The Breakdown - Is PayPal Going to Fine You for Your Opinions?

Episode Date: October 11, 2022

This episode is sponsored by Nexo.io, Circle and FTX US.   On Saturday, a PayPal policy was announced where customers could be fined up to $2,500 for misinformation and other causes, at the sole discretion of the company. The internet’s outrage was quick and loud, and very soon PayPal retracted the policy and said it was published in error. NLW explores what the policy would have done and why some are asking what it suggests about a future with central bank digital currencies (CBDC).  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “The Now” by Aaron Sprinkle and “The Life We Had” by Moments. Image credit: Justin Sullivan/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, October 10th, and today we are talking about the dust-up with PayPal over the weekend. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or If you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX.

All right, folks, how are you? I hope your weekend was lovely and that you are ready for another fun week in markets. Now, you'll remember that last week, markets started quite optimistically. There was a two-day rally that had everyone excited. However, it was for not, and by the end of the week the Fed had trotted out a slew of officials to disaffow investors of any remaining optimism. This week's stocks opened lower, and there are a few things going on with the rough start. The first, of course, is that people are still focused on what the Fed will do next,

and assimilating all the information from speakers we got last week. Goldman Sachs wrote, We continue to expect that the Fed will hike by 75 basis points in November, 50 basis points in December, and 25 basis points in February, to reach a terminal forecast of 4.5 to 4.75%. Drages on growth and inflation from a stronger dollar, and slower global growth should help keep the economy on a below potential growth path and make it noticeable if partial contribution to lowering inflation.

TLDR, more of the same. And no Fed pivot. However, this week, markets have a slightly different focus. Third quarter's earning season is beginning, and it's putting a spotlight on what may be the outcome of the inflation fight, which is the risk of recession. There is a sense that markets haven't been fully pricing in the hit to growth and earnings that would come with the recession, and so some are wondering if these earnings will start to show

some of that weakness. This week, we see reports from companies including PepsiCo, Walgreens, BlackRock, J.P. Morgan Chase, and Wells Fargo. And this earnings season is starting on shaky ground. The S&P 500 has moved more than 1% in 11 of the past 14 trading days, which is the most in that time frame since April 2020. Also reflecting that period, earnings forecast have been slashed by 6. percent across the index, which is the most since that quarter. This quarter's earnings will be a bellwether to gauge how the Fed's policy tightening has impacted the economy across multiple sectors. It will also show which companies have managed their businesses well during this tumultuous

period. The price-to-earnings ratio, a popular stock valuation method, is also showing signs that there could be more downside to come. Last week, the S&P traded at 15.9 times 12 months' earnings, which is in line with the long-run average of 15.7%. If reports show a collapse in earnings, the stock market could all of a sudden appear much too richly valued based on that metric. Diane Jaffe, a senior portfolio manager at TCW Group's relative value team, said, quote,

There are so many naysayers out there. I don't know if they'll give companies credit yet for really being able to manage their businesses as well as I think they have been. Now, also this week over in the UK, there is still a huge focus on the Bank of England's support for the bond market. Specifically, investors have been selling government bonds as the BOE has deployed less than a tenth of the 10 billion pounds it had earmarked for daily purchases. Peter Schaffrick, a macro strategist at RBC Capital Market, said just this morning they put out this big headline

that they would buy up to 10 billion pounds, but this program doesn't seem to be designed to buy big. The market is disappointed by that. The BEO did also announce two types of lending facilities that are designed to help pension funds get to cash even beyond those bond buying programs. All of this shows just how difficult the government backstop game can be. But today, we are focused somewhere slightly different. This weekend saw a really interesting fricacy that I think is fairly reflective of the power shift battles we focus on here at the breakdown. On Saturday, the Daily Wire reported that plan changes to PayPal's acceptable use policy contained a clause which would allow the payments firm to fine users up to $2,500 for, quote, the sending, posting,

or publication of any messages, content, or materials that, quote, promotes misinformation or presents a risk to user safety or well-being. Those fines could also be levied for, quote, the promotion of hate, violence, racial, or other forms of intolerance that is discriminatory. The policy was set to go into force on November 3rd. The fines would be at the sole discretion of PayPal and reflected what PayPal claims is the reasonable cost of tracking violations and damage to the company's reputation. The internet was not happy with this new policy. David Marcus, the CEO at Light Spark and former president at PayPal, said, it's hard for me to openly criticize a company I used to love and gave so much to. But PayPal's new AUP goes against everything I believe in. A private company

now gets to decide to take your money if you say something they disagree with? Insanity. David Sacks, who was also formerly C-O-O at PayPal, quote tweeted that and said, get your money out of PayPal right now. Harlabo's Fugara said, this is insane. I wonder if they can go into your linked bank account if your PayPal balance is zero. Brendan Carr, a commissioner at the FCC, said Orwellian. PayPal reserves the right to take your money if you post a message that PayPal decides is misinformation. This is why it's so vital that state and federal legislature pass laws that prohibit discrimination by tech companies and protect free speech. Dan McArdle, a co-founder at Masari, said, obviously PayPal will walk back this take your $2,500 for speech they don't like thing. But just remember that they must deeply believe in that

sort of thing for it to be discussed at all, get into a document, and then pass rounds of legal and executive review before making it into production. Now, Dan was, of course, right. PayPal quickly backtracked remove the planned update policy and put out a statement on Saturday night saying, quote, an AUP notice recently went out in error that included incorrect information. PayPal is not fining people for misinformation and this language was never intended to be inserted in our policy. Our teams are working to correct our policy pages. We're sorry for the confusion that this is caused.

Although the policy was quickly revoked, the reputational damage was done, and what's more, it revealed a few concerning things about the way power and fintech operates. Crane Hassel, the director of threat intelligence at abnormal security, said, it's not like dozens of lawyers likely had to review the finished before it was published. Brendan Carr says PayPal says its misinformation policy, quote, went out in error. Because who among us has not fat-fingered a new seven-page policy that would take away people's money for publishing, quote, misinformation, and then release that new policy on accident. Tracy's shoe cart said, this PayPal thing is wild, I will have to say, I do not think you can

send out a revision to your policies without a team of lawyers on it. Gonna have to say it was sent out by mistake is high in my BS barometer. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on NXO Pro. The new spot and futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete NXO Suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io. That's P-R-O.N-E-X-O.I-O and sign up.

up today. The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the US. FTX US is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCs. app today and use referral code breakdown to support the show. Now, as you might expect, this policy generated a lot of discussion not just about PayPal, but how it might reflect a type of future that we could be headed into.

King Blackboard writes, small taste of what PayPal can and will do makes an MF or think real long and hard about what a government CBDC could do. James Levish said, you think PayPal is bad, wait until you see what they can do with CBDCs. Benny Johnson, a host at Newsmax, said people, PayPal, just showed you what they're planning on doing to you. Don't believe the, oh, we sorry, mistake. Bullshed. Social credit is coming to America. Dave Collum, a professor at Cornell, said that PayPal has backed away from their plan to dock your bank account, up to $2,500 for posting misinformation on social media, is a bell that

cannot be unwrung. It is foreshadowing of authoritarianism. Possibly unstoppable. It was a good run to now. Now, as you also might guess, there were a lot of Bitcoin fixes this tweets. Frankly, much more appropriately to mostly when we say that. Santiago Santos, a co-host at the Empire podcast that Blockwork, said, PayPal censoring speech and blocking payments is the best thing that has happened for the adoption of crypto payments with stablecoins. At this rate, Web3 adoption will happen more because of the reckless actions of Web2 companies. Jutthica, the head of OTC trading at Cracken says,

In the Bitcoin's store of value versus method of payment debate, PayPal may single-handedly invigorate the method of payment use case. Jan Wustonfield writes, but PayPal and other payment providers work for me. why would I need Bitcoin? Well, this is why. Preston Pish says, thank God these companies are getting arrogant. The world needs them to fail. There are way better options. Finally, UdiWorthheimer writes, PayPal threatening users with 2,500 penalties for holding the wrong opinions is a good reminder for why we Bitcoin. Modern payment tech like Apple Pay is really great most of the time, but the only way to keep them honest is to maintain an alternative. Now, if you follow American

politics, you may notice that some of the sources that I quoted today are fairly standardly on the right. But I don't think it's partisan to be concerned about this sort of overreach. In fact, I think it would be a pretty big mistake if you are on the left to dismiss these concerns as just the same sort of GOP big tech screamers or to just lump it in with the MAGA's still mad about Trump getting kicked off Twitter. This is an example of something that could plausibly be written off as private companies being allowed to do what they want and then quickly normalized. But with much scarier consequences if the principle underlying is expanded to more companies and just becomes an expected part of the internet money experience. Speaking of CBDCs, around the world, they continue to be

a hot focus for governments. On Friday, the Reserve Bank of India published a 50-page concept note for the introduction of their CBDC. The document is the first comprehensive report from the RBI's fintech department, which was formed in 2022, and lays out the intended design features of the CBDC. The digital is envisioned to be, quote, substantially not different from banknotes, but being digital, it is likely to be easier, faster, and cheaper. The Central Bank's report stressed the importance of identifying, quote, innovative methods and compelling use cases that will make CBDC as attractive as cash, if not more. The RBI's stated intentions in creating a CBDC are reducing operational costs involving physical cash management, fostering financial inclusion, bringing resilience efficiency and innovation

to the payment system, boosting innovation and cross-border payments, providing the public with uses that any private virtual currencies can provide without the associated risks, and offering availability and resilience benefits when electrical power or mobile networks are not available in remote locations. And this is a big one, right? The bank views the CBDC is offering the benefits of cryptocurrency without the risks of using privately issued cryptos. Quote, the inherent design of cryptocurrencies is more geared to bypass the established and regulated intermediation and control arrangements than play a crucial role of ensuring integrity and stability of monetary and financial ecosystem. In addressing system design,

the RBI said it would launch both retail and wholesale CBDCs with the retail version being token-based to better emulate the qualities of cash. A pilot program will take place later this year, according to the deputy governor of the central bank. Now, that line and the intent in this report about an Indian CBDC effectively being a replacement for private cryptos goes a long way to show why when it comes to cryptocurrency, a list of specific technical features might not be the best way to understand how it compares to something like a CBDC. Instead, and in the context of this PayPal discussion, you have to ask where any given crypto falls on the censorship resistance scale. There will, of course, be many cryptocurrencies and tokens that are focused on

use cases where they don't particularly care about censorship resistance. But the actions of PayPal and the desires of central banks suggest for why it's important to have some cryptocurrencies, even if it's just Bitcoin, that actually do care about that censorship resistance. Chatter about CBDCs is increasing in the U.S. as well. Last week, John Lipsky, the senior director of the Atlantic Council spoke with CoinDesk and voiced concerns about the U.S. dollars reserve currency status if the U.S. can't get a CBDC policy delivered in a timely manner. Quote, while the dollar is not in any risk at the moment over a long time period, three to five

to seven years, there could be a fracturing of the international financial system. Lipski wasn't so much concerned about another currency taking the dollar's place, but rather a, quote, real splintering of different means of transactions, not just dollar-based. The Atlantic Council maintains a website showing global progress on CBDC policy, which shows that 105 countries representing 95% of global GDP are exploring the creation of a CBDC. Obviously, as we see with India, some countries and regions are pushing well ahead of mere exploration. Last week, a Bank for International Settlement's research project concluded among 20 Asian commercial banks, settling 22 million in foreign exchange transactions using CBDC infrastructure.

Lipski said, quote, we haven't seen that before. We've seen the technology tested. We've seen the hypothetical settlement, but we haven't seen actual money in a serious amount flowing between countries. Now, Lipsky also laid out his view on how the U.S. should engage with the reality of CBDCs being rolled out within the next few years, suggesting that the U.S. could act as a leader in the space by creating a CBDC that is, quote, cybersecure, protects privacy and delivers near instant settlement. Quote, we're the dollar, we're the issuer of the world reserve currency and other countries that are in a further state of CBDC development would say to themselves, well, we should probably be aligned with what the U.S. and what the ECB is doing. Now, as for me, I have real questions about whether the U.S. dollar's long-term role as a settlement currency and as a reserve currency is going to be predicated on whether it gets these new sort of digital features. It's not impossible that it plays a role. Certainly convenience, finality of

settlement, speed of settlement do matter. But it seems likely to me that the dollar's ultimate place is going to be as much about what else is available, shifting geopolitical alliances, and the weaponization of currencies as a specific diplomatic and even military strategy. One of the biggest questions for folks who are exploring a U.S. CBDC is to what extent the privacy protections that basically everyone who talks about this in any meaningful way right now articulates being important. If you ever hear Fed Chair Powell talk about a CBDC, he makes sure to say that the privacy preservation aspect of that is enshrined. The question is how? Would the U.S. want a scenario where it says it's private but actually has backdoors because of Bank Secrecy Act and KYC concerns? or would it actually use technology that represented true, unimpeachable privacy?

It's hard to imagine that, but that might be the fight that we're having as a USCBDC moves farther down the line. There is also, of course, the question of who ultimately authorizes a USCBDC. That's one where the Federal Reserve has been very unwilling to put that power on themselves, and instead kicking it over to Congress. Right now, in Congress, there remains a lot of skepticism about a USCBDC, particularly from the congressional Republicans who are most involved in the crypto space as well. but I tend to think that it's a debate that's barely begun. The good thing about that, if you are interested in these questions,

is that it's easier to shape the discourse now, basically than it ever will be again. So my recommendation would be start tweeting, start writing, start advocating, and generally get involved. For now, I want to say thanks again to my sponsors, nexo.io, circle and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital

enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.