now come together to form what we think of as Paxos, which obviously probably is most well known for its relationship with

PayPal. But, you know, you know, before that you had it bit, which you obviously you still do. Um but, it's definitely one of the smaller exchanges. And so, were there times when you And And obviously, you know, I think we discussed this the last time you were on my other show, Unconfirmed, where we were talking about how in 2015, when you did get the trust charter, I recognized that that was significant, but I sort of still didn't understand exactly why, like how it was going to be used, or, you know, like I couldn't really see what was what where things were going or what was going to be created. And so, I kind of want to hear about your journey over that 7-year time period where you were building Paxos, and maybe, you know, you tried certain things, and you know, did you kind of

always know where you were going to end up, which right now is I think you're kind of more in this B2B play, or earlier, you know, were you trying other things, and then did you feel like, you know, you tried to pivot? Well, I think there's a a number of components to that. When you're in the early adopter stage, which I think is clear uh way of describing where the market was five or six or seven years ago, and real early adopter. I mean, like bare No, no adopter stage, right? At that point. And um you know what I mean? You know, you you could tell the whole community like, you know, in one Reddit room, uh or one email thread. Um and so, when you're in that stage, you kind of need to have the AOL strategy, I describe it as, which you need to do

everything, from soup to nuts, from the front end all the way to the back end. It's a small world, and, you know, the only way you can capture value is by doing a lot of different things, because your customers need all those things done, but there's nowhere else for them to go get it. And that A 1 strategy makes a lot of sense. And if you're going to end up in a mainstream adoption point, the A 1 strategy starts to make less and less sense, and it becomes much more about specialization over time, and enabling a wider swath of users and businesses, B2B, B2B2C, and it's not just around having the entire stack yourself.

Because we had this belief that this technology could fundamentally change financial services, we thought about what types of strategies, what types of businesses can be very valuable and very important when you get to a more mature state. And what should we start to build in order for that to happen? Now, I didn't I would have never imagined it was going to take what in some sense seems like a short period of time, but in some sense feels like a long period of time, which is 7, 8 years, 9 years, whatever it is, to get to this, you know, really fantastic moment that the space is having now. I thought it would have happened maybe 3 years ago where we'd get to something that looked more like this. And I guess things always take longer than you think, and then they happen happen faster than you thought. I

think that's the saying. And so that happened for us, and so when we built the business, it was always with the intention of let's be for many different types of institutions that want to eventually come in on a turnkey basis and be able to access crypto, be able to access tokenized assets. Because I still believe that this is about a lot more than Bitcoin. It's hugely important element is Bitcoin, but just the power of re-platforming the financial system onto a blockchain is beyond transformative across the board in so many different ways, and we can talk about that. And building that in the early days definitely felt like we were wandering in some sense through the desert because we weren't building a B2C platform, and that was mainly who the earliest

adopters were. And then it was mainly for traders trading with those early adopter retail, and that's still very much still almost retail in some sense. And here we are not building a retail platform, but I think that over the horizon viewpoint of where things were going to go is what is really paying off for us right now because we've made sure we kept our business, I think, a lot more focused on that infrastructural layer. And so the point of it bit our exchange was this is for institutions to be able to use who are holding their assets, wanted to be a safe liquidity pool, wanted to be a safe place to be able to execute.

Um but of course that only has so much utility if you don't have lots of retail players in there. Now you can go acquire those retail players, or you could go acquire businesses that have retail players. And so that's the point here is add firms like PayPal, add firms like Revolut, and a whole number of other firms where they want to power their end user experiences and have a safe, reliable, compliant, turnkey solution. And you can't get that anywhere else because there wasn't maybe the an obvious thing to build when you're in the early adopter stages.

It's interesting also because I could imagine and and you tell me if I'm wrong, but it sort of seems like when you're trying to make that types of sales pitch, what happens is that maybe getting the first kind of big client would take a while, but that once that happens then there would be kind of like a flood of them. Do you know what I mean? It's just like whoever wants to be first, like nobody wants to be first. But then once somebody goes and everybody's like, "Oh, we all have to catch up." So am I right that that's kind of how those conversations went?

Well, there's some elements of these firms just really coming into a space that you know, they have to be careful about, that you know, has a little bit of a risk to it. People fear the reputational risk or they fear just doing something new, fear being first, lots of regulation. And so all of those things certainly I think held back this mainstream phase a little bit more than we would have thought. And so I think all of those are contributing factors and not just to them coming to Paxos, but to them coming into the space in general. And so really playing that through with our strategy of we're going to focus on creating turnkey solutions for these types of businesses, banks, brokers, payment companies, technology

firms, remittance companies, I think that's now really clear that that was the right right way to approach things, but you know, it felt again, you know, like, "Hey, why why didn't you just go out and acquire, you know, millions of retail customers?" You know, and I think, you know, that's, you know, you know, that is just the nature of shifting from early adopter to mainstream, having the right moment in time, and and we're able to get there because we had the right investors, I think we had the right vision, you know, all of us really believed in where this was going to go over time, even when it was not obvious.

Yeah, it is so similar to your initial contrarian bets in the traditional financial services space in the in the markets where you could kind of see that something was going to happen, but you just needed to wait long enough for it to happen. Yes. Which I know that can be a challenge, but obviously it paid off for you. know, in investing there's a saying there's no difference between being early and being wrong. Um, and so and that's because, you know, you have to be able to have the position, you have to be able to continue to make it. And there's so many firms in crypto and in general where that time just took was too hard or maybe they focused too much on just the blockchain technology, private blockchains being such a huge

fad for a moment in time. Not that it's gone away, but there was a huge moment where everyone was just about it's only about private blockchains, about private blockchains, not public blockchains. You know, you could get um, deterred and pulled away. So lots of chapters in this book, uh, uh, when you kind of drill in and it kind of looks smooth when you zoom out, but it definitely has been a wild ride. Yeah, yeah, you've kind of actually straddled the two trends, um, pretty well, especially given that one of them hasn't really panned out in the same way that, uh, you know, the hype kind of, uh, seemed to indicate it would back in 2015 2016.

Absolutely. So um you know, speaking of the PayPal relationship, I did ask on Twitter what I should ask you and a number of people wanted to know this. So, PayPal empowers corporations to provide a crypto experience for their customers so they can buy, sell, and hold crypto. It also does enable those customer, or not customers, but your customers, the firms, to send and receive crypto. And so, I know, obviously, you don't represent PayPal, but can you give us into insight into why PayPal users cannot withdraw the crypto that they purchase there, you know, directly to their own wallets or to other crypto addresses?

Well, you know, I think there's a couple components to this. The first is, I think everyone should appreciate that PayPal coming in the space is probably the biggest thing that's happened to the space, uh, you know, notwithstanding, you know, Elon Musk and, uh, Tesla, you know, creating some like huge hoopla around it. Um, at the end of the day, that's 300 million consumers that PayPal, uh, either has enabled or, um, uh, will plan to enable. They're rolling this out over time, including international and Venmo. Um, and so, there's a lot that PayPal is doing here, and just getting that into place was a big deal for them. They've never had a possibility of owning something aside from dollars, holding something aside from dollars in the rap. So, this is a big deal, and I think them making the

commitment, which is very big to the crypto space and decentralized finance space, is just an important moment for all of us. And if you go and read their two-page press release, they've laid out what are some, you know, really expansive goals that they want to achieve over the next 12 to 24 months. Now, you know, I don't think that I can tell you exactly what their plans are, but I would say that this was just the first step. You know, this is let's get going. You know, you can't launch everything on day one, and so they have a lot more plans. And, you know, when those actually come out, you know, we'll see, but it's not um I don't think this was as far as they want to go. This was how do we get going and, you know, launch something as fast as we can and

build on that. And so, I I if you approach it from that perspective, I think it looks less like, uh you know, you're buying crypto but you don't really own it to it's more like I now have access to crypto in a way I never did before, and there's going to be a lot more coming down the pipe, and that's going to be really great, um you know, if you're a PayPal customer. And, of course, PayPal and Paxos we're sitting here trying our best to make sure uh they have uh as much functionality as they want to be able to offer to their customers, and, you know, I think you're going to see a lot more exciting things from them in pretty short order.

So, my theory around why people can't send the crypto directly to their own wallet or other crypto addresses is because when we're switching from a service that runs on traditional on the traditional financial rails where you can like claw back funds if you need to, and then you're, you know, moving to a system where you cannot claw back funds if you if you need to, that this creates an opportunity for fraudsters, and so they maybe need to kind of like up their fraud protection. Is that a good theory? Well, I think this is an important component, and by the way, we saw this with the rules out of Treasury. They're thinking about different ways of being able to track movements of funds to non-customer wallets in blockchain and

crypto. So, there is, you know, clearly like a compliance component to making sure that you understand what's going on when funds leave your platform. Whether it's Paxos or Coinbase or PayPal. And so, but again, I think I would really focus on uh wow, this is a huge effort for PayPal to get to where they're at. And this is about, you know, adding in functionality over time. And so So, are you working with PayPal on adding those functionalities? Well, I can't really speak for PayPal here, but I would say that we're clearly excited to be an infrastructure provider for them. And as they continue to roll out more services, where I think we're going to be there with them in a lot of

ways. And you know, I know that people really want, you know, as much as you can possibly have today. But sometimes you got to be patient. And you know, I think you'll see some really good things out of out of what Paxos is doing and out of what PayPal is going to do in the next 12 months. And I also noticed in the PayPal Q4 earnings call that CEO Daniel Schulman said that PayPal will be creating a new business unit dedicated to crypto. I wondered, what does that mean for Paxos's partnership with PayPal? Well, firstly, I think that gets to the point we were just making before, which is they're putting a lot of resources behind this. They have a group that's just focused on it.

We work with them all the time. It's great to see them now have dedicated more dedicated resources in that way. You know, at the end of the day, Paxos is an infrastructure provider. We're not going to be the only infrastructure that PayPal relies on. I think it'd be probably nutty if they only used Paxos, you know, given the size that they are. It would just make sense that they're going to do things themselves. They're going to use other providers. But on the other hand, there's just a number of things that we can uniquely enable. And not just now, but over what they want to do over the next several years.

And so, we're going to be there, I think, like as a really important partner for them. And we're excited to be that best possible partner for them. And others, too. You know what I mean? There's just so many players now who are saying, "Wow, PayPal blazed the path. They're doing it. Why can't we do it?" A lot of people are saying, "Oh man, you know, look what's going on. You know, we have to get off our hands and get in the game." And they're trying to figure out a way to do it. And here we are as Paxos purely dedicated to that. We're not going to compete with anybody. We're here to help you. We're here to do it fast. We're here to do it in the most trustworthy way that you could possibly want. And you know, we're really thankful for the the partnership we've

had with PayPal so far. And shortly before recording this show, you were the final speaker at the Bitcoin for Corporations event held by MicroStrategy. And your parting message to the audience was that Bitcoin as a reserve asset for corporations would be a trend in the future or pretty much has arrived. And they should not be the last to get in, but to be early. And I was curious, you know, it's only been a few days, but what kind of interest has Paxos seen since that event? Yeah, I mean, I I think it's really another exciting moment here in Bitcoin. It just chapters and sometimes are unpredictable. I wouldn't have imagined that late 2020 and early 2021 was going to be about corporate treasury adoption of crypto. Like I honestly I would have

never imagined that. On the other hand, it's very exciting to see because like I was mentioning at that conference MicroStrategy, which was so exciting to be a part of because it's opening up all kinds of new vistas here. You know, people are seeing this as a reserve asset and a monetary network. And in some ways it's like gold was before we went off the gold standard. I think. And that's what digital gold allows is now a capacity to hold something where you know, you can participate in a monetary network in the future. And so you get involved, you own some now.

It's still a small market cap overall versus where it can be. There's a lot of tailwinds. They're not going to stop printing money anytime soon. We have another 1.9 trillion dollars stimulus bill coming through. I was looking at the amount of government spending as a percentage GDP. We're just about where we were during World War II. And that's crazy, right? This is where we were at World War II. I mean COVID's like a real crisis, but this is not World War II crisis. And so we're printing money and spending it at a pace we've never ever seen before. And yeah, with that type of tailwind, uh unfortunate as it might be for the value of the dollar, it's it's very fortunate for the value of Bitcoin.

And its emergence as a monetary network that can be used in the future as a means to connect everybody on a global basis. And you know, it's exciting to see corporations want to be a part of that because that really is mainstream adoption. I mean, that is as mainstream as it gets. And then, I mean, this obviously is just a few days after that event, but also with the Tesla news, did that create any extra spike? Well, it's definitely created even more interest. I mean, you know, you have MicroStrategy which was, you know, almost like a revival in some ways around like how fantastic Bitcoin and the Bitcoin monetary network can be for society on a broad basis. Um you

know, I think Stephen Ross did an awesome job of explaining that when he was talking with Michael Saylor. But also, now you have Elon Musk who, you know, the richest man in the world, he has a huge platform. You know, he's put some real dollars behind it. A billion and a half dollars is is not a small amount. Uh clearly, he's thought about this. It's a public company. And that I think starts to really open up this possibility for a lot of other companies. You know, someone's got to go first. You people need air cover. People need someone to be able to point to and say, "Someone else could do it. Why can't we do it?" And Um, been the first in a lot of things, uh, from, you know, electric cars to, you know, going trying to go to Mars.

And so, why wouldn't it make sense for him to be one of the first, uh, to own what could be, you know, really the new monetary asset? And I think everyone's going to look at that and say, well, you know, he's been really prescient, you know, we should take a really hard look at this. And that's definitely what we're seeing. All right. So, in a moment we're going to talk about all kinds of other current events that, uh, involve this technology, such as the GameStop Robinhood situation. But first, a quick word from the sponsors who make this show possible. There's a lot to think about when building e-commerce web application. Integrating with Square's APIs to take payments, however, is a no-brainer.

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How would you characterize the main issues that occurred with the GameStop/Robinhood situation? Well, you know, I think this is a really um a really important uh warning sign for all of us in financial markets. And um I wrote a blog post about this and you know, my point is Lehman Brothers, GameStop, and the next financial crisis all have something in common, which is that uh if we're relying and continue to rely on the infrastructure we have, it's inevitable that you're going to see more of this. And the real problem is in financial markets, we built them 50 years ago because we were switching from paper to electronic. You know, there was a lot of good reasons why you had to get

out of paper and get onto electronic, but you gave up something when you did it. So, when you're paper, you're sitting here having to settle trades, giving a paper certificate and getting dollars for it, you're actually moving the real asset. That certificate is the ownership of IBM. And if I give it to you, Laura, you own the IBM shares, that's a bearer asset. And when you happen is uh you try to electronify that, it's not easy to do. It's you know, it's really hard to use the right technology 50 years ago to make sure that there's an electronic certificate that's moving from myself directly to you specifically. And so they put everything into a giant pool.

And so this is what people don't really understand is that actually all the shares of all stocks in the country sit in a giant pool at the DTC and it's actually held in a in a street name called Cede and Co. No one's even heard of it, but they hold all of the stocks in the entire US are basically sitting there unless you withdraw them into your name. Which some, you know, people do, you know, certain preppers and conspiracy theorists are like, I want to own my own stock. And rightfully so because what happened with we saw with Lehman Brothers is that you can't let someone fail because everything is in a sense mutually owned together.

And so everything becomes too big to fail because it's all sitting in a giant pool. And so 50 years ago that made sense because you needed to solve this problem of paper to create more liquidity because they were having to shut the stock market every Wednesday and limit hours. You just couldn't keep up with the amount of trading. So they're like, "Okay, let's start DTC and put everything in a big, you know, a big pool account." The problem is 50 years have gone by and we've completely outgrown that mode of doing things. It's running on COBOL mainframes from the '70s. You know, you're it's taking 2 days to settle, which doesn't make any sense. You know, you can order toilet paper to your house faster than you can settle a share of stock. That doesn't make How Why does that make sense? Um so all of these things are real problem.

And you know, you basically get something like GameStop and it really underscores it. I mean, we haven't even had a real crisis in in essence and the plumbing came unglued again. Uh imagine, you know, we almost had it with COVID. We almost had it with GameStop where things almost locked up. And if we don't re-architect the system in the right way, you know, we're going to have this again. And um it's shocking that we're using like the equivalent of Latin, you know, COBOL mainframes to manage things when we could now be using technology like blockchain. And you could be actually tracking each share moving through the system and know the end owner at all times. And that gets back to what does a blockchain do? It says, "Who owns what when?"

So that's the backdrop to like this GameStop issue. And so what happened is you have 140% of the shares short. Everyone's like, "Well, why did that happen?" And they think, "Oh, maybe it's, you know, the Reddit army or maybe it's uh hedge funds or maybe it's the broker-dealers. Who's the problem here?" And then actually the problem is the infrastructure. Because everything's sitting in a pool account, you can't tell where the shares are. So I'll give an example really simple here. So I buy a share. I take that share and I lend it to you. You take that share that you've borrowed from me and you sell it.

And then someone else buys it. And then they can lend it out again. And the same share keeps getting lent out again and again, and there's nothing nefarious per se happening except for the fact that we don't have a way of being able to track the shares as they keep moving through the system. And so now you end up with 140% of the shares short. And then the next problem is you're settling in two days. Why are you settling in two days? I mean, it's just it doesn't make sense, but you are. And so between the day you trade the share and the day you settle, well, someone guarantees it. And all trades are actually guaranteed by the DTC.

Now, they've never used this guarantee fund. In 50 years, they didn't use it in the '87 crash, they didn't use it during the Asian crisis, or the dot-com bubble, or when Lehman Brothers failed. It's never been used before. But what they do is they draw they make huge capital calls right at the moment when everyone needs their own capital. So they normally have $7 billion of capital in the fund. I can tell you I know three brokers, including Robinhood, where there's over $7 billion of capital calls that were made, just from three brokers. I mean, there were tens of billions of dollars most likely of capital calls that were being made right at the moment when all those brokers need money. So they're actually drawing in all this capital and making more systemic risk because it's

too big to fail. And so why do you have a too big to fail intermediary sitting in the middle? Well, because 50 years ago we decided that was the best way we could do things, and it was, but now it isn't. You could be moving the shares around in near real time, maybe same day you could start at, and that would really collapse all of the risk of your fear that someone would fail, and so you need a guarantee. And so taking from T0 to T2 to settle is a big problem. And then here is another nuance, which people won't believe. On the day of settlement, all the shares and all the cash go in.

They only come out at the end of the day. In between, there's a lien on it from the DTC. So you have a guarantee that's happening for two days, and then on settlement day, you have all of this cash that's and shares that are trapped. Crazy that you would do this and really an anachronism that it's still done this way. And so you can imagine now GameStop is just a small example of how this could unravel. Too much shares are short because the technology is old and can't track it. It takes a long time for there to be settlement. It takes a long time for there to be a trade guarantee.

You have a too big to fail intermediary in the middle and suddenly like things really just become the plumbing just gums it all up. I think it just like from like a pure narrative perspective, what I also love about the story about how all of this kind of nasty and outdated underbelly of finance got exposed was it was from a really crass and vulgar subreddit where some of the people had you know names like deep effing value and a YouTube personalities like the name Roaring Kitty and then on the other hand, you know, a lot of it was driven by anger at from that like came out with a little

note about why GameStop what stock would would go and it was like a famed short seller. And so like all the when you put all that together and then you just see how this all this house of cards tipped over just from all that like it's a to me it's um just you know, just there. Dry kindling and it's because like the plumbing just doesn't like exist and there there is a much better way to do this and you could have like a system where actually you free up capital and have more safety and more fairness. You would know where all the shares are that are short. You can track everything. You can you know, shrink settlement times and that could open up access and it could you know, allow there to be a lot more people

participating in the markets. So, I think it's like in some sense it feels mundane. Oh, wow, it's the plumbing. You know, that doesn't sound like somebody that you want to like turn into a bad guy. The plumbing's the bad guy. But, it really in this case is, you know, something that's actually holding back the whole financial system because everywhere you go, whether it's payments, equities, corporate bonds, the whole thing is all 19th century sewer systems, you know, like in New York City and like it just looks fine and a storm comes and it doesn't even have to be a bad one.

This is just like, you know, you know, a simple summer thunder storm and the streets start to flood. You know, just wait if we had another super storm come through. It's really funny you made that analogy cuz I wrote my grad school master's thesis on that issue was specifically On sewer systems? That's amazing. Well, yeah, kind of it's like it was about, you know, environmental, etc., etc. But, anyway, okay, so Paxos has built something that kind of maybe could be, you know, the beginnings of the kind of solution that you were describing. In the fall of 2019, you announced that Paxos had received a no action letter from the SEC to settle stock trades on a blockchain-based platform in near real time.

And that is something that really could threaten the dominance of DTC, as you mentioned. So, can you describe for me what your private permissioned blockchain, the Paxos settlement service, looks like and what problems it solves and whether it could actually resolve the issues we saw with Robinhood and GameStop. Yes. So, we're really proud we have a no action letter from the SEC to settle tokenized equities. We're the only firm that has that. Now, the no action letter limits us in terms of number of stocks and amount of volume. So, we're doing it in, you know, a handful of stocks and a certain amount of volume. I think we've done 1.7 million trades now since last February when we started we got approved to begin and

And what is the number of institutions on on it? So right now it's SocGen, Credit Suisse, and Instinet Nomura. We have another participant that'll be joining shortly and another one that's signed on. So we have, you know, another couple that are coming on and then we have some more that are really engaging with us and certainly the GameStop news has accelerated interest in how people can move settlement and how they can really um remove these impediments to their business. This is now a a real focus because it's become in some sense an existential issue for many firms. And that's good because it's you know, you want to address this when you can, not when you have to. And you know, and when you have to being a crisis it'd be a

real problem. So now is a good moment, you know, times are still good, you know, it's not going to be, you know, a different type of issue like if a you had a Lehman Brothers again. And so we've started with those firms. This is really working well. Um we're applying for a clearing agency registration license, which is fairly rarefied piece of infrastructure. There's two that are really functioning right now, the DTC and the Options Clearing Corp, the OCC. We would be the third. We'd be the second one that's settling equities trades with the DTC and ourselves being those two. And that would allow us to really start to do unlimited volume in a whole variety almost unlimited use cases here. And so

I think we're going to we've been working on this application now for years. Uh believe it or not. So I think we're very close to being able to submit it and go through public comment and get approved. Hopefully we're optimistic in the middle part of this year. Certainly I think the latest news I think is you know, underscores the need for this. And so we're really excited to get this thing going and believe it or not, only 10 firms are 80% of the US equities market. So I know it's like, you know, you think the equities market seems like it's a lot of players, but actually it starts to really uh narrow down in terms of who is actually uh trading with who. You know, one broker trading with a broker.

80% is uh 10 brokers. And so, I think we can be at five, six, eight when we launch, which gets us most of the way there, and um and we'll continue to add more. And what the advantage of this is you can settle on any time frame you want. You can know exactly how many shares are short. You can track it where it's moving. You can be in a position where you have much lower expenses. We cut 70% of the expenses out. Since you're settling potentially on the same day that you do the trade, you actually be able to release capital while being safer uh because most of the capital's tied up because you have to you're afraid someone might fail over two days from when you do the trade now. Imagine if you're actually settling on the same

day. This is like, you know, real big improvement, and potentially you could even do intraday. Like every couple hours you could you could uh settle up all the trades. Really make a big, big difference in terms of allowing there to be more access, allowing there to be more safety and fairness in the markets. And there'll be transparency for the regulators to see what risks are building up every single day at in real time. Uh whereas right now you don't have that. And uh instead you have a too big to fail intermediary that's facing every single trade in the market. And that's how the DTC operates. So, we're really excited about what we have. This is modern technology using blockchain, tokenizing shares, and I think the key shift is paper allowed you uh going from paper to

digital allowed you to create more liquidity. Going from uh digital to token allows you to keep that liquidity, but to also have chain of ownership. So, you really know who's owning the shares at all time, and that actually creates safer and fairer markets. And you know, famously a lot of blockchains have issues with throughput when you compare them to legacy systems. So, for the Paxos settlement service, what is the current number of transactions per second it can handle? So, there's a This is a good point and there's a couple of components to this.

Clearly blockchains can't handle in real time, so what I would call real-time gross settlement. Every time there's a trade, you settle. Blockchains could not handle that level of volume. It's just very, very hard to do because you're potentially trading in microseconds and then you have to settle and resettle and that would be very cumbersome to do. You don't need to settle that fast. Even if you want to trade that quickly. And so, you can set up a system where you're settling every couple hours. So, the trades come through, you're batching them, you could net the trades down, and then you settle it out, and then you continue on for the, you know, the next period. And you can pick whatever settlement time period you want. And that actually is something a blockchain

can do very reliably. That does not stress them. Now, you could not put that on a public blockchain, also to be clear initially. I think you have trouble because regulators want to make sure they understand who's securing the network, and that's harder to understand in a public blockchain at the moment. People are coming more and more comfortable with it. But also the throughput on Ethereum, for instance, is 17 transactions per second. That wouldn't be able to handle even batched settlements in the equities markets because you have about 120 million settlements a day. On the other hand, being able to do 120 settlements at the end of a trading day over the say the course of 30 minutes or 45 minutes is really not that complicated.

Maybe 20 years it was or 30 years ago it was. That was probably a confounding problem 30 years ago, but now it's not. You know, the advances in hardware and the advances in software mean that you can actually manage that type of volume relatively in a straightforward way. So, I think, you know, you have to think about what exactly problem you want to solve. Do you want real-time gross settlement? That technology for blockchain is not going to do that right now. Maybe it will in the future. If you want to be able to settle at the end of the day or in batches, and be able to handle even the all the amount of settlements in the market, that is completely achievable with today's technology.

Mhm, okay. Yeah, batching maybe at the end of the day would still introduce some of the risk that we were discussing with Robinhood and GameStop, but if you did it multiple times throughout the day, uh it could mitigate that. Um and one other thing, so just so I understand, um with all the companies whose stocks then trade on the Paxos settlement service, all the shares are now digitized and only tradeable there, and then so now the entire like all the shares for that company then are transparent and the trading and all of them is transparent, and then so if any of them were to be become darling of Wall Street bets, then

we wouldn't see the same kind of kind of like issues that we saw with GameStop. Is that the theory? So, there's two components to what you said, just to unpack it a little bit. Even if you settled, by the way, at the end of the day of T0, you would still be fairly safe versus intraday batches, because what happens is you see the risks building up all day long, and you could have limits. And you could say, "Oh, okay, you've hit a limit. You need to pay down the level risk that you have." And so, you would have transparency on all of your counterparty risks in real time. And that means if something got out of whack, you don't have to wait till the end of the day, you could do it earlier. So, even if you said normal processes end of day, during exceptional times, you would be able to

address it earlier. So, I think that that's the component here is is creating flexibility, so that you can reduce risk when it's appropriate. You you have to necessarily force it at all times. And then the next component is we're backward compatible. We have a full DTC participant account when we hopefully you know knock on wood here receive our clearing agency license. It's a mandate that we are backward compatible into the DTC. And so that means that when shares trade if the two participants are Paxos customers the shares will settle at Paxos.

If one of them is it can settle at the DTC. And if none of them are it definitely settles at the DTC. And so that means that shares can move over into the Paxos environment and get tokenized and if they need to go back into the old environment they can. So there's some moment of time where we're backward compatible into the old environment and that allows somebody it doesn't create a requirement that every single person switch over to Paxos but I suspect what will happen is you're going to get a certain amount that come through and then you hit a tipping point and that's when you start to get all kinds of additional benefits around tracking every single share at all times because if it goes back into the old

environment you can't track it. We can only track stuff that stays on Paxos. Oh wow okay that's really interesting. Yeah so maybe you're right that there might be kind of like a messy period where it's sort of in and out you know kind of somewhat transparent and somewhat not transparent and then at a certain point there probably would be a tipping point when yeah it's just obviously superior and everybody moves that way but And and the advantage of that is we wanted to make it backward compatible so that it made it really easy for participants because ultimately you have to think about how do you get people to adopt this? Well you get them to adopt it because it costs less it you know it's solving operational problems it's you know safer it's fair it allows them to mobilize their assets

in a different way. But also um, part of that is how do solve your operational problems means we can't create new operational problems. So, you know, if you have two places that don't talk to each other, uh, that would be a real difficulty. And so, we are deliberately set up where that wouldn't be the case. And that just means that, uh, benefits will scale over time. Uh, you know, we're not going to port the whole market over tomorrow. Uh, but if your broker spent all of their time in the Paxos environment, uh, you would be able to track all the shares. You know, so if someone said, "I'm going to spend I I only settle on Paxos. Uh, you can only trade me if you settle on Paxos." You'd be able to see that. So, this comes down to partly like, you know, how do you want to get the

benefits and when? All right. And for the SEC clearing agency registration, when you get that that's um, the registration that will enable you to move on from stocks to other types of assets? What allow us to move on from, uh, stocks in the no-action letter so that we can then operate, you know, really in all stocks and in, uh, unrestricted volume. But also, by the way, it can allow us to do a lot more than stocks, bonds, etc., other things. So, there's so much opportunity here because, you know, the stock market alone is 45 or 50 trillion dollars of assets. Uh, you know, the single largest, um, asset, uh, class in the world is US equities. Uh,

you can imagine getting the point where that's tokenized is a huge step forward in basically re-platforming the financial system and creating a much safer, uh, a much more dynamic way of being able to allow companies to raise capital and for participants to be active in the equity markets. I mean, it's a huge deal to get that to go because um, then it becomes a lot easier to get subsequent asset classes. Most participants will already be on if you got the US equities market to go. And that's part of our point of let's do the US equities markets, uh, because it's very liquid. It needs it.

It's a big problem, and it'll then be the um, um product journey to get the whole rest of the asset class uh moving on this uh on this journey, too. You know, part of your journey to um tokenize other assets has started with a tokenized gold product that you guys offer. And um uh I was wondering, you know, why was that one of your choices for a different type of real real world asset that you would offer, and how do you plan to move on from uh securities and from from the one gold offering?

Yeah, so uh we're really excited about where the gold product is. It's grown a lot um in the last year. It's gone from maybe 15 million of tokenized gold to about 100 and almost 30 million dollars of tokenized gold. Um and so it's growing quite a bit. You know, gold was a very logical asset to start to tokenize. Uh firstly, because it is a bearer asset, but you can't own it in a bearer asset way in the digital world. People have been owning gold by owning an ETF or a future. And so this is a problem. How do you get bearer assets uh that are physical to operate like bearer assets in a digital way?

And um and not just be, you know, uh an account-based asset, but be a token-based asset. And so in the case of gold, first of all, it's been money before. Uh people want to be able to use it like money in many places. It's still the the foremost store of value, even though Bitcoin is clearly showing so much promise. And there's 10 trillion dollars of gold in the world. And gold is mainly traded around and moved. It's not uh consumed. So, you know, you wouldn't want to go do iron ore. Uh you know, you basically pull iron ore out of the ground, and then you consume it. So, there's not as much need to tokenize it as it would be for something that's highly tradable. US equities is an example. Gold is an example. Um I

think we're going to definitely do other uh types of assets. Silver, platinum, palladium are logical other ones to do. They trade not nearly as much as gold. And, you know, there's a lot of other things to add besides equities. There's bonds, um there's private company shares, uh which is something uh we'll be doing shortly. Um and um you know, you kind of go on from there. Real estate, uh collectibles, but there's an adoption curve in my mind around how assets become tokenized. And that adoption curve is driven by what are the benefits that you get by being tokenized. And so, there's really kind of three-ish benefits as I think about it. One is it just saves you uh money. And it might save you capital,

might save you expenses, you know, some way it's saving you money uh by going from what is either a digital um account-based asset or a physical asset into a tokenized asset. The other benefit you get is uh liquidity. And liquidity means that you've now made the asset easier to move around and trade. And so, that can be a significant benefit because a lot of times, you know, you're frictional costs when you're trying to move assets around. The And then the last uh benefit is access.

When you create a uh digitized version of the asset on a public blockchain, it's open access. Now, you have to have the right controls in place from a compliance perspective, but it's open access. You can really create an ability for someone to have assets that they couldn't before. Uh you know, example being dollars, an example could be gold. Now, some people get scared about open access because they think, "Oh my god, it's going to go to money launderers and, you know, uh you know, terrorists." Now, of course, there's some risk with that, but on the other hand, you also get the capacity to create universal uh ability to access financial assets, which is really hard for people. There's so many people who don't have bank accounts or don't have ability to access um and participate in the financial system. And so, access is a really key

thing. And maybe you'd say the fourth thing is it allows her to be more innovation because you can now program assets and change them around and do different things with them. That's the advantage of basically going to going tokenized. And so, if that's the benefit, uh you want to think who's which assets get the most benefits from going this route. And that's where you want to start. And so, obviously crypto uh is a new asset class and uh that's pulling people in. It's pulled dollars in. And you needed to have dollars in there because it helped to create all kinds of operational savings to have money moving 24 hours 7 days a week 365 days a year.

There's lower expenses. You have um freed up capital because the money is moving fast. You don't have it just sitting there moving slowly through the banking system over many days. And then, you have an ability to program it and create more accessibility. You know, people can hold dollars without a bank account. That's a huge benefit. Cash is a logical thing to get pulled in. It got pulled in by crypto, but it's going to be now used in buying goods and services and eventually for wholesale asset settlements. So, now dollar's the next thing. And then, you say, "Oh, gold can make sense." And equities can make sense.

When do you get to like real estate? That's probably a little bit later in my opinion. Quickly before we move to stable coins, which, you know, you were just mentioning, I did want to ask earlier when you said collectibles, did you mean physical collectibles? And if so, like what? Like art or coin like coins or stamps or I don't I didn't even know what you meant. be any of those. It could be There's examples of cars, uh art. I know of a number of projects that are working on art. And like digital or physical art? Um physical art. And so, let me give an example of one that could be interesting as well. There's a lot of museums that are having troubles and tough tough times now. Well, what they could do is sell some of their collection, maybe pieces of it to people who can own

some of it, but the museum continues to be the depository. They hold it. Uh people can go see it. But you can now raise money where you could sell fractions of pieces of art. Like that's in one example of uh something that you could do with art. Another one could be that you just use it for whole pieces of artwork. You know, you don't you want to trade fractions of it or whole pieces. You know, how do you make sure you track the provenance of artwork? It's an enormous problem and it's an enormous asset class. And so art is an example. We've seen people trying to do collectible cars. I think uh there's really no end to the way you could use the blockchain to track who owns what when.

Um but what you need to do is, you know, figure out some of the operational logistical hurdles to it. Uh have it make sense to do it at what time. And so you're going to see more of it. Real estate is another example. People's houses. Imagine if you could track the mortgage title moving through the house. You'd never have to use title insurance again. Uh you know, you you know, you kind of go on and on. Like there's just there's so many exciting things to do. There's $600 trillion of assets in the world. Where do you like how do you start with a problem that big? Uh there's going to be lots of nuance when you get into individual assets and individual countries.

Yeah, I could imagine custody would be a big question for things like physical art and and stuff. But okay, let's move on to the stablecoin question because, you know, you did talk about obviously how stablecoins have become a big part of the crypto ecosystem. But, you know, I just wondered I know it is one of your business lines. You have your own stablecoin and you also provide the back end for other uh providers to have their own stablecoins. How do the different stablecoin providers compete with each other? They're ultimately competing on a number of different propositions. One is what is the utility of this coin?

You know, what can I do with it? Uh can I go buy things with it on different exchanges? Can I go make a loan? Can I borrow in it? Um can I just hold my money in it? Is it available in lots of different types of wallets? So there are some that are much more widely uh usable than others. USDC, Tether, Pax, BUSD, HUSD are coins or the you know, I think we have three of the top five dollar stable coins. And you know, they're you know, very accessible and very usable. And that distinguishes it from some smaller stable coins where they might not be available on lots of different types of wallets or on lots of different exchanges.

So, that's one thing that distinguishes. The next thing is well, what's the regulatory oversight? And I think particularly for Paxos, we have a primary regulator, which is the New York Department of Financial Services that oversees our stable coins. And that's different from anyone else's. So, Tether has no regulator. USDC doesn't have a primary regulator. They have money transmission licenses, but they don't have a primary regulator that oversees it. We actually have both our both us as a trust company has a primary regulator and our products have a primary regulator. And that's exactly what if you looked at what FATF guidance, the FATF, or you look at Treasury guidance and others, they really talk about you should have a primary regulator that

oversees it because otherwise, you open yourself up to all kinds of possible misuse of it. And so, we're I think really try to always make sure in everything we do at Paxos that we're looking at what the regulators are saying, making sure that we're following best practice because we're not just trying to hamstring ourselves. We're doing this because ultimately, how do you get to mainstream adoption? You're never going to get to mainstream adoption without a primary regulator overseeing the coin. You know, banks are going to accept it. I don't think corporations are going to accept it.

They're going to want to use something that they can trust. And that part of that trust is having someone else who's overseeing it. That's what you always have in financial services because you can get to issues where an issuer without a primary regulator overseeing it could very well be faking the assets that are backing the token. And of course you can use auditors and other people to help, but some are unaudited and unregulated and that could start to create systemic risks and maybe consumers wouldn't realize it or uh less sophisticated uh users wouldn't realize it and that's what we're proud of how we separate ourselves from others.

And so it sounds like you're talking about Tether primarily which is unregulated and uh what what was the other Unbacked, unregulated and unbacked. Oh and and or unaudited rather. It's we don't know if it's unbacked. Um there are a lot of allegations about that. Although now recently there's news that um a loan that Tether gave out to Bitfinex has now been paid back so Yeah. Um however what I was going to say is we do know it's unbacked actually. So they actually said we're unbacked meaning they said we have a loan. Yes. And they have Bitcoin and other things like it's not if you look at the terms of service it doesn't say it's backed just by dollars sitting in a bank account. You know, if you look at like um the Bahamian banks, they have like maybe $700 million

in all the Bahamian banks, but the primary Tether bank is supposedly in the Bahamas. Where is the $25 billion sitting? Uh everyone would like to know the answer to that. No one knows, but they have said that they're not fully backed one for one with dollars. Um and you know, that may be fine, but that means it's not a dollar stablecoin. Right, right. Although I did have Gregory Pepper and I think was his name, the deputy CEO at Deltec who said that that $700 million figure uh for for the Bahamian banks was some portion of the assets like like just just the Bahamian dollar reserves or something like that and that um US dollar reserves would not be

counted in that. I I think that was his explanation. I I'm going to have to link to this in the show notes. Um because I I don't remember the exact specifics, but he did have an explanation. Um, but something that was interesting was you discussed this with Frank Chaparro on The Scoop podcast back in September 2019 and you were talking about Tether. And at that time you said, "This is the best it's ever going to be for them because it's unregulated and institutions won't touch it." And uh, hello. At that time Tether was about 3.5 billion and now it's ballooned to 28.5 billion. So, do you believe that now is the best it will ever be for Tether?

Um, and then just in general, you know, how do how do you think this whole thing with the kind of regulated unregulated stablecoins is going to play out? Well, I'd say, uh, maybe two or three things here. First, yes, I still think this is the best it's ever going to be. And what I meant by that is it's never going to get used outside of the crypto ecosystem. Right? So, it's never going to it's never going to get mainstream adoption. And so, maybe it grows to $50 billion, but it's only going to happen because people in the crypto space are using it, not because, you know, I can tell you maybe I'm wrong here, but I I would be shocked if Tesla or MicroStrategy goes, "Oh, I'm going to start using Tether to move dollars around." But I don't think that it'll be shocking for Tesla or

MicroStrategy to move tokenized dollars around. They're just not going to move Tether dollars around. And so, when you think about there's $60 trillion of M2 in the world, you know, is Tether going to be the number one dollar stablecoin in a world where you get to huge amounts of tokenized dollars? No shot. It's impossible. Um, you know, it's unbacked. They've already told us. You know, I mean, you know, we'll see what happens with the New York Attorney General. I just think it's very unlikely that you could be unregulated, unbacked, and unaudited. I don't think we know enough to I don't think we know enough to to say whether or not it's unbacked, but I thought that they went on a podcast and clearly said, you know, we Yes, and the terms of service say it may not be backed. If you go on the Tether website,

it says it's not fully backed. Yeah, it hold well or that it holds a mix of other assets including the coin etc. not being a dollar backed. So, I maybe we could say it more be more precise and say it's not fully US dollar backed. You know, there's other assets that are backing it. Right. I mean, that's a big deal. That's a you know, it's supposed to be a dollar stable coin. You know, you're really not then. You're a security actually. Mhm. You're a security when you start to have other assets in there that aren't short-term US dollars in there. I know because we spent a lot of time examining this. Uh you know, um we'll see obviously what happens here over time. But, um you know, I I think there's a uh I think they're whistling past the graveyard.

Um that and it could be a security. Yeah. No, it is it is it is interesting to see um how this is going to play out. And and also I think something that fascinates me too about this is that, you know, a huge percentage of Tether usage comes from Asia. So, um in the end it may be fine for Tether, but um but yeah, here in the US things may go in a different direction. All right, so um I have so many questions about regulation. Um obviously we talked about how Paxos initiated the process to obtain that New York Trust Charter even before the BitLicense existed. If it had existed at that time that you started that process, would you opt for that instead? Like do you you know, what do you think of kind of going the Trust Charter route versus

the BitLicense? Well, for us it's just crucial to have been a trust company in and that's why we did it in the very beginning. Um we thought about getting a money transmission license and there was uh conversations about what a BitLicense might look like. And for us uh getting the trust license made all the sense in the world because we wanted to be infrastructure. And it'd be very hard to be infrastructure if you just have a BitLicense. It'd be very hard to have a primary regulator that oversees the tokens that we've issued. Our gold tokens, our dollar tokens, additional tokens that we launch in the future without having to trust. And so to me, um it's a linchpin of our strategy.

Um you know, getting it, you know, meant that we were going to operate a little bit more slowly than firms that were just using money transmission licenses uh or the bit license because they could operate in other states um in a in a much different way than we could as a trust. But um again, it kind of go back goes back to our strategy of did you want to be the uh early adopter winner or do you want to be the mainstream adoption winner? Do you want to be infrastructure for, you know, the B2B and the B2B2C players when, you know, this goes into being about billions of users or did you want to, you know, get the scale at 40 or 50 million users? And so we just tried to have that long-term viewpoint from the very beginning and, you know, really wasn't over the horizon viewpoint like

our conversation earlier, but it's one that I think is really clearly bearing fruit now and has put us in a different place with all of these firms that are now coming in and looking for turnkey solutions. Yeah, we'll see how this plays out over the long term because obviously, I mean, if we go back to that comparison point about how Coinbase started around the same time and it has gone that route with the money transmission licenses and and I I just think in general operating from California um you know, versus New York which has had these pretty onerous uh regulations. Um you know, Coinbase now they, you know, in January they did 117 billion dollars of volume. It Bit uh you know, saw a little over 2 billion. So, you know, I

understand that now uh you're you're going after a different um route, but you know, Coinbase clearly has been successful. They're going to IPO. It's it's going to be what looks to be a successful IPO. So, Absolutely. I think Coinbase is like it's been fantastic. I mean, they have, you know, huge retail user base. And so in in that way it's where I'd say uh the money transmission licensing route makes a lot of sense because you know, you can acquire the retail consumers. For them, it's about the service that you're offering. Uh, and then when you look at institutions, they're expecting just a different level of oversight. And so that meant that in the early adopter phase, you're going to be moving slower, but in the mainstream phase, you're in a different position.

And so that's and so it's not bad or good, it's just a different thing. Right. Well, uh, so your firm has been so buttoned up when it comes to compliance and regulation and so it seems like you have a pretty pragmatic approach to it. And yet I do imagine that you maybe have thoughts about how regulation in the US could be improved, particularly since you do operate in other jurisdictions. So what would be on your regulatory wish list for US regulators? And we can talk both federal and state level. Well, you know, they kind of interplay together. There's just an alphabet soup of uh, different regulators, you know, kind of across the board, the Treasury and different departments within the Treasury and then the OCC and FinCEN and that's part of Treasury. Uh, CFTC, SEC,

um, you know, you look at all the different state regulators. Uh, you know, kind of it's almost bewildering in some sense. Um, I think there are some simple things that could be done which is states coming up with a a way of being able to create reciprocity if you hit certain benchmarks with other states. Uh, right now the only way to get get explicit reciprocity is essentially you have FDIC insurance. Uh, that's the most green, you know, uh, green line way of getting, uh, so to speak, uh, full reciprocity across states or having a federal oversight.

And of course that would be, you know, becoming either a federal uh, bank or a federal trust. And so I think, you know, it's important for there to be some competition amongst regulators, uh, because you can be innovative then. Uh, you know, we don't we want competition in the markets, we want competition everywhere and you want to be able to have different places where people can try different things. So, I think that's valuable, but on the other hand, you know, you can have too much competition and then you don't get reciprocity and it becomes really hard to move around. So, I don't think we should have one regulator, but I also don't think that having a lack of reciprocity works either. That would be one easy way to solve things. Now, of course, there's also something I didn't mention which is the Federal Reserve is

also another regulator. So, the Fed, the OCC, the SEC, the CFTC. Now, they're doing different things. But, even the IRS is a regulator. And so, where does this come into play? It gets a little confusing. The IRS says Bitcoin is property, Treasury and FinCEN is saying maybe this is a monetary instrument. How you're being treated for tax reasons is different from how you're being treated for regulatory reasons. That is a problem. I think there needs to be some way of creating some clear understanding of what an asset is amongst these different regulators.

And sometimes it it might blur the line, but like for instance, Bitcoin doesn't feel like we're blurring the line here. There should be a common way, but there isn't. And so, there has to be a common way of saying, let's look at an asset class or look at a token. Let's have some of these federal regulators come together who might be overseeing it is a security, is it a derivative, is it a property and being able to have a common viewpoint. That would actually really promote without having to make any kind of adjustments to all these different regulatory umbrellas, that would actually have a really clear way of giving entrepreneurs an understanding. And then, the last thing I would say is regulation tends to be one-size-fits-all and that is really difficult because

businesses aren't one-size-fits-all. If you have to carry the burdens of being a fully regulated entity, but say you only have a million or two million dollars in revenues, you're not really taking a risk-based approach to which what applies. When can you be in a sandbox? When can you have a period of time to get up to speed? You know, we'll give you a grace period of 1 year or 2 years or revenue threshold when you need to get to some place could really help entrepreneurs a lot. And that wouldn't necessarily be for Paxos because we've already done all this, but I think it's good public policy, which is how do we how do we allow there to be more innovation and more competition?

You know, I think that's what you need. And so you you have to make it so it's possible for people to be entrepreneurs and not get tied down in oversight that makes sense if you're a large company, but doesn't make sense if you have almost no customers. You're trying to get a product out into the market. And so I think those three things uh state oversight, clear understanding of where an asset sits, and um you know, some types of sandbox and grace periods can make a huge huge difference for financial services. We've seen it in other areas.

And one other thing I was so curious about was in the US, what percentage of your operating cost do you estimate you spend on compliance? Uh well, that's a good question. I don't know the answer to that off the top of my head. You know, we were looking at this uh couple months ago, but it's very very significant. And now some of those are fixed costs, so it changes over time as we scale, you know, those costs can scale. Um but I can tell you we've spent tens of millions of dollars getting ourselves into the position that we are right now from a regulatory perspective. That's an enormous amount of capital. Um you know, you look at just creating the trust company, uh millions and millions and millions of dollars of capital. You can't be a startup uh who's you know, raised a seed round of 1.2 million

dollars and said I'm going to become a trust company. It's just not going to work. Now, there's a reason why you know, you probably shouldn't don't need to be a trust company, but could you operate in a sandbox uh to be able to do things? Could you have a grace period to be able to offer certain things? Um you know, maybe there's a you know, a minimum amount of uh revenues that could give you um a chance to explore product market fit. I think that would be really huge um for, you know, breaking open uh competition um in financial services, which is going to be good for everybody. Um and it doesn't mean you don't need regulation, but it's when do you need it?

All right, so I've kept you long enough, but last quick Well, we'll see if whether or not it's quick um question. You've applied to be a trust thing nationally, and in December Paxos also recently raised its Series C fundraising round of $142 million. And so I just wondered, you know, what was next for Paxos? Well, look, we're going to keep pushing our regulatory uh stack uh to be able to handle more assets and to be able to handle them in broader ways. Having the trust uh on a national basis does create um explicit uh federal uh preemption.

So, you know, you can operate in all the states in a really clear way. That's valuable. It also gives you potential access uh directly to the federal uh Federal Reserve um where you can now hold dollars and bonds directly with them. That will be important for us. Um getting a clearing agency registration from the SEC, as I mentioned before, is another big um approval. And we're doing a bunch of these outside the United States as well. So, you know, you're going to have to keep building on a regulatory stack. There's no uh kind of sitting on your laurels because as this becomes more and more mainstream, it needs to be able to operate in different ways than maybe where you did, you know, 5 years ago or even where you did today.

And so we're constantly looking down field at other things that we can do to be able to expand the geographies we're in, the assets that we're in, and the way those assets are being used. All right, well, this has been super fun. Where can people learn more about you and Paxos? Paxos.com is a great place to start. Um also, your podcast. All right, perfect. Well, thank you so much for coming on Unchained. Thanks for having me. Thanks so much for joining us today. To learn more about Chad and Paxos, check out the show notes for this episode. Don't forget you can now watch video recordings of the shows on the Unchained YouTube channel. Go to youtube.com/c/unchainedpodcast and subscribe today.

Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Dan Edelvik, Shashank, and the team at CLK Transcription. Thanks for listening.