The Wolf Of All Streets - All Money Is Coming To Crypto | Charles Cascarilla, CEO Of Paxos

Episode Date: November 16, 2021

Charles Cascarilla, Co-founder and CEO of Paxos Digital, was an extremely early Bitcoin advocate. While Charles knows that he wasn’t patient zero, he believes that he was one of the first 100 people to use the asset. Charles has made it his mission to build a well-regulated financial institution that enables the movement between physical and digital assets. To that end, Paxos has been the go to platform for major companies like PayPal and Meta to build in the crypto space. Investors will enjoy this birds-eye view of the industry. Amber Group: Amber Group is an integrated digital asset platform serving retail and institutional clients by providing deep liquidity, attractive yields, and sophisticated portfolio management tools. With 12 offices on three continents, and nearly a trillion dollars in volume traded, Amber Group offers clients personalized, compliant, and secure service across dozens of digital assets. Find out more at https://thewolfofallstreets.link/ambergroup -- Sorare: Where fantasy meets reality. Collect, trade and earn weekly prizes on https://thewolfofallstreets.link/sorare. #OwnYourGame -- HBAR Foundation: Fund your project quickly and easily with the HBAR Foundation. Apply for a grant and be put on the fast track to success at https://thewolfofallstreets.link/hbar -- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co ーーー Join the Wolf Den newsletter: ►►https://www.getrevue.co/profile/TheWolfDen/members

This episode is brought to you by Amber Group, the HBAR Foundation, and SoRare. Please stay tuned for more information on all three of them later in the episode. What's up, everybody? I'm Scott Melker. This is the Wolf of Wall Street's podcast, where two times a week we talk to your favorite personalities from the words of Bitcoin, finance, music, art, sports, politics, basically anyone with a good story to tell. Now, one of the main narratives in crypto has been institutional adoption over the past few years. But what we don't talk about as much is the companies that are actually building the infrastructure to allow that to happen. And that actually applies to mainstream adoption as well.

We all talked about institutional adoption in 2017. But looking back, it was kind of nonsense because obviously the infrastructure wasn't there for them to custody their assets securely or to even really start thinking about investments in Bitcoin. Well, today I have one of the people who's been around since very early building that infrastructure, the CEO of Paxos, Chad Cascarilla. Chad, thank you so much for being here today. It's great to be here. Thanks for having me on. So I don't usually start with background, but I think it's actually really relevant here. Can you talk about the early days of Paxos, what you guys are doing now and why you started it in the first place? Yeah, sure. We started Paxos really as an outgrowth of

my co-founder's experience. We were really investors in financial services companies for most of our career. We had our own asset manager. My partner still runs it. And investing in financial services companies really forces you to understand the plumbing. And as we went into the financial crisis in 2008, what became very apparent to us, and we were on the right side of that movement in both subprime and commercial real estate and a whole variety of other areas. We kind of really called it well. But what we didn't anticipate was how the cascading effects would be exacerbated by the plumbing of the system. And so you kind of understand it's there, but you didn't realize the second order effects would be so compounding.

And that was really shocking. In fact, you know, everything was paper based or really lag settlement. You didn't know where anything was. And what's even more shocking is you still don't know where anything is and it's all a batch processes even today. And we can talk about how GameStop was a perfect example of where it wasn't a financial crisis that was exacerbated. It was actually a financial crisis that was caused by the plumbing in the case of GameStop.

And that was nearly a cascading event, which shows you how it actually really continues to be a major problem. And so then we came across Bitcoin and this was in May of 2010. So pretty early days. And to be honest with you, I just figured it was going to go to zero. Bitcoin was at three cents and like any penny stock, they go to zero for a reason. But on the other hand, what was very interesting to us and intriguing was the technology. And it's not so much that Bitcoin isn't intriguing. It is. But at that time, Bitcoin and blockchain were more or less the same thing. There was no concept of blockchain and Bitcoin being different. You got through the internet

and basically three clicks on Bitcoin in those days. There was basically the white paper and like some Reddit group maybe had like five people on it. But anyways, we were intrigued by it. We were interested in it because we were constantly looking for technologies that could change financial services,

companies and landscape because of what our day job was. And what really began to occur to us is that this technology could fundamentally replatform the financial system. And again, that's not to take away from Bitcoin or crypto in general, but that it was as one part of the broader story, which is how the entire financial system could be shifted. And drawing on our experience of seeing different business models, we began to think, what would you need to build? What would enable that to come to fruition if indeed this technology was going to replatform the system? And we immediately gravitated towards infrastructure, financial market infrastructure.

And now this is something that most people aren't familiar with because it is so many layers deep and it's so far away from anybody's experience of what they need to deal with on an everyday basis that most people aren't familiar with or heard of it or really understand it. And the reality is this infrastructure is very important. It's highly regulated and it's a platform. And so analogy would be like, it's somewhat like AWS, not exactly because it's not, hopefully not very hardware like, but in any case, it's kind of like that. People know infrastructure when you say AWS. So it helps to create an analogy. Another type of infrastructure would be Visa MasterCard. People are familiar with it. Nobody's a member of Visa MasterCard, even though your card says Visa MasterCard in there. That's kind of like saying Intel inside. You really have the account with your bank or the merchant and then you're using it.

And so financial market infrastructure might be known in some sense, or maybe ACH, but a lot of different pieces aren't known. But in all cases, it's really operating in a centralized way. And our vision for this financial market infrastructure would be that it's an open, open regulated platform connected into blockchain networks and having assets that begin to be put into those networks to move around. That's a big idea. And so what it required was us to go get a lot of regulatory approvals from the very beginning, because ultimately we were thinking, how can you create societal wide outcomes? Don't get me wrong. The early adopter community is very exciting. It's been fun to be a part of. We were there from the beginning, very beginning. I, you know, I know, you know,

I don't, I wasn't definitely a patient zero, but I gotta be like patient, like a hundred or something in the whole network. You know, I remember with just our CPUs being 25% of the mining capacity, just CPU computers. That's how early it was. So there wasn't a lot of people. And and so I mentioned that because I don't think that growing up beyond the early adopter community is a problem. I think that's a good thing. And that's why we really spent so much time thinking about the regulatory approvals that would be needed to make that happen. It's not because we are trying to think of ways to hem the system in, but we're trying to think of ways to expand it to affect as many people as possible, really on a global basis. That's what led us to create Paxos. That's why we created it the way we did, which is build a lot of regulatory rubles to hold and move many different types of assets.

And to make sure that those assets can be held by us and moved on blockchain rails if they're not crypto native. That's what we're fundamentally doing. We take cash, we put it on a blockchain or gold, we put it on a blockchain or shares, private or public company shares, put it on a blockchain. If it's already on a blockchain like crypto, we'll hold it shares, put it on a blockchain. If it's already on a blockchain like crypto, we'll hold it and you can build off of us too. So we're either helping connect you right into the base layer, layer one, or putting things into a layer two to be able to move around. You were talking about regulation seven or eight years ago, but it seems to just have become a truly hot button topic, at least on the government side. It's my feeling that you were ahead of the game. You were trying to do things right,

but probably regulators didn't really care at that point because it hadn't gone mainstream. It feels like now we're very much on their radar. I'm really interested in hearing your thoughts on where we are right now with regulation, with the current regime. And if all of that work has been for not, if you're encouraged by what you see coming and what you think reasonably will be the end outcome of all of this sort of conversation. Well, there's a couple of interesting dynamics. Certainly, we felt like we were wandering the desert a little bit when we were going and getting regulated. We started working on our trust in 2012 in the state of New York. We're the first one that was approved in May of 2015.

And what's interesting about that is a thousand page application took us three years. In 2012, there was still only Bitcoin. And so we were already thinking that far ahead. But that was way too far ahead. And the reason it was like wandering the desert is because the early adopter community didn't understand what regulation would be required for something larger. And you certainly won't be rewarded by users and institutions by being highly regulated, the most regulated. It actually just slowed you down and cost a lot of money. And that's really why people don't do it in a small industry or something that's such an early stage. But we were playing for this moment, which was mainstream adoption. And so we were approved in May of 2015. That was still early days. No one knew what a trust was. And we made some great

headlines, but then it quickly faded away and it really wasn't what was top of mind for people. But I think it has now become top of mind precisely because we've hit this mainstream adoption moment, this time when it's plausible to see very quickly this going from not affecting very many people to affecting most people's daily lives. I think it's in daily conversation, but the fact daily lives, that's where the real powerful shift happens. And I think regulators understandably want to make sure that we're not creating unknown risks by doing that. I think there is a broad conversation that's happening. And I think because of what we've done, we are uniquely positioned to be a part of that conversation.

Clearly launching PayPal and Venmo and interactive brokers and now Facebook Novi using some of our products. You can see that we're really crossing over to a big set of users. And we have a lot of other very large companies that are coming into the space. That's what I think regulation enables is that type of shift. You know, you have to make sure you do it right so that you don't lose the benefits of this technology. And you don't lose the benefits of innovating. And I think that's one of the real tricks. How do you build a regulatory stack? And how do you build this product engineer tech stack that can create a lot of benefits for everyone.

Right. You can build all those things, but then there's obviously the fear that regulators don't do the work. They don't get it. They pass some sort of heavy handed legislation or regulation that sends innovation offshore. Obviously, we know that they can't kill it. They can just slow it down in the United States, I would argue. But do you think that we're at a point now where we might see sensible regulation that actually makes sense and we can move on? It's just my feeling that people want clarity even more than they care about what that actual regulation is. I think that there's a couple of components to this. The first is what people really want is clarity. They want consistency and they want certainty. That's what I know we want. So you go get a regulatory approval. You know that it's going to be consistently applied in this way. You have the

clarity of how you can use it. And you know with certainty that this is going to stand up. I don't think that that really exists at the moment. And that is hampering things. We've done, I think, the best of everyone of trying to be both proactive in terms of getting the regulatory approval and being expansive in how many you have. So we have the most and we've done it for the longest. And, you know, that's great. But we're not sure that's enough still. I think it should be, frankly. But that's a debate that's being had. I do think that there's a spectrum. We saw, you know, some of that this week. There's a spectrum of should this be all the way to just being the most regulated financial institutions can operate in certain spheres.

We have lots of different types of regulatory approvals in this country. You know, what does it mean to be well regulated? And I think that there are others maybe who don't want there to be any regulation. And I think there's some area in between. I think that's certainly what we've staked out. But one of the key components that's going to have to come out is legislation. What needs to be talked about, what needs to be understood, where is the right place to be on the regulatory oversight curve. And I don't think that it's clear what that's going to be. I know

that there's a lot of potential bills that are being considered. I know that there's executive orders that can be considered. There's regulatory memorandum that can be put out, interagency guidance. I think there's going to be a lot more that happens, partly because I think that the current administration has really put a lot of focus on being able to address these in different ways. And I think if it's done right, it could be very powerful. I think if it's done poorly, it'll do exactly what you said, which is push people overseas. It could hamper things. It could really drive this industry into a place where innovation can't happen. Right. It feels to me very haphazard and like they're just throwing band-aids on small wounds and not really trying to address the entire problem. But I am confident that they'll eventually get there. You mentioned before, obviously, infrastructure

you're building for PayPal, Venmo, interactive brokers, Facebook, I think were the four that you named. Is that because you were so far ahead of the curve that you're clearly the best option? And could they have even done this a few years ago? I sort of joked in the intro that, you know, we look back on the 2016-17 for institutional adoption, and we just weren't ready. Is this now the time that this infrastructure is finally there and we can see these things happen? Yeah, no, and I definitely remember that 2017 time period. And by the way, I think it was driven by institutional adoption, but maybe not the way we're describing it now. Like it was institutional adoption of like some family offices or fast movie hedge funds or some VC funds.

And so like kind of like the bleeding edge institutions. And I think I agree with you. We all kind of maybe mistook that as there was an entire institutional wave that was coming um and and there was it's just that um you know the waves come in sets and so you had the first wave in like probably a three or five wave set of institutions coming through and so that first one was the really early adopters and you know they kept coming through um and that pushed the price up and there was a lot of digestion that needed to happen. And, of course, a big correction. And then and obviously a huge amount of retail and consumer interest that gets driven. And then I think what you've seen now is kind of broader fintech adoption, like, you know, because behind some of those came, there was Square and SoFi and Revolut and PayPal. I put them all in this category of kind of more mainstream, but still,

you know, fintech disruptor, you know, companies, payment companies that were able to come into the space and have, and that's driven this next set of kind of fast movers. And then I think maybe that the third set of adoption will be the traditional financial institutions who are clearly working on this. But they just they take longer. Their their movement and the reaction function is just not nearly as fast as like VC funds or, you know, kind of, you know, a square. But then you're going to get, you know, some of the big custodians and the big banks and the big brokers that will come in. And that wave hasn't really started yet, but it's coming. And I know it's coming because there are such leads and lags

that they've been looking at this for so long that even if you went into some kind of another crypto winter, it's going to come like, you know, and that would be what takes us out of it. Or maybe it'll come some kind of another crypto winter, it's going to come like, you know, and that would be what takes us out of it. Or maybe it'll come before there's another crypto winter. It just takes us to a whole new place. But it's coming. And I think that's really next year. It's probably, you know, it could be another six to 12 months, maybe more like 12 months before they get fully into involved. And that would be, I think that would really start to complete this institutional adoption and mainstream curve

that will happen when you can go get this anywhere and do anything with it. But we're still away from that. Yeah, I think a lot of people think that these institutions move quickly. I remember there being a lot of excitement they would have, and they don't realize that some of these risk managers will take three or four years, obviously, to even look at an asset and consider it. So if we're talking about endowments and pension funds, I assume is who we're really talking about here,

that huge wave of money, it's going to take some time. But that leads to the question, are we there for the products and ways for them to gain exposure to this asset that we need? A lot of people said it was an ETF, but is a futures ETF enough? Do we need a physical ETF for them to come in? Are they confident buying spot Bitcoin with the custodial solutions that exist? Do you think that we're in a place now where they can come when they're ready? Well, there's a lot there. I think a futures ETF is okay, but there's all kinds of slippages on that. I don't think it's the final product that you need. I really think there should be a Bitcoin spot ETF. There are a lot of ETF products that are basically prima facie a problem. Inverse VIX ETFs, they have multiple times leverage. There's

no way that's better than a spot Bitcoin ETF today. And so I really hope the SEC will look at that because I think there are enormous numbers of products that exist today that are far more dangerous for the average consumer than a Bitcoin ETF. I think that when you look at other spot ETFs that exist or pseudo spot ETFs, there's oil or this thing or that thing. Those markets are not that transparent. They don't have the type of oversight of even the Bitcoin, the major Bitcoin exchanges right now. It's not perfect. There's more that needs to be done. But at the end of the day, the index reference price for the Bitcoin futures is based off of the spot Bitcoin exchanges in any case. So, you know, you just create a derivative that has all kinds of other effects going on in it that doesn't get you the underlying.

But the fact of the matter is, that's just putting a new asset, Bitcoin, through old rails. The whole promise of Bitcoin is that we're using new rails to do new things. And so what it should really be about is how do we take traditional assets and get them on Bitcoin rails, not how do we take Bitcoin and put it through the traditional rails. That just gives you the same level of systemic risk, the same level of counterparty risk, the same batch processing that we're trying to get away from. And it really closes the system down. And I think that's okay

if you want to own something as a speculative asset. But that's not really what the promise of Bitcoin and blockchain is all about. It's that it's an open system allowing anybody to come in and be a part of it. And it doesn't get completely segued into an entirely archaic system. And I think that as promising as a Bitcoin spot ETF is and how much I think it should already exist. What is much more powerful is allowing existing institutions to begin to connect directly into a public blockchain to make it directly available, to allow customers to be able to directly send and receive

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that's the way you really allow innovation to happen is that you make it so that anybody can interact with this, with these assets in the right way. And that will unleash amount of innovation that we haven't seen. We're already seeing it in the financial system, or I should say the crypto ecosystem, what the financial system could look like. Look at what's going on in DeFi. That would never be possible in the traditional system. It doesn't mean that it's being done in the way that will allow it to scale. But the point is that it's proving out new concepts in a way that would never have been possible if they weren't in the crypto system where you can just move very, very quickly.

And so you can begin to imagine this world where $700 trillion of assets in the world are put into blockchain rails and the token rails. And if you can imagine that, they could move not exactly like how the crypto ecosystem is moving with all these different lending and automated market makers and all kinds of other things that are going on, they all need to be refined. But it's going to rhyme with that. You could have never imagined that world if you were just trying to linearly draw the current financial system forward. Impossible. These are nonlinear developments. And I think that's one of the most important points here is these nonlinear developments have to be given the room to be tried and iterated on, innovated in some really important ways to improve, to then be able to grow up and we'll have a system that is far better than the one we have now. You alluded earlier to GameStop being a prime example of the problems with that existing system. And obviously, I think we can all understand the improvements that being on crypto rails

could make there. But I would love for you to talk more about what happened with GameStop and how you can see the infrastructure you're building making, you know, situations like that never exist again in the future? Yeah, I think GameStop is really interesting because of what's not commonly understood about it. And I wrote a blog post on this too, which people can take a look at if they want to dig into it. But, you know, effectively, there's a couple of ways the plumbing work works. And it's the plumbing that caused the problem. And I think it was really unfortunate that the plumbing is causing the problem because the tail is wagging the dog. The whole point is that, you know, you should have a foundation that allows you to have a system that works and we don't.

And so in the case of GameStop, broker-dealers were executing trades for their customers to go buy GameStop and a whole variety of other equities. Most of those are retail trades, not all of them, but a lot of them. And when you're doing a retail trade, most of the time people aren't trading a margin. They have the cash in the account. But the way the system works today is even if you have 100 percent of your cash in your account and you tell your broker to go buy a share of GameStop, they go and buy and it doesn't settle for two days. And from the day when the execution on the exchange happens and two days from now, the broker dealer has to put the capital up. And the broker dealer is putting the capital up for that two day settlement in order to help fund a trade guarantee, because this is true for the entire stock market. You have two day settlement lag from when the trade is executed to when you're going to settle.

There has to be a guarantee because if a broker fails, what happens? So there's a guarantee that's given by this thing called the NSCC and the National Securities Clearing Corp. And that guarantee costs a huge amount of money. It ties up anywhere from 30 to, well, actually 15 to $ billion dollars of capital for the trade guarantee and then on settlement day the broker can get can send a client cash in to settle the actual trade but the broker has to front it for the guarantee and for the settlement day so then the settlement day uses up another 30 to 45 billion dollars of capital now that's liquidity and it's tied up all day long and the clearing corp and has a lean on it so you're in total tying up an enormous amount of society's capital 45 to 75 billion dollars of capital all because you're

settling on t2 if you're settling on t1 and you're doing it in the right way and you know you could run your risk systems all day long which you could do with modern technology this is not confounding technology uh by any means you know we're not going to the moon here this is simply sending messages through um uh you know databases which we've been doing for a long time and doing it in real-time speeds um uh would probably doing it in real time would probably uh stress things certainly if we went through a blockchain it would stress things but you if you went through a blockchain, it would stress things. But you could do it at the end of day of T0.

You would immediately cut out most of that capital and liquidity that's locked. And then you wouldn't have had this problem where brokers are suddenly getting capital calls for far more money than they ever could have reasonably been expected to hold. Suddenly you have a $3 billion capital call in your Robinhood. That's not easy to basically fund out of the blue. No one would basically say, oh, well, this worst case scenario could happen.

Let's hold $3 billion of extra capital. Nobody's doing that. No one's just like, oh, I'm leaving $3 billion around, right? You're basically looking at what your normal business is. And this was an exogenous situation. And you say, that's what I need. And by the way, you're holding the cash anyways of your customer. So where is the risk? The risk is actually the lags. And the way we've

tried to get around the risk of those lags is becoming more and more costly and more paradoxical because by the way, this was a great system 50 years ago, right? It's just not a good system now. And every system, you know, advances to the point where the contradictions outweigh the benefits. And then you got to put a new system in place. And that's what we're saying. This is not like, you know, nefarious.

It's just that it doesn't work anymore. What is a new way to do it? That makes perfect sense. And how does crypto fix it? I mean, I guess that's the next question. How does crypto fix it? I mean, I guess that's the next question. How does it fix it? And if we were to decide to switch all those systems to crypto today, would we be ready?

Are the blockchains ready or do we need more innovation? That's a really important question. So when we talk about switching to crypto, we're really talking about like, can you put all of those, could you put all of the US equities market on a public blockchain? I think the answer is absolutely not. No. Ethereum can't take it, right?

I mean, Ethereum fees are up 2,800% since this summer or something. It's not going to happen there at all. Yeah. No, it'd take you weeks to process one day's of trades at 17 transactions per second or whatever it is. But that's not, I think, where you'd want to go now. And by the way, there are other blockchains aside from Ethereum you could put it on and, you know, maybe Solana or some other chain could handle that amount of volume. But I don't think that's what you would do. And that's not even what we're doing. We're saying let's put this on a private blockchain, a private Ethereum blockchain. And the reason you have to do that is, one, because there's the regulatory frameworks for what could create the level of confidence

for infrastructure required to be private right now. And secondly, the throughput capacity things that you need are impossible on a public chain. It doesn't mean that it won't get there, but it could take a long time. It could be in long meaning. It could take five years. It could take 10 years. I think the regulators will get there. And I think the technology will get there, but it could take a long time. You know, it could be in long meaning. It could take five years or could take 10 years. I think the regulators will get there and I think the technology will get there where you could trust it.

But you couldn't put something like like 120 million settlements goes to the U.S. equities market per day. You put 120 million settlements moving, you know, hundreds of billions of dollars through this system, I think that would probably be a little nutty to do right now because it's just not ready for that. It hasn't been able to handle that type of capacity, but it will. It'll get there. These are engineering problems. They're not impossibilities, but it wouldn't work now. But I do think that if you tokenize the equities, you put them on a public blockchain or you put them on, let's say, on a private blockchain. In the case of what we're doing, you get serious benefits. You can create a much more transparency into where the assets are at all times from all the participants.

You can be able to query this golden record. You can make sure that the asset and the payment are moving simultaneously. You could even enable something like 24-7 trading of U.S. equities as a result of this. You can certainly have the real-time risk management. You have lower operational costs. You start to create a whole new way to be able to lend and borrow, new ways of creating ETFs. You can just enable so much by upgrading this basic layer of where the assets sit from COBOL mainframes. You know, 54 million lines of COBOL code in seven different systems at the DTC for all the different things they run. You know, and that's, you know, that was great technology at one point. It's just not allowing the world to operate in the way that we could with modern systems. And it's not just around stock settlements, around all assets migrating and changing this entire process. I think having assets on a public blockchain that are not as high throughput, not as much value moving first. And that's why, for instance, we have created a gold token or we have a dollar token and you can start to use it and you can even put them on different chains and you can allow this experimentation to continue to happen. You should migrate equities and bonds, but you've got to figure out when you migrated into a public chain.

Yeah, that makes sense. Is there a happy medium? Because obviously we're not there yet, but we know that the existing system doesn't work. I mean, is there a way that we can transition slowly to that without completely breaking the system on either side? Well, that's actually, I think, the hallmark of what we've done at Paxos. So what we have spent all this time doing is getting this regulatory approval so that we are hooked

into the old infrastructure. So we're a full member of Swift. I think the only crypto and blockchain firm. We have a full DTC participant account. That's where all the stocks and bonds sit today. The only crypto and blockchain firm. We're a member of the Fed National Settlement System, which is the industrial strength Fedwire. The only crypto and blockchain firm. The point for those different approvals and connectivities is that we can be backwards compatible. So you can put equities on a private version of Ethereum or a private version of any one of these chains, and you can yet be backward compatible with the old system. We have an account in both. We can move the assets back and forth. We can create settlement. You can start to migrate the system and it'll migrate. I think it'll actually end up migrating pretty

quickly because the benefits are so significant. But yet you've done it in a way where you're fully compatible with the way it's working now. And that's the same thing with, for instance, moving dollars on a blockchain. You put dollars on a blockchain, but you need to be able to get them back into the old system because that old system has a huge amount of functionality. In fact, a huge amount of greater functionality still. You want to go buy most things. You can't do it using a tokenized dollar. So how can you make sure you can get back into the old world as fast as possible? And that's, I think, one of the things that is so important around trying to create big societal level outcomes is you can just go create a whole brand new system, but it's hard for that brand new system

to get enough heft to overcome the embedded network effects of the old system when so much is based on it. And when the regulators will start trying to box the new system in, and for potentially good reasons in some instances. So you're boxing in the new one, you have the old one, how can you bridge it? And that's what we've done. That's what is so important is we believe in this new system. It's got to have regulation, connect into it, and then allow this migration to happen. And by the way, there are some things that just are going to run way ahead of the migration curve. That's great. Let's be a part of that too. I mean, I think we all agree that decentralization in theory is superior. The problem I always see here is that obviously decentralization, what we're talking about eliminates the third parties, obviously the toll collectors. That's good for us, but those people are not going to go quietly into the night, right? I mean, we're talking about the biggest institutions and the wealthiest people in the world who have everything to lose by the superior systems we're talking about being put into place, right? I mean, if we eliminate the payment companies that exist right

now, if we eliminate the settlement houses, a lot of people that don't want that to happen. I think there's a lot of truth in that. I do think that the counterpoint to also weigh is that I think there'll be intermediaries in the new system. So I don't think that we'll end up in a decentralized utopia as much as I might think that's interesting for a number of reasons. So if you look at Bitcoin, I don't know the exact numbers, but I think maybe five years ago it was five or 10% of Bitcoin was held at custodial wall. It's now it's like 50 or 60%. So Bitcoin is decentralized, but yet you want to use a third party that you can trust because there's division of labor and the internet is an example of this is decentralized, but there are really clearly a number of places that everyone goes

in order to access that decentralized environment. And they become centralized places. It's Google or Facebook or whomever it might be. And so, you know, there's always going to be this push and pull between decentralization and centralization because you, but what you're going to have is a whole new system. So right now the current system is fully centralized all the way through. It's an account-based system, you know, the, from the base layer zero to the intermediaries and to the networks that connect all those intermediaries, they're all centralized, they're gated,

they're restricted. And so I think what we're really talking about is how do you get to a decentralized system where if you get to a decentralized system where if you want to use an intermediary, you can, but you don't have to. And I think that's the exciting place to be. And so, you know, some of those intermediaries in the current system could very well make the shift. There's no reason they can't. When I go talk to a lot of these large institutions, I say, hey, you know, your customers want to be able to move their assets in a different way. You have infrastructure that's creating a certain product set. Your customers want a different product set. They either want to have access

to crypto, that's a new asset, or they want to have access to their current products in a new way. They want to be able to move faster. They want their money to go instantaneously. You've got to come over to this new system because that's what's going to make it happen. And so, you know, that's where, that's this whole third wave of institutional adoption that's happening is these institutions are realizing, you know what, why are we holding on to this old infrastructure? It's not giving our customers what they want. They're going to go somewhere else. How do we move over to it? And so there'll still be institutions. You won't need as many intermediaries but i i'm not sure i can see a world where you don't have any intermediaries even though that would be great because that'd be like a world where everyone creates their own email servers or their own email apps you know i mean like that's just yeah how do you you know you see what i mean like i think

that's the interesting issue the theme of the day clearly is happy happy medium right but i'm imagining you go into those meetings and you basically say, do you want to be Blockbuster? Do you want to be Netflix, right? There's no lack of history now for old systems failing to innovate and then going out of business, especially in the last 10 or 20 years, right? I mean, you take the 10 largest probably companies in the world is a completely different list

than it was 20 years ago, right? I mean, they go out of business when they fail to innovate. I'll tell you what, it's very fascinating because it is very obvious now because how much innovation has happened over the last 30 years, partly because the internet, but just in general, how much innovation has happened over the last 30 years, how commoditized information has become so that it really becomes around being able to intelligently use it. That's dramatically changed so many industries from entertainment to media, et cetera. Clearly other areas. But what happens is you have institutions that get built to solve problems in a certain way. And as they become larger, you you actually, you know, solidify and crystallize how you're solving problems. And so I think it's the actual institutional structure itself that ends up being the problem, because as you have a new way of solving the problem, that whole structure was not built to solve it in a new way. And so that's actually

the hardest part is you just, you just can't figure it out. It's not so much that people don't want to do it. They just, the structure itself is incapable. And I think, you know, companies inevitably, you know, have shelf lives. They used to be hundreds of years and now they can be much shorter because you have to start solving So if you don't know how to like build problem solving and shifting, and I'm not even sure how you can do this at huge scale. I'm going to give you a couple of right. You're going to face this problem constantly. And that's the creative destruction.

That's the Shumterian growth that is very powerful, but it's also very disruptive. Yeah. It's kind of a meme at this point to say too big to fail, but maybe we need to come up with too big to succeed, right? They really, at scale, it just can't change. It's a dinosaur. It's out of control, moving at a pace that can't be stopped. It really is such an interesting concept. But there are companies that are trying to innovate, right? Obviously, we've seen Facebook's rebrand to meta and commitment to the metaverse. But the

bigger Facebook news right before that was the Novi wallet and the fact that they chose your stablecoin, USDP, for that Novi wallet, because obviously we saw the history and evolution from Libra to DM to, OK, maybe we'll start with an established stablecoin in our Novi wallet, right? Or at least that's how it feels optically from the outside. Can you talk a bit about why Facebook's doing that, how that partnership came together for the two of you and why they're using your stable coin? Well, I think it's really exciting to have a really a mainstream use case for stable coins. And I'll define that in a second. What we saw a year ago was PayPal came into the crypto space. And that was, I think, a very big watershed moment, top five global financial institution by market cap, offering crypto to their customers. They used

to have only done payments. They made a shift here and have enabled crypto. And they put out a really long press release and have talked extensively about a broad strategy they have. I think that's really exciting and interesting. It shows how things are generally evolving towards wallet based systems where any assets are available and can be moved. And you might not even know they're blockchain based assets and probably won't and maybe even shouldn't because it's just about solving problems for people i want to be able to send my money to anybody else anywhere in the world how can i do that instantaneously well it turns out you can and you use a blockchain dollar but you don't need to know that it's on a blockchain it's just the dollar moves um and so

in the case of um uh facebook novi here they've been working for quite some time, as everyone knows, to be able to enable the movement of dollars and be able to do it using blockchain. And I think we spent quite a bit of time with them and what they really went out and looked at the market in general and said, you know, we want to make sure that we're using something that's well regulated, where the reserves are very stable, where the regulatory regime is very clear. And that was uniquely Paxos. You know, and so there are other ways to hold reserves, we only hold them in cash and cash equivalents, meaning T-bills and basically over-collateralizations of overnight repo.

So that is just dollars. And it's safer than dollars in your bank account because you're not taking even bank account risk, bank risk. And so that's highly secure. And that reserves are very understandable. We have a primary regulator that just oversees Paxos and our token. So you can have money transmission licenses that allow you to operate. That's a totally fine way to do things.

But you don't have a primary regulator. You don't have someone saying, how are you operating across the entire product set in every single state? And we will come in and examine you for that product. Someone's licensing you by a state by state basis. You can do it in a state or you can't. And then, of course, you can also not have any regulation at all. No regulator versus Tether has no regulator. And you're the largest coin in the outbreak outside the United States. But I think the issue you had is that mechanism is only going to work in crypto. It's not going to be able to get into this real world uses of how can you enable dollars to move for the unbanked and the underbanked?

26 percent of adults in the United States, believe it or not, it's shocking, are either unbanked or underbanked. I mean, they don't have the financial relationship they want. It's probably more than 50% of adults outside of the US, but it's at least 26%. So that's billions of people outside of the US don't have that either. And what do they want? They want dollars. They want to have access to dollars. You can't get dollar bank accounts. You can go anywhere in the world. What does someone want to have? They're like, I want to have a dollar bank account. Well, it turns out you can now. You have a dollar that has been tokenized. But those people might not understand Tether's got all kinds of things that

are backing it. And someday there could be a credit crisis or a liquidity crunch, and they could have problems with the reserves. That's just the reality of if you don't hold it only in the shortest term duration US government paper, you start taking other risk on and they earn the benefit of that, by the way, which is more interest, but you're taking on risk. I don't know if all of their users understand that. I suspect they probably don't. Most people don't. That's where regulation comes in. Things are opaque. How do you help? And so in the case of Novi, they're opening up a real world use case. This is a big deal. No one has done this using stable coins, Guatemala to the US, it's just a pilot, it's small, but it's starting. And it's proving

that you can use this for helping real people who want to have access to the financial system that don't. That's exciting. That is just a start, but it would be kind of like PayPal a year ago where people realize, you know what, we can really do something with this technology that we couldn't have done before. And this is clear. Before we get done, I know we only have a few minutes left, but we know where we are clearly and all this infrastructure is now in place, but what are we still lacking to have that perfect crypto utopia? Obviously, I'm not talking about full decentralization, but where effectively everyone who wants to can interact with this safely from mainstream, from the poorest person in the third world country, all the way up to the biggest institution. Are there still things

that need to be built that you're looking to build over the next few years? I mean, I think there's an enormous amount that needs to be built. In fact, I would say we're still at very, very early stages. Crypto feels a little bit mature. We have $2 trillion of market cap, but it also depends on what do you want that end state to look like? I think our vision is that you will have a system that's been replatformed where all of the world's assets sit on a blockchain. If you use that definition, you know, we're, you know, who knows, 10 or 20 or 30 years away, I don't know how far away we are. And we'd be in the first out of the first inning. At best, you know, you basically have $130 billion that's been put onto a blockchain, which are dollars, and almost no other traditional assets.

So you haven't even really started this replatforming at all. And crypto itself is still very nascent. It's still not widely used. It's still not widely accessible. And so as you begin to migrate dollars, as you begin to migrate traditional assets, that'll actually make crypto have even more value and more use. You can start to get into traditional payments with it. That crypto, it can't be used for now, but you're seeing a little bit of it with Visa and MasterCard and others. So you still have so much to go where you could use crypto for anything

that you wanted. If you want to use as a payment mechanism, you could. I don't know if that'll happen or not, but how can you use traditional payment mechanisms using tokenization and crypto technology? How can you get traditional assets on blockchains? We are so early and you need infrastructure where you get either the traditional system to migrate over or you need firms like Paxos who will build the new infrastructure that will make that migration happen. And you need firms that will get very simple for consumers and businesses to be able to use it. PayPal, Facebook, No know, in some ways consumed in the tokenization process. So you won't be retiring anytime soon? Not if the goal is to succeed in re-platforming the financial system. Definitely not. We're counting on you. You're the guy, obviously. You guys are the ones who have been ahead of the curve.

So we're counting on you. Where can everybody follow you and keep up with what you're doing after this conversation? Well, our website is bythebestplacepaxos.com. We've talked about a bunch of things. We've written about some of these things in the blog, GameStop, different parts of trying to understand money

and understand Bitcoin and energy, trying to make sure that we can be there supporting the industry from a thought leadership perspective, but also from an infrastructure perspective. Next time we do this, I want to talk energy because I know that's one of both your and my favorite topics, but we just ran out of time this time. So I love it. I think it's very important. I do too.

So thank you so much for taking the time. I think you gave a lot of perspective and then most people don't really understand the plumbing or what's happening behind the scenes and how important and essential it is. So thank you for building all this and for taking the time to explain it to everyone. Well, it's great to be on. Thanks for saying that. Bye.