The Breakdown - The Massive Significance of the PayPal Stablecoin

Episode Date: August 12, 2023

A reading of Stablecoins Can Keep the Dollar the World’s Reserve Currency - Brian Brooks, Charles Calomiris PayPal’s Stablecoin Is a Watershed Moment for Finance - Austin Campbell 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 Saturday, August 12th, and that means it's time for the weekly recap. Sort of. 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. And 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. Breakdown Pod. Hello, friends, happy Saturday.

At the end of this week, I had to travel a little bit last minute. And so my choices were either, one, skip the weekly recap altogether, or two, do something just a little bit different. So obviously, I decided to go with doing something just a little bit different. And basically, what you're getting is a long read Saturday on top of a long read Sunday, which is coming tomorrow. Tomorrow's episode is a fun walk-down memory lane if you are interested in Bitcoin. The piece is actually from 2019.

I think you'll really like it. And for today's weekly recap, I have two pieces that are obviously much more contemporaneous, and I think in some ways do certainly reflect big themes that have been on display both this week and last. The first is by Brian Brooks and Charles Kalamiris, and of course Brooks was the acting U.S. Comptroller of the Currency in 2020 and 2021, and before that the chief legal officer at Coinbase, and is now a partner at Veller Capital Group. Kalimuris is now Dean of Economics, Politics, and history at the University of Austin, and was the chief economist of the Office of the Comptroller of the currency under Brooks.

The piece they contributed to the Wall Street Journal was called Stablecoins can keep the dollar the world's reserve currency, and if you listen last week to Long Read Sunday, you will have heard this argument. Stablecoins they write? Blockchain-based assets backed by bank deposits and treasury securities are at the heart of a dollar-based revolution happening throughout the developing world. Their price is supposed to stay steady, often at $1. Think of them as digital versions of prepaid cards with the potential to be important tools of American soft power in a world where the role of the dollar is in question. Stable coins aren't merely a more efficient means of electronic payments. With some economists and

policymakers worrying about de-dollarization, i.e. the eclipse of the U.S. dollar as the world's reserve currency, stable coins could bolster the post-war arrangement in which the dollar's dominance helped foster global trade and the biggest reduction in global poverty ever. But that can happen only if Congress implements a sound and stable regulatory framework. That is why House Financial Services Committee Chairman Patrick McHenry's bill to regulate stable coins is vital. It would establish federal and state oversight for stable coin issuers, impose qualifications for reserve assets, and implement rules on redemptions and public disclosure. It's hard to argue with these seemingly bipartisan goals, and Mr. McHenry has collaborated on the bill with Representative Maxine Waters for more

than a year. Yet, at last week's vote on the measure, Ms. Waters and most of her Democratic colleagues pulled their support, with no clear reason for their sudden change of heart. Did they suddenly decide stable coins aren't important? Any tool that could boost the U.S. dollars should be considered. Dollars as a share of reserves held by foreign central banks have fallen in the past generation. In 2000, dollars represented almost 73% of global central bank reserves. Today, the share is around 59%. Though much international trade and many commodity transactions are still settled in dollars, this year, large countries, including Brazil and Argentina, entered bilateral agreements with China to use the yuan and their local currencies for trade settlement. Rumors abound that a summit next month,

Brazil, Russia, India, China, and South Africa, will consider creating a new currency arrangement, while leaders of the so-called BRICS countries deny an impending currency union, and Hale-South Africa's ambassador at large for Asia and BRICS said, the days of a dollar-centric world are over, and BRICS nations intend to settle trades in their local currencies in the near future. This year, Saudi finance minister, Mohamed al-Jadad, said Riyadh, is open to settling oil trades in currencies other than dollars, once an unthinkable idea. U.S. policy hasn't boosted global confidence in the dollar. The asset freeze on dollar holdings in Russia's central bank imposed after Russia invaded Ukraine, while understandable politically, shocked

investors in central bankers, who realized for the first time that the dollar may not be the safe store of value at once was. A de-dollarized world would damage the U.S. The dollar's reserve status reduces U.S. borrowing costs, which is crucial in an era when government borrowing and spending are at a record high and still climbing. Reserve status also insulates the U.S. government, banks, and the general public from foreign exchange risk. All things being equal, reserve status also allows American consumers to buy foreign goods more cheaply, since foreign producers would rather have dollars than other currencies. The nationalist and anti-colonialist impulses behind de-dollarization in the developing world aren't likely to help citizens of those

countries. Argentina's decision to price trade deals with China and yuan and pesos may reflect Argentina's national pride, but the country's 114% annual inflation rate means that workers there will see their purchasing power quickly decline. And that's nothing compared with Zimbabwe's 175% rate or Venezuela's 400%. At the end of last year, 17 countries had inflation rates above 20%, and 57 had rates above 10%. This is where stable coins come in. Faced with the dismal prospect of saving their wages in local currency stored in local bank accounts, more citizens of high-inflation countries are opting to use dollar-backed stable coins as a synthetic savings account. Dozens of startups offer stablecoin savings and payment options in Latin America and Africa,

often in countries whose leaders are vocally and visibly moving away from the dollar. Dollar-backed stablecoins have market capitalization in the hundreds of billions of dollars, and they support transaction volumes many multiples of that amount. These offerings are attractive to ordinary people in those countries because they don't require an account at a local bank, only an internet connection. In addition, many stablecoins pay interest and have no minimum balance fees and lower or no transaction fees. More important, they free people from tyrannical developing world monetary policy and allow them to store the value of their hard work in relatively stable dollar form.

Stablecoins could be to finance what voice of America has been to diplomacy. They can communicate U.S. monetary policy directly to the people living in other countries when American efforts to engage other governments aren't succeeding. If stable coins flourish, citizens of other countries will increase the demand for dollars independent of and perhaps contrary to their government's political decisions. But for stable coins to succeed, U.S. politicians need to agree that re-dollarizing the global economy is important. The McHenry bill is a good place to start. All right, back to NLW here. This piece is absolute hotfire. These are things that people in the crypto and Bitcoin space have been talking about for a very long time. But this is about

as crisply put as I've ever seen the argument. What Brooks and Kalimeras point out is that there is increasingly a divide between the leaders of countries around the world and the citizens of their economies. Even as leaders for a variety of reasons, either desire to get off the dollar system, or are compelled and incentivized to by other emerging powers, regular people still want dollars pretty much everywhere you go. That creates the potential for the extension of the dollar's dominance for at least a generation. And that's an opportunity that, frankly, I think, and my guess is over the coming years, many politicians from both sides of the aisle will start to think, should not be squandered. Now, of course, the pressure on Congress to get off their duffs and actually

pass stablecoin legislation did nothing but increase this week with the introduction of PayPal's stablecoin. That is the subject of our second piece, which is by Austin Campbell, and is called PayPal's stablecoin is a watershed moment for finance. Austin kicks off with a quote from Steve Jobs. Innovation distinguishes between a leader and a follower. On August 7, 2023, PayPal announced that they were launching PiUSD. In five years, we will look back at this exact moment and realize this was the beginning of the turn in history. Why do I say that? Up until this date, the majority of the builders in crypto were just that, in crypto. The largest companies operating the space were exchanges and stablecoin issuers. The largest market capitalizations

were for the blockchains themselves. Most of the activity in the space was deeply self-referential, with the ICO boom, DeFi Summer, and the rise of NFTs, all catering primarily to users and builders who are already in the space, enabling them to use more of the technology with each other. I call this phenomenon the bad habit of building more crypto-for-crypto elsewhere, but up until this point in time, it is largely what to find the growth and evolution of the industry. That changed this week. PayPal, one of the largest payments companies in the world with 430 million-plus customers, has planted a flag saying that blockchain technology is important enough that they are willing to spend

years building a product to evolve their business model. Of course, PayPal still has the PayPal app and ubiquitous checkout. button, PayPal still has Venmo. But now PayPal also has PiUSD. Why is this so important? Blockchains are a fundamentally different form of economic organization. A public blockchain in particular is an open many-to-many interface for exchanging value without needing a centralized intermediary. Pi-USD brings us back to the original promise of blockchain, the ability of a two-legged human anywhere in the world to send value to another two-legged human without having to trust or pay a bank, or worse, interminably long string of correspondent banks to facilitate their

transactions. This sort of platform erodes monopolies over time, allowing people to form their own financial connections without the need for centralized counterparties to control them. It returns the power over money to the people. However, the value of a blockchain cannot be unlocked without something to go with it, and more importantly, something to do with it in the real world. This is where PiUSD alters reality as it comes online in various parts of the world over time. Now by attaching a blockchain to the traditional PayPal platform, someone can send PiUSD to a relative, to a vendor, or to an employee anywhere in the world. Or at least that's the plan. For now, PiUSD is available only in the U.S. This, of course, was true of previous

stablecoins, but here is the important difference. That stablecoin can now become a PayPal balance. It can be easily cashed out through traditional rails. It can be kept as the stablecoin itself, knowing others can use these off-ramps. Liquidity increases value and options increase value. PayPal with PiUSD has moved blockchains, it is building on Ethereum, from being many-to-many for transactions, to being many-to-many for the options of what to do with the value received after the transaction has occurred. Over time, the adoption of blockchain and faster, cheaper, safer transactions will now grew due to this fundamental shift. There are many companies and individuals sitting on the sidelines unsure if they can trust crypto-native stable,

if crypto-native platforms are stable, and if others are going to use the technology to justify their own time and investment. Pi-USD answers those questions. PayPal is building with the battle-tested NYDFS standard for stablecoins by partnering with Paxos. PayPal has been operating globally for multiple decades running a payments network, and PayPal has handled vast amounts of money safely, securely, and without losing user funds. Now, other builders and companies in the space can compose the Pi-USD stablecoin into their own apps, their own protocols, their own wallets, or simply into the back end of their own internal systems, and have confidence it will work. Likewise, PayPal now has the ability to abstract away the fact that crypto is being used,

upgrading the backend while the customer has a similar experience to their current products. This process will not be overnight, but will play out over years or even decades. This week, the snowball was pushed from the top of the hill. The regulatory and geopolitical ramifications of PiUSD should also not be underestimated. Stablecoins are here to stay. As technologists and financial professionals increasingly understand the implications of blockchains, there will be more of these efforts. PiUSD using what is likely one of the two best regulatory frameworks in the world for stablecoins,

is a demonstration that sable coins can be done safely, and with the same principles of fairness, consumer protection, and stability that we already value in the traditional financial system. PiUSD will serve as a call to action for positive technological progress, and a warning to those who thought this would just go away. Those who believe that entrenched decrepit monopolies would simply grind forward are now finding that they are very, very wrong. PayPal has fired the first shot among traditional firms at scale and become what is likely the first true Web 2.5 company in the world, bringing blockchain and finance together at a scale that has previously been unachievable. I, for one, have never been more excited about the future of finance.

Okay, guys, back to NLW for a very quick wrap-up. I think Austin's piece obviously puts a very fine capstone on this huge event of the week. I think it's pretty inarguable just how significant a moment this is. I think Austin's correct to identify PayPal as now a Web 2.5 company, and this may be as a Web 2.5 innovation. Now, a lot of folks are understandably disinterested in the version of stable coins that are just another centralized ledger payment, or at least feel that way and have the properties thereof, and that's a reasonable stance to take.

But I think it's equally undeniable that it is very, very likely that millions and millions of people are going to have their first interactions with cryptocurrencies with one of the crypto products that has the best product market fit of anything in the world, which is, of course, US dollar stablecoins. We will learn a lot in the coming months about not only if but also how people actually use PiUSD, but it's hard not to agree with Austin that this is a seminal moment in the history of this industry. Anyways, guys, that is going to do it for today's episode. If you enjoyed it, do me a favor and go smash a five-star rating on the app wherever you listen to this. It makes a big difference.

It helps people discover the show. And I truly appreciate each and every rating. Thanks again for listening. And until tomorrow, be safe and take care of each other. Peace.