The Breakdown - PayPal's Stablecoin is the (Second) Biggest Crypto News Story of the Year

Episode Date: August 8, 2023

In today's episode, NLW dives deep on PayPal's Announcement, which he argues forms a matched pair with BlackRock's spot BTC ETF application as the key events in the most important trend of this bear market. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, August 8th, and today we are talking about PayPal's new stable coin. 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. All right, friends, today we are talking about the big PayPal news, which was announced yesterday, and it hits at what I think is one of the biggest themes of the year, which is TradFi coming into

the absolute utter wreckage of this industry after the last year plus of bad behavior, and positioning themselves to take over like adults compared to some children who have lost their privileges. We'll get into that a little bit more, though, so first let's talk about details and the reactions from the community. So PayPal is launching PayPal USD or PYUSD, a stable coin that is issued by Paxos. It will be fully reserved using bank deposits, short-term treasuries, and other cash-like instruments. Initially, the stable coin will be only available to U.S. customers. In one of the bigger parts of the announcement, PiUSD is an Ethereum-based ERC-20 token. That means it will have compatibility across the Ethereum ecosystem from day one.

Customers will be able to transfer the stable coin between PayPal and Ethereum wallets, person-to-person payments will be enabled, the stable coin will be integrated into the existing PayPal checkout process, and it will also be convertible into other cryptocurrencies already available on PayPal's platform. Now, while the stablecoin will be redeemable for US dollars on a one-to-one basis, that feature will be intermediated by PayPal. What's more, this is happening right away, the rollout to US customers will happen gradually over the coming weeks. The company also said that support for cross-platform payments with Venmo users will be coming soon. Now, there doesn't appear to be any way to prevent non-U.S. residents from getting access to the

stable coin on Ethereum, but details on that point haven't been made clear yet. There's already a smart contract deployed to the Ethereum network to operate the stable coin, although there hasn't been any activity so far. PayPal CEO Dan Shulman said in a statement, the shift towards digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the US dollar, our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.

Now, a stable coin has been a long time coming for PayPal. The company first hinted at plans for this in early 2022 and obtained a full bit license from New York State later that year. Indeed, along those lines, pretty much every step of the way, PayPal has gone to pains to ensure their crypto products are well-regulated and authorized. Shulman said that PayPal had extensively discussed their plans with regulators stating, we are in a place right now in these conversations that people feel comfortable with a respected, well-regulated U.S. financial entity moving into the stablecoin space, and I think

it's an important initial move. Put a big old pin in that point, as I think it is extremely, extremely telling. In their communications about the news, PayPal highlighted their choice of Ethereum, basically saying that they wanted it to be easily plugged in to the existing ecosystem of developers, wallets, and Web3 applications as well as exchanges. Now, on the back end, Paxos will be providing all of the infrastructure for the stable coin and will begin issuing monthly reserve reports starting in September. Walter Hesert, the head of strategy at Paxos, called this a watershed moment for the stablecoin industry when it comes to regulatory compliance. He noted that, unlike some rival stablecoin issuers, Paxos is regulated as a trust company by the New York

Department of Financial Services. Hesert said, the difference is significant because we have a prudential regulator. In our case, you have a regulator overseeing every activity involved in the issuance, including the reserve management. This means no matter where you are in the world, anybody who has this token is protected by the oversight and the rules that are set for us by New York. Now, speaking of Paxos competitors, Circle CEO Jeremy Allaire said of the launch that, quote, it is a strong signal that near instant, borderless, and programmable payments in the form of stablecoins are here to stay. He also said, I'd like to congratulate PayPal and Paxos for the launch of PiUSD. It's incredibly exciting to see such a significant internet and payments company

entering the stablecoin space. This is what happens when we start to get regulatory clarity. And with the Payment Stablecoin Act, this can open up a free competitive market for dollar stablecoin issuers with strong supervision, allowing the U.S. to compete with digital dollars that are uniformly safe, transparent, liquid, and supervised to Fed standards. Stablecoin laws are arriving in Japan, the UK, EU, Hong Kong, UAE, Singapore, and the U.S. Customers will know who they are dealing with, and firms that can survive scrutiny by central banks and prudential regulators will thrive. That's the market in 2024 and 2025. Now, staying on this regulatory theme for a moment, Patrick McHenry, the chairman

of the House Financial Services Committee, had a strong opinion on the PayPal Stablecoin launch, and what it foreshadows for crypto in the U.S. He said in a statement, this announcement is a clear signal that Stablecoins, if issued under a clear regulatory framework, hold promise as a pillar of our 21st century payment system. Clear regulations and robust consumer protections are essential to enabling Stablecoins to achieve their full potential. That's why it's more important than ever that Congress enact legislation to provide comprehensive digital asset regulation, especially for stablecoins. We are currently at a crossroads to keep America at the forefront of digital asset innovation. Congress is making significant bipartisan progress on legislation to ensure the U.S. leads the financial system of the future.

We must finish the job. Now, it's notable not only that McHenry has been consistently one of the most steadfast advocates in Congress for rational crypto legislation, but that much of his work over the past 18 months has been focused on brokering bipartisan agreement on what stablecoin regulation should look like. Now, as a little aside, it is pretty remarkable to think about how different this response is as compared to the last time a big tech firm attempted to roll out a stable coin. I'm referring, of course, to mid-2019 when Facebook announced Libra. That announcement was met with incredible skepticism, and Zuckerberg himself was hauled into Congress to explain.

Now, there are a bunch of reasons why this is different. One notable one was that Facebook wasn't a U.S. dollar stable coin, but was a Bankor-style bassist of global currencies in which the U.S. dollar represented only 50% of the reserve. Second, Zuckerberg was planning to set up in Switzerland rather than the U.S. Third, it was Zuckerberg, who was already in hot water for different reasons for both the Republicans and the Democrats. And of course, on top of all that, ultimately Facebook wasn't first and foremost a financial services company. Although PayPal is also nominally a technology company, it's never been anything but a financial company. There was also the fact that simply put,

we're four years on. That's four years for Congress to have learned. about and be able to distinguish between. Moving on, though, let's talk about what the denizens of crypto Twitter thought about this. One of the biggest themes of conversations was talk about potential restrictions, potential censorship, and whether this is just a central bank digital currency by another name. Lawyer Sasha Hodler says, I just read the PayPal USD Terms of Service. Full KYC, custody by Paxos, tied to your PayPal login, PayPal can reverse any transactions, claim to be fully backed by actual USD, all the censorship capabilities of a CBDC, but launched by big tech instead of the government. Riot Platform's VP of research Pierre

Richard echoed those sentiments saying, so-called stablecoins are permission fiat, corporate versions of CBDC. Mark Jeffrey from Boolean Fund said, so basically the PayPal Stablecoin is a CBDC wearing tether lipstick. But what about specific concerns? Well, the big one was summed up by Crypto McKenna, who wrote, the PayPal Stablecoin has the ability to freeze your account and wipe your balance. I assume all payment processors will be forced to implement the CBDC-type functionality. Now, others had issues with PayPal specifically. Chairman Burr-Bernacki wrote, Ah, yes, PayPal, the noble crusading company that stands for free speech,

financial access for everyone, and free-flowing capital. Notably, they've never debanked anyone or frozen anyone's funds for activity they deemed, not illegal, but immoral. There's absolutely no cases of PayPal demanking anyone, and when they've accidentally frozen accounts, they've been very quick to resolve the issues and have no track record of simply keeping your money. I can't think of a safer place to put my funds. Obviously, that commentary was being very sarcastic. Now, Bitcoin or Walker writes,

Can't wait to not use PayPal's new stable coin because I already deleted my PayPal when they said they would steal $2,500 from people for misinformation. For those of you who don't remember, that was a policy that was discussed in October of 2022. Now, others are sort of surprised that people are surprised that PayPal would act like a centralized company. Bernals writes, wait, people thought that the PayPal coin wouldn't be centralized? It's a fully backed stablecoin issued by a highly regulated Tradfai entity. If you thought they weren't going to ham-handedly bake in token freezes, I don't know what to tell you. Chainlink God writes, Yes, PayPal's new centralized Pi-USD stablecoin had centralized admin functions,

as does USDT, USDC, USBP, and all other pre-existing centralized stablecoins issued by trusted third parties. It's not really that surprising given the regulatory compliance requirements around handling fiat with consumers. Honestly, I'm surprised they actually went with the traditional stablecoin model of Blacklist, versus a more aggressive model of whitel. Austin Campbell echoed these themes saying, The New York Department of Financial Services Guidance for Licensing Stablecoins literally spells out that BSA, AML, and sanctions compliance is required. This is probably the lightest touchway to do that versus a whitelist or something, the cost of doing business for a fiat-backed coin. Former Chief Information Security Officer at A16 Z Crypto Nassim wrote,

I don't get all the fuss around PayPal's PiUSD having a centralized supply management. They are a financial institution whose goal is to make money move faster and more efficiently. not to be decentralized. People need to internalize that blockchains can be very efficient, interoperable rails for many use cases regardless of the ethos alignment. Technology is rarely used for its original author's purpose, just like mobile phones or the internet. David Morris from CoinDesk puts it really simply, saying,

PayPalUSD will be the most censored and seized centralized cryptocurrency of all time. Not even saying that as a sweeping condemnation. It just is what it is. Shapeshift founder Eric Voorhees agreed, but put a positive slant on it, saying, you should assume that all centralized stable coins can do this. Still, the launch is hugely positive. Further helps the world move into crypto.

And from centralized crypto, people discover and become familiar with decentralized crypto. And that, of course, gets us to the takes about how this is, one, good for Ethereum, and two, good generally for crypto mainstreaming. And of course, a lot of that is about scale. Business analysts Ethan Hughes writes, Over the last 30 days, Ethereum has peaked at 556,000 active addresses. PayPal has 4355 million. active users, and just issued their own stable coin as an ERC20 token on Ethereum.

PayPal has 782 times more users than Ethereum. If only 1% of PayPal's users onboard to crypto through the stablecoin, that would result in 8x more defy users than we have peaked over the past month. Now, I could read one of a million other bullish tweets as well, but you get the idea, and I think it's pretty crisply put. There obviously are big implications if people actually choose to use this thing. Now, still, when it comes to the big themes that we've been talking about this year, I think one of the biggest discussion points are the regulatory implications.

Crypto lawyer at Wilkie Far, Mike Selig writes, Banking regulators have essentially said banks can only issue stable coins on private blockchains. PayPal will issue its stablecoin on Ethereum. This regulatory arbitrage has to put pressure on Congress to pass a stablecoin bill ASAP. Austin Campbell quote tweeted that and said, I've been saying for a while that stablecoins are coming whether the banking regulators want them to or not. Fighting on the hill of defending a wildly antiquated system that rips off consumers is not going to end. well. We need to embrace technology and empowering the end user. Jason Yanowitz from Blockworks

writes, PayPal taking on USC. Love to see it. It's easy for regulators to be anti-stablecoin when shadowy supercoderes create them. Less easy when it's major U.S. financial organizations. Get ready for the stable coin narrative to shift in D.C. Now speaking of a shift, Nick Carter, one of the most careful trackers of Operation choke point 2.0, definitely sees something significant here. He tweeted, PayPal News is the first positive piece of news I've seen in the chokepoint 2.0 category since January. Paxos BUSD was ground zero in terms of extrajudicial coordinated cross-agency regulatory harassment. The fact that PayPal was able to get this through with Paxos is telling. How press at North Rock Digital puts it even more simply, tweeting,

Paxos works with finance, send them a well's notice, and shut it down. Paxos works with PayPal, we approve. Clear trend here from U.S. regulators to try to marginalize those they feel are shady bad actors, and bring in large U.S. institutions to run the show instead. This has implications for ETFs. And this, of course, gets to what I think is the big, big theme here. The incredibly clear trend right now is that all of the big companies, the big traditional financial institutions,

who spent the last bull run dabbling and starting to get aware and learning and preparing themselves, and who had started to spend the beginning of this bare market building infrastructure, all of those firms saw in the collapse of FTCS and the following, regulatory response, not a reason to leave the space, but an incredible vacuum in which to operate. The thinking has to be from these players that crypto-native institutions and startups had their chance and they biffed it. So now, the maturation of the assets and the growth of interest among consumers in them, and on the other, the regulatory disfavor of a lot of the institutions that those consumers were dealing with, what's the answer? Of course, it's for Tradfai to come in and

clean up. It is not an accident that the thing that set off the recent shift in spot Bitcoin ETFs was BlackRock entering the space, the world's biggest asset manager. PayPal's announcement of their stable coin is absolutely part two of that trend that started with BlackRock's ETF proposal, but in no universe is it the last version of this that we're going to see. Now ultimately, when it comes to the influence of the PayPal stable coin itself, it is very easy to do the math on the total addressable market and come away salivating. But at the end of the day, it will be a test as much of anything about whether regular people have uses that they want to use stablecoins for. Is this, in other words, just another stablecoin competitor for the

crypto natives? Or is it something that brings more people in? For that, we will of course have to wait and see, but damn, this is a spicy and significant announcement. I would not sleep on the significance of it. Appreciate you guys listening as always. And until tomorrow, be safe. and take care of each other. Peace.