The Breakdown - What We Learned About PayPal's Crypto Strategy This Week

Episode Date: February 5, 2021

Today on the Brief: Elon Musk back to DOGE trolling Bank of England says to prepare for negative interest rates Janet Yellen on “Good Morning America” discussing retail investors Our main discussion: What did we learn about PayPal’s crypto strategy from its quarterly earnings report?  In this episode, NLW breaks down: How PayPal’s perspective on crypto evolved What we learned about the success of its offering in Q4 2020 What’s next for crypto at PayPal in 2021 Why its biggest play is squarely focused on central bank digital currencies   -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

What you see here is clearly how PayPal is starting to position itself. They want to be the company, I believe, that shows that this new type of digital currency can and does have a role to play in payments. And part of the reason that they want to do that is because when central banks decide that they want to go all in on versions of digital fiat, PayPal wants to be there waiting and ready to help them. 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 and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, February 4th, and today we are talking about what we learned about PayPal's crypto strategy this week. First up, however, let's do the brief.

First on the brief today, Elon Musk is back to trolling everyone. Two days ago, he said, he was going off Twitter for a while, but instead of that, he started meaming hard on Doge. He tweeted first Doge as a follow-up to a SpaceX photo, then You're Welcome with an image of him as Rafiki from the Lion King, holding up, as you would imagine, a Simba Doge. The Your Welcome was in response to the price going up. He followed this up with Dogecoin is the people's crypto, and then no highs, no lows, only Doge. On and on it went, and of course the price is up something like 50s, 50% today, lull. I'm completely convinced that Elon is just complicated performance art to remind us to not take things so seriously. Next up on the brief today, the Bank of England says prepare for

negative interest rates. When we think of interest rates, we think of something positive, right? If you park your money in some type of account, you get money back. That's how it's been for a very long time. Well, as it stands, a huge amount of global sovereign debt, some 17 trillion, is actually negative yielding. This means it actually costs people to hold it. This has big consequences for the financial system. We've covered before on this show Swiss banks that are now charging people for keeping their money with them rather than giving them interest on it. Last fall, the Bank of England said it was exploring the possibility of taking rates below zero. And this week, the bank published a letter to lenders saying that banks would need six months to start adapting their systems and processes to work in a new negative interest rate world. Now the letter says that the Bank of England is not saying that

negative interest rates are inevitable, but at the same time, they are now actively engaging with financial institutions to develop solutions for this new environment. Zero and negative interest rate policies are one of the, if not the, key background context for everything that we talk about on this show. So at some point, I will do a whole show just on that if you guys want it. Let me know. Last up on the brief today, let's talk some Yellen and meme stocks. Treasury Secretary Janet Yellen went on Good Morning America today and said, we really need to make sure that our financial markets are functioning properly, efficiently, and that investors are protected.

We're going to discuss these recent events and discuss whether or not recent events warrant further action. This is, I think, the first real test for the Biden administration in terms of how they're going to look at key market issues. Are they going to focus on behaviors that they find predatory from big financial institutions? Are they going to focus on transparency from the most opaque sectors of the market? Are they going to focus on investor protection? And if so, what is that actually going to mean? Is it going to be real investor protection, i.e. things like not allowing brokerages to turn off

trading on a whim versus a more paternalistic investor protection that dictates what people can and can't spend their money on. Meanwhile, while the narrative is that this whole meme stock thing is dead, of the 50 stocks that Robin Hood put on its restricted list, a third, 16 have doubled or more in 2021 still, and only six are lower year to date. Net net, 276 billion in market cap was added versus the 164 billion that was wiped this week, so this game to me still seems to have innings to be played. With that, let's shift to our main discussion. Yesterday, we talked about the rise of the institutional buyer in the Bitcoin space. For a decade, the Bitcoin and later crypto markets were entirely driven by retail.

It was only last year that that finally started to seem to shift. Of course, the beginning of this year has also validated the idea that that is shifting. However, there were some indications, even as all these new funds and new types of actors were coming into the market, that maybe retail would have its return to prominence again. First, let's look at the grayscale Bitcoin Trust. This is a fund that went from 2 billion assets under management at the beginning of 2020 to 23.7 billion assets under management now. Of course, that is driven by institutions, but at the same time, their main product,

GBT, is effectively exposure to Bitcoin that you can buy in the traditional stock market, that you can buy with your IRA. That's a huge part of its appeal. It's why people are willing to pay a premium. in many ways, I think that the growth of grayscale last year was sort of a double indicator, both the rise of institutions, but also the appetite among traditional market investors for Bitcoin exposure. I think you can also see the growth of defy over the summer and fall as an indicator of where a lot of the inside crypto retail investor energy was going. Although, as I've said,

many times, this wasn't external retail coming in, and that's a good thing. The barriers to entry were simply too high. However, it's very clear from how much activity there was that that was a major focus for those retail investors who are already in the crypto space. But there was one huge piece of news from last fall that suggested really where retail might surge back to be a big part of the next bull run as well. This was, of course, the announcement that PayPal would begin offering crypto services. To understand how big a deal this was, let's actually go back to as recently as January 2019. The World Economic Forum in Davos, when PayPal CEO Dan Shulman said things like, quote, I've always thought that crypto was more of a reward mechanism for implementing blockchain.

We're not seeing many retailers at all except any of the cryptocurrencies. By November 2019, things had evolved a little bit. Shulman did an interview with Fortune where he talked about leaving Libra. PayPal had been the first fintech company to leave Libra as it fell out of regulatory favor, and basically he said that they wanted to focus on their own roadmap in the digital currency space. He did also say, however, that he owned crypto, specifically he owned Bitcoin only. Looking for the best way to stay on top of your investment game? Nexo.io has you covered in three easy steps with their high-yield savings account for digital assets.

Step one, create an account at nexo.io. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited. Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo.io. Now let's forward to 2020. Cash hap has become a more and more dominant force in the consumer mobile payments market. It's got a better brand in many ways, certainly a younger vibe, and a legion of devoted fans, particularly in an urban setting. It also has a CEO in Jack Dorsey, who is seriously committed to Bitcoin. And by the middle of last year, that commitment was clearly

paying dividends. In Q3, for example, of last year, cash app generated 1.63 billion of revenue and 32 million of gross profit on Bitcoin. That was up 11x and 15x respectively year over year. Taken from PayPal's perspective, it was clearly becoming a liability that PayPal didn't have something for the space. Now in June, CoinDesk reported that sources were saying that PayPal was getting into the crypto game, and by October, that had been confirmed. PayPal came out with a real announcement saying that they were going to be offering crypto buying, selling, and holding for their customers. Initially, it was to be just for U.S. customers and just on their main PayPal app.

Over the following year, they would roll it out internationally and integrate it into Venmo as well. Even more importantly, they plan to roll crypto out as a payment option. option across their global network of 26 million merchants. These merchants would never actually have to touch Bitcoin or crypto to accept it. PayPal would do the conversion automatically behind the scenes. Interestingly, PayPal also made it very clear in their press release that they were thinking about the coming central bank digital currency era and positioning themselves to help become the rails. That press release had a quote again from Dan Shulman, president and CEO, saying,

The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access, efficiency speed, and resilience of the payment system, and the ability for governments to disperse funds to citizens quickly. Our global reach, digital payments expertise, two-sided network, and rigorous security and compliance controls provide us with the opportunity and the responsibility to help facilitate the understanding, redemption, and interoperability of all these new instruments of exchange. We are eager to work with central banks and regulators around the world to offer our support and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce.

Reading that, it feels a little bit less like they were just scared of cash app and a little bit more like they see a fundamental sea change coming and wanted to be at the center of it. PayPal started rolling out crypto services to their customers immediately and by all accounts it was so popular that they had to race to roll it out even faster than they anticipated. However, when it comes to big public corporations, the proof is in the pudding, and the pudding is quarterly earning statements. We are currently in earnings week on Wall Street, so let's see how PayPal's crypto efforts are actually doing. Here's the info we got yesterday. Last quarter, PayPal grew by 16 million new active accounts.

They handled 277 billion in total payments volume. By November 12th, it had removed the wait list to all of its 350 million users around crypto services. In the quarter, transaction revenue increased 12% to 5.7 billion, although it's not clear how much of that came from crypto, buy, sell, and hold products. One important accounting note, PayPal is not including transactions relating to crypto in total payment volume, although they are including revenue in that total transaction revenue. Now, here was one really important detail. Customers who purchased crypto have been logging into PayPal twice as much as they were before buying crypto. One easy explanation for that is that they're checking the price to see how it's changed.

However, it almost doesn't matter for an app like PayPal to see a doubling, an increase of 100% in how much people are logging in, that creates immense opportunity to convert them to more buying, more activity in general. What then about follow-up commentary? These earnings reports are always a published report and then a call with the CEO or leadership of the company. The headliner quote from Dan Shalman was this. The volume of crypto traded on our platform greatly exceeded our projections. We're excited to build on this early success by allowing customers to use their crypto balance as a funding source.

We hope to launch our first international market in the next several months. One of the big takeaways is that they are clearly headed in the payments direction. Susquehanna Financial Group is a market maker for PayPal Securities, and one of their senior FinTech research analysts said this. Basically, Square offers crypto as a service, and they make the market, but they don't really market up. Trading is interesting, but it's not nearly as interesting to us as a payments acceptance device. PayPal has incredible merchant volume. Shulman, for his part, said that they plan to begin rolling out the crypto payments capacity to merchants later this quarter. Maybe most

importantly, however, was this. PayPal is investing in a dedicated business unit entirely focused on crypto services. Shulman again says this. We all know the current financial system is antiquated, and we can envision a future where transactions are completed in seconds, not days. A future where transactions should be less expensive to complete, and a future that enables all people to be part of the digital economy, not just the affluent. We are significantly investing in our new crypto, blockchain, and digital currencies business unit in order to help shape this more inclusive future. So what you see here is clearly how PayPal is starting to position itself.

They want to be the company, I believe, that shows that this new type of digital currency, can and does have a role to play in payments. And part of the reason that they want to do that is because when central banks decide that they want to go all in on versions of digital fiat, PayPal wants to be there waiting and ready to help them with something that no one else has, which is networks of merchants who can be turned on almost instantaneously. They're clearly positioning themselves to be infrastructure for the central bank digital currency era, and this is all about stepping stones on that path.

In that way, it'll be interesting to see how much PayPal in the quarters to come actually emphasizes their revenue from these new services versus what they do vis-a-vis merchants. For now, we have one more indication of just how upsized this industry has gotten over the last couple years, and it's going to be exciting to see how it all plays out. For now, guys, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.