175 - 400M PayPal Users to Crypto with Jose Fernandez da Ponte

Can we go Bankless using PayPal? We brought on Jose Fernandez da Ponte, the Senior Vice President of Blockchain, Crypto, and Digital Currencies at PayPal and Venmo to help us answer that question. Jose is responsible for driving PayPal’s efforts to bring the utility of crypto-assets and crypto-networks to their hundreds of millions of global consumers. He also knows a thing or two about how the banking system works and how to fix it. And we also got the SVP of PayPal to say, “DeFi Mullet,” not once, but three times. *PayPal currently offers crypto services only in the U. S., U. K., and Luxembourg. Venmo is available in the US only. ------ ✨ DEBRIEF | Unpacking the episode: https://www.bankless.com/debrief-jose-paypal ------ 🚀 Unlock $1,000+ in Perks with Bankless Citizenship 🚀 https://bankless.cc/GetThePerks ------ In today’s episode, we cover: 1) What PayPal sees in crypto 2) What PayPal’s 400M accounts can do with crypto today 3) How we get to $1T in stablecoins 4) What’s the role of CDBCs in a world of highly successful stablecoins? Can CDBCs and crypto co-exist? 5) Jose’s contrarian view on crypto regulatory environment in the U. S. and why he sees it as a “glass half full” ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask 👾STADER LABS | ETHX LIQUID STAKING https://bankless.cc/Stader ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku 🎮IMMUTABLE | GAMING ECOSYSTEM https://bankless.cc/Immutable 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle ------ TIMESTAMPS: 0:00 Intro 7:55 What a PayPal Dollar Is 11:21 PayPal & Venmo Crypto 16:29 The Crypto Strategy 22:59 DeFi Mullet 27:33 Service Providers 31:24 Is Crypto Useless? 32:30 PayPal’s Crypto Back-End 34:40 How Hard Was PayPal’s Crypto Integration? 36:35 Path to $1T In Stablecoins 40:31 Payments 44:36 Gaming 46:46 Network Integration 49:47 DeFi on PayPal’s Radar? 56:38 What’s Broken About U. S. Banking? 1:01:51 Settlement in the U. S. 1:06:32 Best Digital Cash Society 1:13:10 Stablecoins in the U. S. 1:16:25 Crypto Regulation 1:20:44 Making Crypto More Useable 1:23:30 Closing & Disclaimers ------ RESOURCES: Jose Fernandez da Ponte https://www.linkedin.com/in/jose-fernandez-da-ponte-a46ba81/ Payments and Evolution of Stablecoins Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4425922 ------ Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams, and I'm here with David Hoffman, and we're here to help you become more bankless. Guys, we've had a thesis on Bankless for quite a while, on how we get to 1 billion crypto users worldwide. We call it the DeFi mullet thesis. That's right, DeFi mullet. That's fintech in the front, DeFi in the back. Basically, the idea is fintech will help onboard the world to crypto. And there is no bigger fintech company than PayPal. Our guest today is Jose Fernandez DePonte. He's from PayPal. He's a senior executive. He leads

• 0:43Ryan Sean Adams?

  all of their crypto and blockchain initiatives, and he wants to tell us what the 400 million PayPal accounts can do with crypto right now. We talk about that. We talk about the future of CDBCs, stablecoins, and the regulatory headwinds crypto is facing right now. A few takeaways for you. Number one, what does PayPal see in crypto? Why are they developing on it? Number two, we talk about what PayPal's 400 million accounts can do with crypto today. Is this the front door to a bankless money system? Number three, we talk about how to get to $1 trillion worth of stablecoins. We've got a ways to go, but Jose has a plan. Number four, we talk about the role of CDBCs in a world of highly successful stablecoins. Can CDBCs

• 1:25Ryan Sean Adams?

  and crypto coexist? Number five, we talk about Jose's contrarian views on crypto regulation, the environment that we're in the US, and why he sees this environment actually as a glass half-full. It's not all bad news. And David, maybe my favorite part of this episode is, we just got the senior vice president of PayPal to say the words "DeFi mullet", I think twice in this episode, so I enjoyed that as well. What's the significance of this one?

• 1:50David Hoffman?

  It was really refreshing to hear Jose say that PayPal is here in crypto based on its merits. And I mean, it makes sense. PayPal is a for-profit company that has shareholders that needs to do right by its shareholders. It's not going to adopt crypto for some ideological reason. God, who would be so crazy to do that? PayPal is going to adopt crypto because it provides a certain set of unique services and product offerings to what PayPal wants. And that's why PayPal is here in crypto. And they're also, I'm sure, paying attention to CBDCs as part of this conversation or this podcast. Though I'm sure they're also paying attention to FedNow and other payment and money innovations.

• 2:30David Hoffman?

  Yet, they are paying attention to crypto and perhaps, perhaps according to Jose, you'll have to find out by listening to the episode, paying attention to crypto the most because crypto is the best and furthest along in all of these things. That's just my bias. But hearing that PayPal is here for their own benefit and crypto is here to service them is a nice perspective to bring. The other thing that we didn't talk about this and I want to talk about in the debrief, Ryan, is that on that same vein, in that same vein, PayPal is adopting crypto's payment rails to facilitate payments. But it's also letting you touch Bitcoin and Ether, other monies in of its same merits. So what does that mean when PayPal lets you touch Bitcoin and Ether?

• 3:14David Hoffman?

  Because maybe that's just what people want. And so I think there's another conversation of just like, not only is PayPal a fintech for payments, but now it is also allowing for the expression of who wants to choose what money they want to express their moneyness desires in. Little did they know PayPal is allowing people to choose Bitcoin and Ether, even though they are a payments company. I thought that was pretty interesting.

• 3:37Ryan Sean Adams?

  I express all of my moneyness desires in crypto. Let me tell you that. And I can't wait to talk to you more about that.

• 3:43David Hoffman?

  Tell me about your moneyness desires, bro.

• 3:46Ryan Sean Adams?

  I'm sure we're going to be saying the words DeFi mullet more than a few times in that debrief as well. Of course, the debrief is the episode that David and I are going to record right now, right after the episode that gives you the highlights and our thoughts on what we just heard. So stay tuned for that. If you are a Bankless citizen, you have access to the Bankless premium feed. If you're not a citizen, just upgrade. Click the link in the show notes. Do it. Add the premium RSS feed. You can get access to that right now. Okay, we're going to get right to the episode with Jose. But before we do, we want to thank the sponsors that made this possible, including our number one recommended exchange. That's Bankless Nation. I'm super excited to introduce you to Jose Fernandez DePonte. He is the Senior

• 4:26Ryan Sean Adams?

  Vice President of Blockchain, Crypto, and Digital Currencies at PayPal. PayPal plus Venmo, of course, one and the same. He drives the company's efforts to bring the utility of crypto assets and crypto networks to millions of global customers. Certainly have seen PayPal doing a lot in the space. He also knows a thing or two about how the banking system works, how it's broken, and maybe has some insights in terms of how to fix it. Jose, welcome to Bankless.

• 4:53Speaker 02

  Great to be here. Nice to be with you, Ryan and David.

• 4:57Ryan Sean Adams?

  It's great to be with you. We've wanted to have this conversation with somebody from PayPal and yourself for quite some time. So I'm glad we could arrange this. I figured we could maybe break this into two parts for Bankless listeners. And part one is just try to figure out what PayPal is doing with crypto right now. And then part two, maybe you could give some wider insights, the 30,000-foot view in terms of what is actually broken about global banking. Maybe we could talk stable coins, CDBCs, and crypto's role in all of this. Does that sound okay?

• 5:30Speaker 02

  Absolutely. Let's do that.

• 5:31Ryan Sean Adams?

  You know, first though, Jose, I have a 101 level question, all right? And this is my own kind of kindergarten level curiosity. Can you tell me what a dollar is in PayPal? So being in crypto for as long as I have, I feel like I have a pretty good understanding of what a USDC, what a stablecoin actually is, and what its back

• 5:56Ryan Sean Adams?

  Because we've had to study that in crypto, right? We've had stablecoin failings. We've learned about under collateralized stablecoins and algorithmic stablecoins. We see sort of USDC and its balance sheet. We kind of know maybe a little bit what's backing Tether. What about a dollar in PayPal? What is that backed by?

• 6:20Speaker 02

  Yeah, absolutely. Happy to do that. And it's funny because sometimes we internally in the team, we like to joke that if we were starting PayPal all over again now, maybe we'll call the PayPal balance unstable coin in a permission environment. Right? Because it's pretty much what it is. It is electronic money for the, we'll talk about this when we discuss international. But is Europe has this concept of electronic money that I think that is really helpful for what we are trying to discuss. So when you have a dollar in your PayPal balance, that is backed by funds that are held in bank accounts for the benefit of that user. So we'll talk about banking later, but there is no rehypothecation of assets. There's nothing like that.

• 7:04Speaker 02

  The money sits on the bank is there when a user wants to redeem a dollar in PayPal balance and take it out to their bank account again.

• 7:12Ryan Sean Adams?

  So Jose, every dollar in PayPal is backed one to one with a dollar somewhere in a bank account. Some, is that correct? And like what banks does PayPal use? Because that's coming to play too. And we've talked about USDC. Do you use some of the larger banks all over the world?

• 7:28Speaker 02

  There is a number of banks as a company. We operate in 200 markets. So the treasury and the banking relationships that we have is international. And I don't think that we have, and I couldn't tell you off the top of my mind, the names of the banks. Our treasury team deals with that. But we are active globally. And again, I think that we are one of the few finance institutions that I know that is active in 200 markets.

• 7:50Ryan Sean Adams?

  So is the business model of PayPal just pretty similar for all the crypto people? More or less the same thing as USDC where you have funds, dollars in a bank, many banks across the world, across the financial system. And then you have representations of those dollars as ledgers that are presented on, you know, mobile or a web browser. Is that kind of the very quick summary of it?

• 8:14Speaker 02

  I would say more than that PayPal, what is at its heart is a payments company, right? So the origin of PayPal came from peer-to-peer money movement, but then eventually became a way in which you wanted to do a transaction in an e-commerce environment. And remember the good old days of early internet and the New Yorker cartoon that nobody knows you're a dog in internet. So it was definitely a trust problem and people wanted to buy online from other parties, but they didn't want to provide their credit cards and they didn't want to need to deliver more information than they wanted. So in essence PayPal grew to ensure the trust and the confidence when you were doing an e-commerce transaction.

• 8:56Ryan Sean Adams?

  So let's get to crypto now, Jose, because I know PayPal is doing a lot with crypto now, and it sounds like you are one of the key leaders of that charge. Let's start with just this basic question. I'm sure a lot of bankless listeners have an app called Venmo or have an account with PayPal. If I log into my Venmo app right now, what can I do with crypto?

• 9:18Speaker 02

  So what you can do is the story that we have been crypto PayPal has been in crypto probably for the best part of the last four years. I myself have been in crypto probably since 2015, back in my banking days. And the way when we started, the first thing that you could do with PayPal and with Venmo, initially with PayPal only, and then it extended to Venmo, was to buy, hold and sell a few tokens. So you could get into PayPal or you could get into Venmo way back in 2021 and 2020, and you could buy a few tokens. You could buy Bitcoin and ETH and Litecoin and Bitcoin Cash. And you can still do that to this day. It was a custodial experience and it was an experience in which the user

• 10:00Speaker 02

  would only buy from PayPal and sell back to PayPal. So you couldn't, you could not do on-chain transfers. And the reason we started there is because we thought that we helped the ecosystem in three places. And one of the places where we helped is access. So there was a lot of users who were intrigued about crypto, but they didn't want to get into detail of what SHA256, cryptographies and horrible wallets and this and that. And they didn't want, quite frankly, to give their banking details to some exchange out there that they didn't know and they were not familiar with. But they liked the PayPal brand and they trusted the PayPal brand. So the first thing that we said is, okay, let's provide. A gateway experience, a custodial experience for folks who are curious about crypto,

• 10:44Speaker 02

  but not very sophisticated and want to have their first experience. That's why we started there and by and large that has been very successful. Even today, many of the folks could do transactions with us. We are their first crypto experience. And again, I think that there's part, remember that we have more than 400 million accounts worldwide. So as part of driving mainstream adoption into crypto, I think that ourselves and other platforms are an important gateway for people to engage. Then we started, we moved from PayPal to Venmo, we opened the UK as our first international market. Maybe the most important relevant milestone after that was last year when we enabled on-chain transfers. Because that was the first time that from a PayPal wallet, you were able to connect with an external crypto wallet.

• 11:28Speaker 02

  And that triggered a bunch of things. So if you think in terms of network theory, so you have now 400 million accounts on the PayPal and Venmo ecosystem. You have, you know, will know better than I do, but to say more than 100 million crypto wallets out there, which were separate. There was no connectivity between those PayPal wallets and those crypto wallets. When we enabled on-chain transfers last year, basically you were building a bridge between the 400 and the 100. And that means a number of things. First, if you believe in network theory, the value of a network grows with the square of the number of nodes. So adding, going from 100 to 400 million connected networks adds value to the ecosystem.

• 12:10Speaker 02

  The second thing that it means is anyone with a PayPal wallet is at most two degrees of separation to anyone with an external crypto wallet. And we think that is something that is extremely, extremely relevant. And that led to a bunch of different things. One of them is first use case, casual users who wanted to double into crypto for the first time. When we opened on-chain transfers that we launched on PayPal last year and we just announced that we have just opened that on Venmo, then all of a sudden, we have that role as an on-ramp, as an off-ramp to crypto. So we see more and more people who come to PayPal and say, "Yeah, I want to buy ETH, not because I want to bet on the price of ETH or keep it in custody at PayPal, I want

• 12:54Speaker 02

  to buy, I want to buy ETH because I want to send it to MetaMask, or I want to go and buy NFTs, or I want to go and do DeFi." And the experience, as you know very well, the experience for fiat to crypto on-ramps... It's pretty clunky, and it's expensive, and there are a bunch of steps that you need to take. So now we have a population of people who are dabbling with crypto and getting used to it, which is fantastic, and then a population of fairly sophisticated users that what we're demanding from us is, A, we want easy, cheap, fast on-ramps between fiat and crypto. And that led to the next thing that we are doing now, which is integrating PayPal in the properties where crypto users go.

• 13:36Speaker 02

  We launched our first integration with MetaMask a few months ago, which has been very successful as well. And there are all sorts of things that now the market is demanding from us, from more on-ramps to off-ramps to different ways to connect the fiat and the Web3 world. The way that we see our role is in building that conduit. We don't play at the protocol level. We don't think it's our role to be driving the protocols. We do believe that we play on the application layer and on the user experience layer.

• 14:04David Hoffman?

  So when PayPal looks towards the world of blockchain, obviously, money and payments are very, very close to what PayPal does. How would you summarize what PayPal sees as its position in this space? We have hooks into MetaMask, we're making stable coins and crypto transfers easier. But how would you summarize in totality what the actual PayPal strategy is for hooking into these blockchains?

• 14:30Speaker 02

  Yeah, so the reason that we are in the digital currency space is because we believe that a relevant part of payments and commerce will move to digital currencies, and that is digital currencies with large, so cryptocurrencies, fiat-backed stable coins, even CBDCs. And if you are a payments company at heart, you cannot just sit that one out. I think that is the first time, I've been in payments for the best part of the last 20 years, and this is the first time that I've seen technology that can radically transform payment rates. For all the innovation that has happened in fintech over the last, yes, 20 years, most of it is just better user experience on the same traditional financial rates.

• 15:13Speaker 02

  And this is the first time that I've seen something that can actually revamp and rebuild those payment rates. If you look at what I'm the most interested in is programmable, fast, low-cost payments. And if you look at some of the information that... That others have published, the colleagues at Circle published some information on the transaction cost. And I think that we're saying depending on the protocol, they were looking at a transaction cost of one cent per transaction. When we have been kicking the tires of some of the latest protocols, we have been doing transactions with a cost of 100 of a cent per transaction. And if you think that the cost of payments in general is about 200 basis points, if you are

• 15:56Speaker 02

  able to run transactions at one cent per transaction, or one tenth of a cent per transaction, then there's a bunch of stuff that you could not do in payments before that you can't do now. You can do micro payments, you can do streaming payments, you can open a channel between the three of us and charge a flat fee and just move value back and forth. You can do business models that were not possible with the old traditional financial rates. And that's the reason that we were so intrigued by it.

• 16:24Ryan Sean Adams?

  There's something, I think, kind of interesting and also refreshing about that posture, which I feel like is PayPal, and maybe we could generalize this to other fintechs, are just looking to the market for solutions. There's sort of a neutrality about this, where you guys are saying, we just want programmable, fast, low-cost payments. We don't care whether that comes from a CDBC, or that comes from the traditional banking system, or that comes from stablecoins, or that comes from crypto. We will adopt the technology that gets us the best programmable, fastest, lowest-cost payment technology, period, and we'll try anything. I think that is the

• 17:07Ryan Sean Adams?

  posture that you guys are taking. Is that accurate, Jose?

• 17:11Speaker 02

  That is accurate. We're coming at this with a very non, I would say, non-ideologic position. So we're in it for the payments aspect, and we think that is what is driving us. I also think there is a little bit of that fallacy of the use case. I'm sure that you and many of your guests in the show face that question every day that I face, which is people asking, but why do you need a blockchain to do this? And why do you need a stablecoin if you have credit cards? And why do you need... Well, I think that is the wrong question to ask, both on the commercial side and on the regulatory side, because it's a little bit of totals all the way down, right? Where do you stop? And say, why do you need planes if you have horses?

• 17:54Speaker 02

  And why do you need wheels if you have feet? So at some point in time, The question should not be about why. The burden of the proof is not on the new technology to prove why. It's on the other side to say, hey, why not? In which cases you cannot apply this technology because there are risks associated to it. But the use cases keep popping up. And I'm sure that if I were in the gaming business, I would bring you a bunch of use cases around gaming on the payment side. And I don't think, quite frankly, that you will see the early adoption of digital currencies for payments on mainstream e-commerce payments. I don't think that the next thing that's going to happen is that folks are going to go to

• 18:36Speaker 02

  a large traditional e-commerce website and start paying with crypto assets. We have enabled crypto checkout as a funding instrument in PayPal for the last three years. And what that means is if you have a Bitcoin or ETH balance with us and you go to a website and you click the PayPal blue button because you want to buy anything, you will be shown your payment instruments, your debit card, your bank account, whatever you have with us. And if you have a crypto balance, you will see your crypto balance. And you can click there and pay with your crypto balance. And what we do in the background is we sell the crypto, we get the fiat, and we give the merchant the fiat. It's a flow that exists, not a ton of people use it. I don't think that mainstream users are thinking of their crypto holdings as a way to pay.

• 19:21Speaker 02

  But what I do think that we will see adoption quickly is first what it is today. I think that there is proof of existence, right? There is 120 billion or so of stablecoins already out there that mostly get used on the crypto trading ecosystem. I do believe that we will see adoption in a bunch of verticals that are really, really ripe for that. Gaming is one that we follow very closely because it has some characteristics that make it really interesting for a digitally native currency.

• 19:51Speaker 02

  There are pockets of cross-border e-commerce, meaning I am in Peru and I want to buy from a merchant in the US, but I don't have an internationally-enabled credit card. You see, some of the crypto payment service providers are mostly looking at those use cases. And I do think that you will see that on B2B payments at scale relatively quickly. Because if you are a company that has to play as supplier in Indonesia and you have an instrument that is 24/7, dollar-denominated, instant settlement outside of banking hours, it's a very rational decision to go and use that. To your point, Ryan, when you were saying it's less about the ideology and more about the hard utility of something that is a better tool in the toolbox.

• 20:34Ryan Sean Adams?

  I like that. And I also want to emphasize the opportunity here for folks that just missed this. And I'm speaking on behalf of crypto natives who are very excited maybe about the future adoption of crypto and what we would call in bankless bankless technologies, Jose, which is what you just said is, did I get this right, Jose? You guys between PayPal and Venmo have over 400 million users. Is that correct?

• 21:00Speaker 02

  I have 400 million accounts. I have several accounts myself.

• 21:03Ryan Sean Adams?

  Sure, sure. Okay, so 400 million accounts. And now there is the ability across both PayPal and Venmo and those 400 million accounts, there has been the ability to buy, hold, and sell crypto assets like Ether or Bitcoin. Now there is the ability over the last year or so to transfer those assets from PayPal or from Venmo to a non-custodial crypto wallet, what we would call in bankless, a bankless wallet. So guess what, guys? What we just created is a backdoor, okay? What we just created here is an onboarding mechanism from the fintech systems like PayPal directly to a self-sovereign crypto wallet.

• 21:48Ryan Sean Adams?

  And we got the network effect that PayPal already has in place. I mean, that is incredible when it comes to adoption potential. Now, of course, crypto has the task to make its non-custodial wallets a whole A lot easier and for people to want to do that. And I think that's the task ahead of us. But what we've called this Jose internally, a bankless for a while. We've been kind of predicting this for the past, you know, two or three years or so. We've called it the DeFi mullet. Okay. Which is basically the idea that, you know, fintech, it's fintech in the front and DeFi in the back. Like the party's in the back, crypto in the back. And we've kind of predicted that fintech would take this path.

• 22:29Ryan Sean Adams?

  Because they are neutral in the sense that they are just looking for the best payments technology out there. So they'll use the banking system they can. They'll use a CDBC if they can, or they'll use crypto rails if they can, and if it's better. And that seems to be the case. And I just want to emphasize for bankless listeners. This hasn't fully been activated because we don't have 400 million users with crypto wallets yet. But there's that potential. Okay, now we have the the gate open, if you will. And to me, that is absolutely incredible. So that was more a comment rather than a question, Jose. I don't know if you'd have anything to add to that, though. Gets me excited.

• 23:05Speaker 02

  Yeah, and I wouldn't call it a backdoor. I think it's a front door. I think that the crypto ecosystem needs onboarding and offboarding connectivity. I don't think that fiat is going away. We just need to make sure that you can build, that you can get in and out quickly. One example, you were talking about the DeFi mullet. Well, I'll give you one interesting case. Now we have crypto assets that you can hold on PayPal wallets, crypto assets that you can hold on Venmo wallets. And you have on chain transfers. One of the things that that enables is PayPal acquired Venmo, I think it's probably eight years ago. So PayPal and Venmo have been sister wallets for the last eight years. And for those eight years, you could not move value between a PayPal wallet and a Venmo wallet.

• 23:49Speaker 02

  They were not connected, they existed in their own worlds. Today.

• 23:55Speaker 02

  You can send value from a Venmo wallet to a PayPal wallet using crypto rails, which is something that is, is one of those when I go back to, why do you need a blockchain to do that? You don't. There are at least five other ways in which you can do that. But the fact is, it wasn't available and it's available today. So that idea that the first transfer of value in interoperable wallets between Venmo and PayPal was a Bitcoin transaction, blows my mind. It is something that has been in payments for, again, 20 years, that the first movement of value that you can make between interoperable wallets has been done on crypto rails. It's just one example of that DeFi mullet that you guys referred to about things that are,

• 24:40Speaker 02

  where we are abstracting the complexity from the consumer. I think that if you go back to the early days of internet,

• 24:48Speaker 02

  yes, you had to understand TCP/IP and a bunch of other things to be able to interact with it. In the same way that you need to be relatively savvy around the protocols and the wallets and the infrastructure to be able to interact in crypto today. For mainstream adoption, we will need to have solutions that abstract that complexity from the mainstream user. And I think that this is a first good example of that.

• 25:08David Hoffman?

  Jose, this goes back to what you were saying earlier about just the idea of network theory. And when you have open, public permissionless networks, the individuals, the users on those networks can grow at a very large scale. And the fact that Bitcoin was able to solve this problem of interoperability between two siloed payment systems naturally, emergently, is pretty cool. And goes down to the very essence of like, why these technologies like excite me and Ryan? And I'm wondering, if on the other side of things, because PayPal is treating these as technologies that can provide utility to the company to increase its value,

• 25:48David Hoffman?

  how does the crypto industry compare to the non-crypto industry that is also on the frontier technical world of payments? And that comes in the world of like CBDCs or any other innovations that we just aren't familiar with because we only pay attention to the crypto industry because we're crypto people. So like, how do we stack up as like service providers to PayPal? Like, how are we doing?

• 26:12Speaker 02

  So there is...

• 26:15Speaker 02

  We need to remember that the crypto industry has been around for a relatively short amount of time. So the plumbing and the wiring and many of the things, it is still in progress, but in the short seven years that I've been involved with the space, we have gone a long, long way. So things like, obviously, there are implications on KYC and AML concerns for the industry. We are in a much better place now with the emergence of transaction monitoring platforms and the likes of elliptic and TRM and C analysis and others. In terms of the fiat to crypto connectivity, we are in a better place than we are now. We compete in the market with many other companies that are providing on

• 26:56Speaker 02

  ramps there and we should have even more. And obviously, and I'm sure that we will talk later on about regulation. It is, it is still very early days. I think that we need to remember that. And again, you're talking about 100 million wallets worldwide, you're not talking about billions yet. And sometimes

• 27:16Speaker 02

  people get a little bit frustrated with the state of development. I think that we have gone enormous distance in the last 12 years. Are we fully there yet? No, of course we are not. There are, there are solutions that would be needed for better KYC and decentralized identity and self-sovereign identity and that will emphasize that adoption going forward. But we are in a place where the numbers that we manage, if you look at surveys for the US strictly, they would tell you that a little bit, I think it's a little bit more than 20% of US adults have bought or sold crypto at some moment in time. And that is consistent with the numbers that we get from our internal surveys. We have so many users in the US that I would say that probably at this stage, the PayPal population is a decent sample

• 28:01Speaker 02

  of, of the general US population. So when you have

• 28:06Speaker 02

  More than 20% of the adult base that has used crypto. You have about 50% of the adult base that has engaged with the stable coins. We have 12% of the population, of the adult population, who has engaged with NFTs. You start to be on the cusp of, usually when you go beyond 10%, you are starting to get beyond the early adopters. And you're starting to be, you're not mainstream yet, but you start to get close to mainstream. So we need to remember these early days, the infrastructure is much better than it used to be. I'm actually optimistic about regulation. I think that what we see going on in places from Europe to Singapore, to Japan, to Hong Kong, to the UAE, there is a drive toward more clarity. Are we there yet?

• 28:51Speaker 02

  No, we're not there yet to the full extent. But again, we need to, we are all playing the long game here. I think that we are making a ton of progress.

• 28:59Ryan Sean Adams?

  It's funny, you say that, you give those stats around usage, because if you believe some regulators, I'm not going to name any right now, or some politicians, they would have you believe that no one actually uses crypto, that there is no use case, except the use case for scamming other people. What can you say about that, Jose? Is that just a, yeah, what do you say to that charge? Crypto is useless.

• 29:22Speaker 02

  Look, as we said before, there is, you cannot argue with proof of existence. So if there is 120 billion in the stable coins out there, that is proof of existence. If you have an asset class that is worth more than 1 trillion, that is proof of existence. So there are, there is utility, people are using that for different things. And again, in terms of how pervasive the penetration is, it's not 8% of the population, but it's 20%. I don't think, the other thing that we like to say is that when, when reality does not respond to your model, what is wrong is not reality, right? So the industry is here to stay and is, and is being adopted. I don't think that genies go back into bottles.

• 30:04David Hoffman?

  I just wanted to take a quick peek under the hood of the actual, how this actually works at PayPal. So users can buy and store crypto, they can also send crypto. Where are the assets actually sourced from? So who is selling PayPal users their crypto assets? And then who's also doing the custodianship? How did PayPal choose its custodian?

• 30:24Ryan Sean Adams?

  I think Jose keeps it on his ledger, right? His ledger.

• 30:30Speaker 02

  Yeah, no, we are we are regulated, obviously, in a number of states. We have a virtual currency license out of New York. We were the first company, I think, that were a conditional bit license that then was became full a bit license. We work with several companies in the space for liquidity and custody. We have a longstanding relationship with Paxos out of New York, and we are investors in the company too. And we do custody with several custodians. The relationship with the with the consumer is is with us. So when somebody is engaging with crypto on the PayPal platform, their user agreement is signed with with us. And then we work with different providers on in the background.

• 31:11David Hoffman?

  Okay, so if Ryan's got a Venmo account and I got a Venmo account and I send Ryan Ether from my Venmo account to his Venmo account, does it make an update on the Ethereum blockchain? Does it make an on-chain transfer? Or is that a is that a transfer inside of the Venmo silo?

• 31:26Speaker 02

  If you're doing that inside Venmo to Venmo, Venmo to PayPal, that is an internal transfer. So we don't need to go on-chain to do that. And actually, is is something that is that also means that the users will not be paying a network fees for that. And that is transfer. Actually, if you think about it, we were talking earlier about Lightning payments. If you think about it now that you can move, you can do fast, free, instant transfers of Bitcoin between Venmo and Venmo wallets, in between Venmo and PayPal wallets. So that doesn't go on-chain. There's no need for that to go on-chain. If you're transferring to your Metamask wallet or you're sending to a Ledger wallet, then that will go on-chain.

• 32:06David Hoffman?

  Okay, and then it took a while to get to this point of actual external transfers. I would assume because PayPal is a squeaky clean business that doesn't want to offend any regulators, that that's why it took a longer amount of time. But can you just explain this, the trials and their hurdles that PayPal had to get over to actually enable outbound external transfers of crypto out of the silos of PayPal and Venmo to external wallets? Like, how hard was that?

• 32:35Speaker 02

  Yeah, I think, thanks for that, David, and thanks for giving us so much credit. Part of the reason that it took a while is because it is just hard to do. This is obviously when when you enable on-chain transfers, is the first time that you are direct interacting with with the permissionless side of it, right? So it's easier and and we wanted to walk before we run. So it took a while. For us to build kind of the wall guarding experience at the beginning, the buy, hold and sell, but also to build the skill base and the talent base and get our regulatory charters. Remember that we acquired a company in Tel Aviv called Curve that was active in custody and multi-party computation.

• 33:17Speaker 02

  And now that team still represents probably around half of our engineering base. But of the team, if you think about it, we have in three years built a team that is more or less 50% of them, people who came who were already at PayPal and new payments inside out, but didn't really have the crypto skill base. And the other 50 came either from acquisitions or from hiding from industry. We had to get the regulatory plumbing and licensing in place. We had to get node operations, infrastructure, connectivity to permissionless blockchains, transaction monitoring systems. It just takes a while. I don't want to blame the regulators for how long it took because it was not on them, it wasn't us.

• 34:01Speaker 02

  We just needed to build that muscle. And then when we were comfortable with it, say, yeah, now we can open the tap and go and engage with the permissionless side.

• 34:10Ryan Sean Adams?

  Jose, you mentioned earlier that there's $120 billion in stable coins out there. And I think David and I just checked the charts earlier in the week. And, you know, that's about right. We got USDC, we've got Tether, we've got Paxos, we've got some of the smaller ones as well. Since you are a payments expert, and I think maybe at some level a stablecoin expert, if you extrapolate the term stablecoin to mean like digital dollars or something like that, can you give us your thoughts on how we get to a trillion dollars? Right? So 120 billion right now, and that's actually down. So for Bankless listeners, I mean, what the peak was like 160, 170, something like that billion?

• 34:54Ryan Sean Adams?

  And now we're down a little bit. I don't think it's fatal, but clearly we've got more use cases to generate for stablecoins before we can get to a trillion dollars in market cap. What do you think it's going to take?

• 35:07Speaker 02

  I think we'll take two or three things and it's funny that you bring back the one trillion because I remember I was asked what was my my five year out view and my five year out view was among other things one trillion of outstanding stable coins out there doing doing transactions. I think we get there. I think it will probably take three to five years to get to get there and it requires a bunch of things. First of all, most of that 120 billion today. They they are used for crypto trading, institutional trading, getting it for crypto capital markets if you want. That will grow with the market. So obviously crypto markets have not been

• 35:48Speaker 02

  extremely active over the last 18 months. When the market comes back, that will drive additional activity and that's one chunk of it. I don't think that will get us to one trillion. I think that what will get us to one trillion is the other side of it, which is going back to your analogy of the DeFi mullet. It will it will mean that you start to use that for payments, which is again our our charger and and although in all those four or five verticals that I think that they are ripe for adoption for adoption. But also I think that it will require that they get they they get used more broadly on traditional asset management. One aspect where I think that actually the US is is leading and what I'm seeing a ton of innovation is the asset management space. If you follow what the likes of

• 36:31Speaker 02

  Wisdom3 and Frankin Templeton and BlackRock and others are doing, I think that in that combination of traditional capital markets and and tokenization of assets, I think that's going to be another big driver of of assets under management and assets under custody for stable coins. I think that at some point in time you top out the the crypto trading side of it. There's going to be some stability there. Whether that takes us to 150 or 200 or 300, I don't know. I don't think that it takes us to one trillion. I believe that for that you need a commerce and traditional capital markets activity. It's interesting if you see in the European Union, obviously it passed MICA, their legislation, their framework for for crypto markets recently.

• 37:15Speaker 02

  And you are starting to see Over the last month, probably I've seen three or four companies that are making progress in Euro-denominated stablecoins.

• 37:26Ryan Sean Adams?

  Really?

• 37:26Speaker 02

  And of those who are out there, and USDC has an Euro-denominated coin, and if you look at the market cap and the assets on chain, compared to the USD base, they are not that big. And the reason for that is that Euro-denominated stablecoins, and in general, local currency-denominated stablecoins, are going to be more useful for mainstream use cases, for payments, again, and others. And I'm sure that if I was working in media, I would bring to a bunch of use cases in media. I just know my space. But I think that we need to, for that trillion, which again, is the goal that I think we should be striving for, we need to get into that mainstream side of the economy.

• 38:06Ryan Sean Adams?

  Can you divvy up that payment segment for us real quick in terms of stablecoins? Okay, like what kind of payments are we talking about, right? So I already use stablecoins for a lot of payments. I would say on-chain transaction-type payments, or sort of investing-type payments, or, you know, just everybody in crypto. I mean, we pay for things in crypto as a company. Bankless is a crypto media company, and we pay people in USDC. So we're starting to use it, but we might be on the early adopter side of the curve here. But when you think about payments, are we talking about like buying a coffee at Starbucks? Is it kind of that level consumer payments? Are you talking about like integrating a

• 38:48Ryan Sean Adams?

  Pay with USDC on Amazon, any kind of e-commerce checkout? Or are we talking about like bigger merchant B2B-type payments, you know, settlement types of payments, like, you know, big dollar amounts? I'm sure you have a much more elegant way of dividing up the payments segment than I just gave you. So please do not feel constrained to my categories of things. But yeah, where's it going to come from, the payments?

• 39:15Speaker 02

  I think you're going to see that in the places where the current plumbing for payments is not the best tool in the box. And that usually is in a couple of places. One of them is anything that has to do With micro-payments or high fluidity of payments. If you are transacting in traditional fiat payment instruments, they really struggle with high-speed, very low denomination in amount. If you're trying to do transaction, if you're trying to pay a transaction that is cents of a dollar with your credit card, it gets very clunky and there are usually there are minimum fees and for that is not a very good use case. That's why I keep going back to things like gaming. If you're buying a skin in Fortnite, the way you do it today is that you need to top up a wallet

• 40:00Speaker 02

  and just have money left there that you're gonna use when you are in-game. If you are, you want to do digital goods at high speed in-game without getting in the way of the experience, that's one place where you will start to see things like that. The other aspect is, the other extreme, I don't believe that for multimillion-dollar payments, the system is that broken. If you are a large enterprise that is paying suppliers, there is enough in the banking system and the corresponding banking system to get that done cost efficiently. But if you are a mid-sized merchant that is doing wire transfers and the wire transfer is costing them fifty to a hundred dollars

• 40:41Speaker 02

  and you can only do it Monday to Friday, nine to five during banking hours, and all of a sudden you can do something that has instant settlement and is dollar-denominated and works twenty-four seven, you're just gonna go there. So I believe that the next bunch of adoption, and there are companies that are already working toward that. I think that companies like Fireblocks, which I have a ton of respect for, they're starting to get into that B2B enablement. Initially for companies like yours, as you're saying, crypto-native companies that are very used to doing that, but more and more, one good thing about the B2B side is that companies are very rational actors. So you put something in there, again, going back to the...

• 41:23Speaker 02

  ideology or lack thereof, say, hey, you're going to show me something in which I can reduce my cost of payments by a multiple of X, I'm going to use it and I'm just going to use the best tool for for the job. So I think that you will see a lot of that into into those extreme cases, very, very small payments and B two B payments. One aspect where I have friends that are starting to use USDC and other stable coins is payouts. So companies here in the valley that have developers in different parts of the world and trying to get that money out to those developers and the banking channels that are just not the best tool for that. And I believe

• 42:04Speaker 02

  that we will see more of it, which is helpful because again, that's going to drive volume faster than the retail use cases will.

• 42:11Ryan Sean Adams?

  I was like, by the way, since you mentioned it, I am very interested in this gaming payments kind of use case, right? And so you mentioned like Fortnite dollars, or I think they're called V bucks, right? So what is a V buck, by the way, like, what would be backing a V buck? Is that just money on, you know, Epic Games balance sheet somewhere? Or is that like one to one mapped into account? Sequel database. That's not like a, that's not like a stable coin in any way, or it's not like the same as a PayPal dollar, is it? And by the way, it's probably similar to like Starbucks gift card and that that kind of class of of units. Maybe maybe you could share some insight because I've never asked an expert this question.

• 42:48Speaker 02

  I couldn't answer that either. I think that's a good question for Fortnite folks and Epic Games. But I think that there are one of the things that I see, not only about buying those skins in the games, if you think of, and it's not only Fortnite, it's Roblox and Minecraft, places where actually you have developers that are building in that ecosystem and they get compensated in that digital currency of that space. But say, hey, what do I do with a V buck now? I need dollars. I need to make payroll. I need to pay my my developers outside. So again, how do you build the value that has been created in one ecosystem? How do you make that into value that can be deployed in a different ecosystem is something where where

• 43:29Speaker 02

  gaming is such a fascinating scenario. Gaming is fascinating in many aspects for the computing geeks in the audience. Actually, a lot of the innovation that happens in computing happens in gaming, because if you're trying to do instant rendering for millions of concurrent users, the computing challenge from that is actually very, very, very demanding. And I think that we learn a lot from from the gaming side.

• 43:51Speaker 02

  I'm not deflecting your question or what is backing a V bag. I just don't know.

• 43:54Ryan Sean Adams?

  No, I get it.

• 43:55David Hoffman?

  There's nothing but the skins are backing the V bag.

• 43:57Ryan Sean Adams?

  Well, it's just probably an entry on the balance sheet, basically.

• 44:01David Hoffman?

  Not even a balance sheet, it's just a database.

• 44:02Ryan Sean Adams?

  One big difference, right? One big difference is that obviously V bucks aren't interoperable. And I'm sure Epic Games would not be able to get away with paying its employees in V bucks.

• 44:14Ryan Sean Adams?

  They want money that is useful outside of the Epic ecosystem. But go ahead, David.

• 44:21David Hoffman?

  Jose, if PayPal is interested in gaming, this implies that there's going to need to be networks that PayPal integrates with that aren't the Ethereum Layer 1, because games and the high transaction fees of the Ethereum Layer 1 just aren't going to go together. There's other networks out there. There's Ethereum Layer 2s. I know Tron, actually, interestingly, has been used for a lot of payment velocity as well. Solana is a low-fee blockchain. And also, since PayPal is now integrated inside of MetaMask, well, MetaMask is integrated with all the Ethereum Layer 2s. So I'm wondering if there's a known strategy here at PayPal with how to integrate and which networks to integrate with. How are they playing the, how's PayPal playing the network integration game?

• 45:04Speaker 02

  Yep. So when we started to be in the space, we were saying, well, you have to be present in the Bitcoin ecosystem and the Ethereum ecosystem. There's no way around that. And as I said, we were very clearly in the game deciding there will not be a PayPal protocol. We're not in the game of having a private protocol. We won't.

• 45:27Speaker 02

  We have a first principle that is developers tell us where to go. We don't tell developers where to go. We will follow and we monitor developer activity and we keep an eye on what's happening in the market and what is getting adoption.

• 45:42Ryan Sean Adams?

  No PayPal chain then in the future, is what you're saying?

• 45:44David Hoffman?

  Pay chain.

• 45:45Speaker 02

  I don't see a PayPal chain in the future, no. Because think about it, why would that make sense? If we wanted a permission environment, we have a permission environment already. So PayPal is already, if both sides of the transaction have PayPal accounts, then we have been doing that for 20 years. If you think about reliability and scalability and throughput and all those things,

• 46:10Speaker 02

  there is actually...

• 46:13Speaker 02

  I'm trying to figure out, and I don't have an opinion yet about whether we go to a world of a multiplicity of layer ones, and they're going to be, I don't think that we're going to see 300 layer ones that are relevant, but I'm trying to figure out what is the maximum number of layer ones that get a scale.

• 46:30Ryan Sean Adams?

  We're all trying to figure that one out.

• 46:32Speaker 02

  Yeah, or we go to a world in which there are layer two's on two or three protocols that have different flavors. The good thing is, again, is we don't have a horse on that race, and we follow the developer side. When we were talking about gaming, for instance, we have been paying a ton of attention to what the folks at Aptos are doing, and we have been participating with them, and they have decided that gaming is one of the verticals where they want to be a part of. We have been looking at Solana, and we have been looking at others. And I'm sure that we have this conversation six months from now. The innovation in the system will have generated three other protocols, either layer ones or twos, that we should be discussing.

• 47:13Ryan Sean Adams?

  David, I love this. PayPal has no tribes, right? They're like, where the cheap payments, secure, fast, and efficient, we'll go there.

• 47:20David Hoffman?

  The devs and the users. So, okay, so that's the network side of things. The other interesting, I think, point of conversation is that PayPal, when you pay integrated payments and stable coins on Ethereum, you're actually not that far away from financial activity, right? There's USDC, but then there's CUSDC, which is a yield-bearing version of USDC inside a compound that is also just another ERC20 token. And so the question is, since PayPal is so proximate to DeFi stuff in addition to payments, would we ever see a day where there's DeFi stuff, DeFi activities, either like savings technology, yield, alternative assets?

• 48:03David Hoffman?

  Is that something that is on PayPal's radar? Or is it mainly going to stick to these networks for their payment and money services?

• 48:12Speaker 02

  I would say that as of now, we are definitely more interested in the payment and transactional side of things, and we are an enabler to the ecosystem. I don't know where it will go in the future. I don't know where the regulatory side of things is going to settle on the staking side and others, and the yield generating part of it. One of the things that I have seen with a ton of interest is how some of these yield-bearing instruments are now being driven by a...

• 48:42Speaker 02

  Tokenization of money market funds and the like, which obviously are something that is in the province of broker dealers and the like. I don't know where it's going to go. I think that for the time being, we are very focused on the payment side and we will explore and see what happens. But our focus very much now is payments. We're not trying. Remember that our crypto product inside PayPal and Bemmo lives inside an app that does many other things as well. So we need to be very discerning about what we add because you don't want to have a mammoth habit that takes forever to load.

• 49:16Ryan Sean Adams?

  That's very cool, Jose. I think this is part one, really, which is what's PayPal doing in the space? And like the TLDR that I'm getting out of this is a lot and it's exciting. And this is a front door to crypto for a lot of users who aren't listening to Bankless right now and are scared to hold their own private keys. And this is a great way to get them into the ecosystem. So that's exciting. Very cool. I want to move the conversation.

• 49:48Speaker 02

  And I would add, Ryan, not only that, I think that what we have learned is that this is definitely that public, but we are finding more and more that there is a more sophisticated public that really likes that connectivity and the easy in and out and the protections. I think that we are still the only company that I know of in the US that we provide a warranty where if somebody gets access to your account, we will provide up to $50,000 of protection if somebody gets into your account and takes your crypto out. I think that we're just, one of the things that we like to think is that we are raising the bar in terms of customer service in this space, both for casual and for more sophisticated users.

• 50:24Ryan Sean Adams?

  Yeah, I think that's important and I hope the former FTX users heard that, right? There is some guarantee for their accounts. I think crypto could use that leveling up from traditional finance who's done that well for a while. All right, well, let's get to kind of the part two of this, which is interesting. Now we're going to, we're going to zoom out for a second, okay? So I know you also have some interesting perspectives and takes on this old banking system that we have right now, both internationally and then in the US. And maybe the future role that stablecoins and CDBCs might play in that. In addition to crypto, which we've talked about so far. You wrote a paper, co-wrote a paper called "Payments and the Evolution of Stablecoins and CDBCs in the Global Economy." And it starts like this.

• 51:09Ryan Sean Adams?

  "The US payment system has proven to be vibrant, adaptable, and innovative. And yet, it has also revealed areas in need of urgent improvement." I think I'll paraphrase that for you, for us, rather. The banking system is kind of broke right now. In fact, I think you say as much later in the paper. I'm curious your perspective on this. And let's broaden this to what role CDBCs might play, what role stablecoins might play in this. But when you look at kind of payments and the banking system today, what's broken about banking in the United States?

• 51:46Speaker 02

  Yeah, so I don't want to unpack there. And I grew up in Europe and I did a lot of working payments in places like Latin America and others. And now I've been in the US for 12 years. And I remain a student of the payment system and regulation in the US because it is fascinating. If you look at what is probably unique about the US. In most other places, the payment systems are established at the national level, even at the supranational level. You're in Europe, there is the SEPA environment and there is connectivity between different countries. The US evolved in a different way in terms of payments. So payments are regulated at the state level. And that actually has been a fantastic thing.

• 52:30Speaker 02

  One thing that the state-by-state setup provides is what I think in Justice Brandeis called the 50 Laboratories of Freedom. So there is a ton of innovation that will happen at the state level. And different states will try different things. And then the things that work will get adopted and things that don't work will kind of fade away. And if you don't have an environment in which you have that state-by-state level. You don't have, the innovation that has happened here, even in our space, on the crypto side, you saw New York a few years ago coming up with their virtual currency framework. And then you saw Wyoming coming up with a special purpose depository institution. And you are seeing now things that are appearing in Illinois and Louisiana and other places.

• 53:15Speaker 02

  So that is fantastic in terms of the effervescence of the of the system and the innovation. One thing that that setup doesn't really, is not really conducive to is that once that you have decided what works, that system is not very conducive to robust infrastructure that rolls out to the whole of the country. And you see that in probably in two aspects. On the payment space, we have been talking in the industry about FedNow for quite a while, which is this real time payment systems that the Federal Reserve will launch this year. There has been an alternative to that already in the market.

• 53:58Speaker 02

  It's called RTP from the Clearinghouse, which is a private company that has been providing that. That is a very welcome progress there because what that will do is be able to settle payments in real time, which is something that has been available in many markets outside the US for a long, long while.

• 54:15Ryan Sean Adams?

  What is the status quo in the US if it's not real time?

• 54:19Speaker 02

  So most of, if you're using the traditional banking rails, most of the transactions that you have, the settlement time is going to take two to three days, probably if you're using traditional rails. Think about, for instance, the use of checks, paper checks. Quite frankly, it's mind boggling that we are still using paper checks. Paper checks are expensive to process, they take forever to settle. Think about this, I was discussing with someone the other day.

• 54:50Speaker 02

  We have planes in the sky transporting physical checks from banks to clean centers. So it is, it takes days. It doesn't make sense that you are in an environment.

• 55:01David Hoffman?

  That's a US thing, right? Other countries don't do paper checks so much anymore. Is that correct?

• 55:06Speaker 02

  Most countries don't do much. Checks, there are others out there that are still using. There are a few in Europe that are still using them, but it's definitely something that is less common than it used to be, for good reason, because there are just better ways to do that. If you see payment innovations like ourselves, but also folks like Cell, that most of them, Cell is run by a consortium of banks, and they are moving toward that type of faster settlement for smaller payments. So I guess that to your point about what is, what can be improved, there is a need to balance that innovation that happens at the state level with that, I guess, that the robustness and the speed of the infrastructure.

• 55:49David Hoffman?

  Would you say that that is what the arc of banking and payments are? Because that would fit in with the idea that technology always increases in speed. Just like, what is the arc of payments? Well, they go faster. They settle faster. Settlement assurances go faster. That is the arc, right? How far, if that is true, how far behind is America in that arc? How much faster are payments settled elsewhere, outside of America versus inside of America?

• 56:18Speaker 02

  I think that in general, I think that US will get there. You know, the moment that you have those real-time settlement mechanisms, you're going to move to T plus zero. So basically, same-day settlement, which is what you can do in other markets. I think that is interesting when you look at the payment space, going back to what we were discussing earlier about why do you need X if you have Y? I think there's a bit of a fallacy on.

• 56:47Speaker 02

  Why do you need stablecoins? Do you have bank deposits? Why do you need crypto payments? Do you have FedNow? I think that all those things should coexist. Because there are some things that you can do in one way that you will not be able to do in other. For instance, FedNow and real-time settlement is a fantastic thing that should happen as soon as possible, should have happened in the past. We should get it as fast as we possibly can. It is still mostly going to be used for interbank settlement payments, meaning you still need to have a bank account to be able to benefit from that. Same thing with what I think is the fallacy that pitches stablecoins against CBDCs.

• 57:29Speaker 02

  Some people are saying, and you see both sides of the equation, in countries that are more pro-CBDC are saying, hey, if we have a CBDC, why do you need a stablecoin? In countries that are more pro-stablecoin, they will say, let's go stablecoins and forget CBDCs. I do believe that that is, again, that's a bit of a fallacy, because I, and I do believe that in the end you are going to see stablecoins that are backed by CBDCs. And it looks a little bit, again, as total all the way down, but if you think about it, it actually makes sense. Because if you think about a CBDC, what a CBDC is, is a digital claim on central bank money.

• 58:08Speaker 02

  So, and there's, what a CBDC, I don't think is going to be, is a digital currency that is deployed on a permissionless protocol like Ethereum. So, very likely, you're going to see ERC20 tokens that are backed by a digital euro or by a digital pound or by a CBDC. And to your question, and Brian, I love your insistence on, what is backing this? There is no reason why a CBDC could not back a stablecoin and that the stablecoin provides that interoperable layer on top of it. So, the difference between CBDC is central bank money. So basically, it's a claim against the full faith and credit of the state that issues the CBDC.

• 58:53Speaker 02

  A stablecoin is, in essence, programmable e-money. And then you see the banking industry talking about tokenized deposits, which are a good thing, too. But again, it's a tokenized deposit. So it is commercial bank money that has the commercial bank money risk associated with that institution. All those are pieces of the puzzle that I do believe that will coexist and will be useful for different things.

• 59:17Speaker 02

  But also, I believe that you need to have a version of digital cash. If you look at, and this is not a US-only comment, when you look at the world,

• 59:28Speaker 02

  people use less and less cash. And again, and cash is expensive to handle. But if you are, if you're a central bank and you're looking at one of your, the mandates that you have is on the one side, financial stability and also financial inclusion, you need to be able to make sure that people have access to the financial system. In a world without cash and without CBDCs and without stablecoins, the only way that you can get access to the financial system is through the banks. And I live in Silicon Valley. And three hours from my house in Silicon Valley, there is a county, Sierra County, again, getting into the Sierra Nevada, where there is not one banking branch.

• 1:00:14Speaker 02

  So this concept is in the US and other regions of banking deserts, of places where there is a lack of banking infrastructure. And there are probably good reasons for it. But we cannot be just reliant on having access to a bank account. We cannot be just reliant on having access to a physical bank branch.

• 1:00:30Ryan Sean Adams?

  In your report, Jose, there is a stat which surprised me. Even 30% of Americans with a household income under 30K reported making all or almost all of their weekly purchases in cash. These are some of the unbanked members of society that are still kind of using cash. I mean, for myself personally, I I keep a $20 bill on me just because there's some toll or some parking garage that's only going to take it. But aside from that $20 bill that they always keep on me and use in case of emergency, it's almost like the break glass in case of emergency, I got my 20. I don't use cash in my everyday life. I use crypto or I use the traditional banking system.

• 1:01:12Ryan Sean Adams?

  But that is not true for a large number of unserved members of society who maybe aren't close to a local bank or just don't have access to it for one reason or another. I remember we had a guy by the name of Richard Turin on the podcast who wrote a book and studies actually China's central bank digital currency system. And he wrote this book called Cashless. And being in the crypto space, obviously, we have some natural resistance against that type of setup, right? Surveillance state.

• 1:01:48David Hoffman?

  CBDC is a bad word.

• 1:01:50Ryan Sean Adams?

  CBDC can be a bad word in this space, right? Well, that means the government can basically freeze your accounts tied to a social credit score, inflate it away into nothing, where's the autonomy, where's the civic rights, all of these things. His counterargument to that was like China needed to bank the unbanked, and this, quite frankly, was the fastest way to do it. So put a mobile app on their phone and they can use digital cash, this new Chinese central bank digital currency, in remote areas all across the country, rather than having to go physical presence to some bank and rely on the crappy banking app user experience.

• 1:02:30Ryan Sean Adams?

  So his argument was basically China has banked millions of people, maybe given China's size, tens of millions or hundreds of millions of people using this kind of technology. I didn't fully agree with that argument, but I found elements of it somewhat compelling. What do you think is the best design for a system moving forward? Do you like China's design? Do you like some of the proposals coming out in the EU? What's the best digital cash design society? I feel like you may be indicating a blend of things, but I'm curious. What do you think it actually looks like?

• 1:03:06Speaker 02

  I can give you a few principles that I think that that makes sense. And implementations will vary depending on on the country you are. The experiment or the experience in China is fascinating. The Chinese financial system, as your guests were saying, has some particularities on what is bank versus non-bank versus payment apps and the like, which is quite unique. The experience in India has been fascinating as well because the India stack went in a different way. They were saying is, hey, let's get digital IDs for everyone. And on the back of those digital IDs, then we can build a unified payment system

• 1:03:45Speaker 02

  and we can have finance institutions that are payment banks, meaning that they are not involved in credit activity.

• 1:03:52Ryan Sean Adams?

  Jose, I don't know much about this, actually. So everyone, not everyone, but a portion of society in India has now a digital ID, which would be like a, almost like a digital passport.

• 1:04:02Speaker 02

  Yeah, so there is, India went with a, with a very broad ranging effort on a, on an identity protocol called AR, where they went and basically they, they got a digital ID issued for most of the country. And, and they combined that with something that is called UPI, which is a unified payment interface, which means that there is a standard for bank to bank account, bank account to bank account payments. So that provides a solid infrastructure on top of which people can build payments and identity applications because they have that common layer of, of payments and, and they will be identified. The other interesting experiment has been really successful, has been PICS in, in Brazil,

• 1:04:47Speaker 02

  where the Brazilian Central Bank implemented a way to basically do free payments from bank account to bank account because there was a very large segment of the population who did not have debit cards or, or credit cards. Specifically on your point on, on CBDCs, there are.

• 1:05:04Speaker 02

  The hot topics of debate on CBDCs, one of them is what you're saying is what are the surveillance implications, what are the privacy requirements, which is the information that the state should have or should not have about my monetary interactions. The other aspect is what I said about in terms of inclusion, what happens if a bank would not give me a bank account? I still need to have access to the economy and I need something that is an instrument that is issued by the central bank. And yet another aspect is this difference about commercial bank money and central bank money and the different risk that that has. There has been, I really like, I think it is relatively old, old in the sense of a couple of years ago, three years ago, the Bank of England issued a paper with their initial

• 1:05:49Speaker 02

  framework, where they were talking about a two-tier system, meaning that the way what they were looking at at a digital pound basically said, hey, the central bank will issue the currency and we'll keep the ledger, but the distribution will be done by financial institutions, banks are non-banks, which will have the apps with which the users will interact. And that provides, that has a number of advantages. First of all, it limits the information at the user level that goes back to the central bank, so it helps mitigate those concerns about surveillance and privacy. And on the other side, meets the consumers where they are today and still gets to distribute that.

• 1:06:33Speaker 02

  I think that that is a good construct. When you get into the weeds, we are years away from mass deployment of CBDCs because then you need to start to think of things like, what is the off-chain problem? So what happens if you have a central bank money that resides in your app and the phone network is down? You still need to be, how do you version control of the database when people are interacting with their phones? And then the network comes back up and how do you do, how does that money movement? There are, once that you get into the technical side of it, there are very thorny issues that I think will be solved, but will be solved over a number of years.

• 1:07:08Ryan Sean Adams?

  Jose, let me ask you a question. Why not just? Okay, it'll take a while for the US to create a central bank digital currency. Why not just skip all that and just use stablecoins? I mean, we have the infrastructure on crypto right now. True, a couple of years ago, we couldn't scale it in terms of, you know, payment networks and low transaction per second and high fees. But we're getting there now. It seems like we have the infrastructure to essentially make a collection of stablecoins, the digital dollar for the United States. Why don't they just let the private market handle this?

• 1:07:49Ryan Sean Adams?

  Of course, this would be, you know, Jeremy Alire and Circle's argument. Why don't you just let the private sector take care of it? That's what American private sector does very well is solve thorny technical problems. And we've got the tech, we could do this. What do you think of that approach?

• 1:08:08Speaker 02

  I think that that is not the question you need to ask because there is not really a choice. I don't think I would say, hey, let's just keep CBDCs and focus on stablecoins. I think that the right question is, I know this is a question as much as an assertion, let's have stablecoins. We need to have stablecoins in the US. There should be private stablecoins that are fiat-backed, that are well-backed, that are regulated, that are safe, that are secure, that people can use. And let's have the conversation about CBDCs. It's not one or the other, both could coexist. I could very well see, as I was saying earlier, that you have a stablecoin that is backed by a CBDC. What we cannot do is to wait for stablecoins until we have CBDCs.

• 1:08:51Speaker 02

  Because then you're talking multi-years and then the ship has sailed. I don't think it's an either or. To the urgency of what Jeremy was saying, I fully agree. We need a framework for the stablecoins in the US, and it is important. If you look at, we were talking earlier, you were saying, Ryan, and you're absolutely right, that volume of stablecoins has come down a little bit. The volume of USD-issued and USD-denominated stablecoins has come down by quite a bit. If you look at from the beginning of the year until now. I'm speaking from memory, but I think it's like 20 billion in USD issued the stable coins that has disappeared, either because it has been redeemed or it has moved to other

• 1:09:32Speaker 02

  places. And I think that while the stable coins that are outside of the US have continued to increase in volume, I think that is, there is a pressing issue on clarifying the framework for the stable coins in the US. And you're seeing that in the legislative action and the discussions that are happening in Congress right now. So I don't think it's either or between a stable coins and CBDCs. We need a stable coins and we need them now. And then we need to have the process and the conversation on of how would a digital dollar look like if that's a decision that a country makes.

• 1:10:03Ryan Sean Adams?

  Yeah, I certainly agree with that. One of our theories for why stable coins are down in terms of total market cap is that there's a new yield farm in town and that's called US Treasuries and it's paying, you know, 5% and higher. So people are going over there. That is the new yield farm. It's not on chain. So maybe there's some of that as well. Jose, you've been very kind with your time. This has been a fascinating, fantastic conversation. I just have a couple more thoughts to close our questions for you. And the first is this around regulatory. So crypto in the year of 2023, we almost, we can't do a crypto podcast without talking about regulatory because it very much feels like in the wake

• 1:10:46Ryan Sean Adams?

  of 2022, the eye of Sauron is sort of like looking directly at crypto now and it's, it's, all of its malice is focused on crypto. It feels that way. Anyway, it's probably not as worse as it seems. From your vantage point, and you guys have dealt with regulators from the very beginning, I'm sure the very beginning of PayPal, there were some interesting conversations with regulators and could you really do it? And there was a time where you were sort of the startup trying to get like regulators on board with what you're doing. From your vantage point, what do things look like in crypto? Is this really a sort of a very bad regulatory environment? Do you see it improving? I'd just be interested in picking your brain.

• 1:11:30Ryan Sean Adams?

  Any thoughts you have on regulation with respect to crypto?

• 1:11:34Speaker 02

  Yeah, and I'm gonna, I might be a little bit of the contrarian here because I'm actually looking at the glass half full. So on the role of regulation.

• 1:11:46Speaker 02

  The way we think about this, and we have been thinking about this all the way through is, for crypto to get traction, you require access, you require utility, and you require the regulation in place. And we have been working on all those three spaces. And one of the things that I've learned is that if you're working on something that is remotely relevant, more likely than not, it's going to be regulated. Healthcare, financial services, education, energy, you name it, there's going to be a regulatory framework there, and there are good reasons for that.

• 1:12:19Speaker 02

  And I do think, and this might not sound very glass half-full, but I do think that there is a risk, specifically in the US, that the US falls behind in digital currencies versus other regions. If you look at progress, we have been talking about MICA in Europe, but you see about the progress in FCA in the UK, you see about the progress in Japan, you see the progress in Singapore, you see the progress in Hong Kong, you see the progress in UAE. So the world is moving toward more regulatory clarity. And I do think that there is a risk of the US falling behind there. But when I look at the US, I think there are a number of assets that are there that

• 1:13:01Speaker 02

  are being put to use. First of all, as we said, we had the benefit of a few years of state-level innovation and frameworks that have been tried and tested. I think that experience from New York, the experience from Wyoming and other places creates the substrate for saying, we know what can work in the US. And on the other side, I think that we are seeing more urgency on the legislative side. There are a number of feelings that are going on, both in terms of stable coin bills, but also in terms of market infrastructure. So I'm actually...

• 1:13:37Speaker 02

  Confident that we will see additional clarity in the US. I would be all dummy and gloomy if I were thinking that that is not the case. Because again, I do believe that the environment that we have now is really complicated. It's driving consumers and companies offshore and it creates a disadvantage. And we are seeing now, I don't know if you have been covering the situation in Europe lately, but there is a ton of appetite in places like France for crypto companies to get established there. So I think that, and I think some of the information from the fantastic developer report that Electric Capital issues shows that the US is losing crypto developers to other regions. We are, we are seeing that.

• 1:14:21Speaker 02

  So again, I think that the situation is not the best, but I am optimistic that we will get to a, to a good place. I think that it's clear that this is something, again, the proof of existence, the 120 billion, the trillion in assets. There is an acknowledgement that the industry is here, the industry is here to stay, and the framework has to be developed and has to be implemented.

• 1:14:42David Hoffman?

  There's always the fight to fight the regulators in the ways that helps the crypto industry express itself and be built in the ways that we want to build this industry. But then also there's the same fight where the crypto as an industry needs to make our products and tools more usable to companies like PayPal. And so Jose, as we come to a close here, I'm wondering if I can just kind of pick your brain on that angle. I would imagine integrating with public blockchains with Ethereum with Bitcoin wasn't the easiest, especially when you have a very high quality app and a user base that expects quality. What could we have done? What could we do? What could the crypto industry do to make your lives easier? What were the big problems when it came, when it came with integrating Ethereum, stablecoins, Bitcoin into PayPal and Venmo?

• 1:15:27David Hoffman?

  And just overall, like if we had the responsibility of making our product better to you and to PayPal, what should we look at first?

• 1:15:35Speaker 02

  Ah, I integrations, as you were saying, have to be easy at all levels, not only on the protocol side. I think that's something that is more available now than when we started four or five years ago, is that way back then, you had to do the infrastructure yourself. You had to operate the nodes, you had to do a lot of the relatively low level, if I can call it that way, that you don't use on traditional computing, you had to do it yourself because the providers were not there. I think that that ecosystem has developed now, and you have folks who will handle node operations, that will spin up nodes for you and manage them for you. I think that that helps. What I'm thinking is, we started doing this four

• 1:16:16Speaker 02

  years ago, and we put a ton of time and effort and engineering resources behind it, because we were really convinced about it. I'm trying to figure out, if you're a company that is less convinced than PayPal was, where you're saying, I'm gonna do it, but if the lift is super heavy, then I'm not going to do it, how do we make that life easier? And I think that that infrastructure, folks are gonna be concerned about the technical lift, who do you use? And again, the moment that you start to have node operators and people that will handle infrastructure and mempools and the like for you, that is getting there, it's getting easier. Also, the compliance side of things, both in terms of transaction monitoring and KYC, has to be more clear. But I think that, again, the industry is

• 1:17:00Speaker 02

  in a better place than it was four years ago. I think that we need, I can't point you to something where we need things that are not available in the market today, but we do need more providers of those. There has to be more competition in the market in many of these places, where you just see two or three companies that are enterprise grade, and I believe that we need more entrants in that, in the market.

• 1:17:27Ryan Sean Adams?

  Jose, thank you for spending some time with us today. This has been a fascinating conversation. We appreciate you.

• 1:17:34Speaker 02

  Thank you for having me. It's been a pleasure.

• 1:17:36Ryan Sean Adams?

  Bankless Nation, we got 400 million users in PayPal right now and Venmo right now. It's our responsibility to get them into crypto, more excited about crypto. We need to build solutions that make them come into our ecosystem as well. So that's on us, and Jose here has done his part. Action items for you, of course. I want you to read the Payments and Evolution of Stablecoins paper. We talked about that. If you want a link to it, it'll be in the show notes. And of course, got to let you know, risks and disclaimers. None of this has been financial advice. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.