Blogs & Articles: How Venmo's Stablecoin Integration Can Grow the Bitcoin Economy 🔗 30 weeks ago

Last week, PayPal, alongside their infrastructure partner Paxos, announced an integration of their PYUSD stablecoin product with Venmo, one of the largest mobile financial applications on the market. With over 78 million users, Venmo is currently one of the largest platforms for purchasing, selling, and transacting bitcoin. As the extended digital asset realm continues to evolve alongside the Bitcoin network, a significant market share of this expansion has continued to pour into dollar trading pairs. A large percentage of volume in the Bitcoin market has trended specifically towards these dollar instruments known as stablecoins, currently dominated by USDT and USDC. 

As large, long-running financial institutions such as PayPal make waves into the stablecoin market with products like PYUSD, and with the integration of popular applications such as Venmo, the dollar's influence on bitcoin, both from a competitive utility standpoint, as well as a market cap perspective, continues to grow. 

I sat down with Walter Hessert, Head of Strategy at Paxos, to discuss the impacts of their expansion into the stablecoin market on Bitcoin, and where he sees the market developing over the next few years.   

A transcript of our conversation, lightly edited for length and clarity, follows below.

Mark Goodwin: Stablecoins obviously have huge implications for the Bitcoin market. The way I see it, there's basically bitcoin and stablecoins. That's about it. I understand the Ethereum "thesis," and while they're a large part of stablecoin infrastructure, that's how I look at it.

Walter Hessert: Definitely. Well, first off, I'll just say, before we start that, I think it's a pretty reasonable framework, and I agree with you for the most part. I think that you can't have the stablecoin as you were kind of alluding to without Ethereum, and so Ethereum is enabling maybe the other most important use case currently in blockchain, or the most valuable use case, which is dollars, in addition to bitcoin as this potential digital gold. I agree with that — certainly from what we have today — in regards to what's really providing value and where we're creating a ton of new utility. That seems right.

Goodwin: What kind of advantage does PayPal and Paxos see over creating a tokenized dollar instrument versus just using USD rails that are currently active on PayPal? Why do all this building out of this tech?

Hessert: What you could do with PayPal today, and their family of products — PayPal, Venmo, etc. — is that you can move a dollar into the ecosystem. Once it's in the ecosystem, you can move it to someone else that's a part of the ecosystem, which means they've gone through onboarding and created an account, etc., which is as seamless a process as you'll find on the internet. But it's still not easy to kind of build that trust and experience with new users. But you can send it, you can move that dollar or thing of value, whatever you want to call it, that digital dollar, to someone in the network, or you can move it back out to banking rails to your own account or store of value. So you can basically move it around in the closed system, or you can move it back out, really just to yourself. 

I think what starts to be exciting is that stablecoins allow the kind of services, trust, brand and the network that's been built by PayPal over the last 20 plus years to be extended to the entire internet, by moving dollars now on to an open, decentralized ledger — in this case, the Ethereum blockchain today. And so I think that that just has enormous potential for PayPal's business, which is one of the reasons they're pursuing. And I also think it's just an enormous potential for users and for other industries to actually be able to utilize those products. When you think about the full PayPal platform now including a dollar that can move around outside of their system, in between merchants and retail, or retail to retail, or businesses to businesses, you are now starting to enable the PayPal platform and the dollars to really move at the speed of the internet for everybody. And so that's what's really exciting.

Goodwin: How exactly did the Venmo integration come about? Why are they keen to add stablecoins? Compared to the traditional USD rails since the launch, have you seen users using this new product comparatively to previous dollar rail systems?

Hessert: We've powered crypto infrastructure for PayPal across PayPal and Venmo and other products since 2020. And the expansion of PYUSD into Venmo was a natural one. I think they have tens of millions of users. So I think by most measures you could argue that it's the biggest or one of the biggest stablecoin integrations that we've seen yet, not just for PYUSD, but for all stablecoins. PayPal basically made an enormous commitment, an enormous investment in the stablecoin market with the launch of PYUSD, and so they're going to leverage all of their properties and all of their resources to help it grow. And the expansion into Venmo is clearly a big achievement in that regard, and a natural one. 

We're seeing more and more growth every day as PYSUD is rolled out across the PayPal ecosystem. We see growth happening as those ramps are increasing across their platform. We're also seeing it happen outside of the PayPal ecosystem. Just last week, you had Crypto.com announce a big partnership, and they're going to be supporting it and pushing it to their customers. We've seen the same with other exchanges like Kraken and a whole host of large exchanges and wallets now like quickly rushing to supporting PYUSD. Stablecoins are a fully decentralized product, and don't necessarily need a network. Most people are interacting with the blockchain through different products, centralized products in many cases, and the support of all of those products — the listings, the availability, the liquidity — is ultimately what creates the utility in the new ecosystem. What PayPal brings is an enormous base and enormous network and an enormously trusted brand to kickstart that. And the expansion into Venmo is one of the big pillars.

Goodwin: Sure. It is probably immediately already the biggest stablecoin mobile interface on the planet. Paxos has done other kinds of stable instruments in the past. How do you see this from a competition standpoint? How do you see that playing out with your other dollar instruments, and other stable-like instruments, that Paxos has issued in the past?

Hessert: Well, Paxos is just infrastructure. We are never ourselves trying to create relationships directly with the end users. We're really just trying to serve the B2B2B or B2B2C type relationships and help our enterprise clients be successful. Whether that be PayPal, NewBank, Interactive Brokers, or Mercado Pago, Paxos really just wants to enable these companies to be able to offer blockchain products. Today, we have one big white label in the market, which is PYUSD. We'll likely have a couple more, and we'll make those available through all of our platforms. 

Now, we are incentivized to see all of those different products grow, and so right now we're putting a lot of attention and effort into supporting the growth of PYUSD, but we really are kind of agnostic to our different enterprise partners as the whole industry matures and as our platform matures. In other words, as it grows, we will enable a suite of different products. It could be a different branded U.S. dollar token, it could be a different branded euro token, it could be a different branded gold token. We want to make those available to all of our customers in the most regulated infrastructure platform in the blockchain space.

Goodwin: Do you have any sort of like stated goals for PYUSD market cap or general issuance? How large do you see the stablecoin industry growing?

Hessert: Well, I think PYUSD certainly has an opportunity to be one of the largest, if not the largest stablecoin in the market over the coming years. We can see where we are today and we've seen kind of incremental improvements to stablecoins. You had Tether, which was the real innovator and pioneer in the space and they've built a really strong product that serves a kind of valuable purpose in the market. You had USDC come out and they did MTLs and they kind of built a different type of brand. It was an incremental improvement onto Tether. And now you have PYUSD, which I think is an enormous improvement on top of what we've seen in the market from both a regulatory perspective and from a support perspective. I think we're going to see that over the coming years from a utility perspective. 

I think that we’re going to be in a market that is trillions of dollars of stablecoins, which are privately issued and highly regulated. I think that PayPal has set the standard for regulatory oversight. I don't think that the USDT or USDC models of regulation or lighter forms of oversight are going to be sufficient anymore. You're going to need credential oversight for these tokens, and I think that PayPal has a really, really great opportunity to take a big share of this next wave of growth that is really going to be driven by their connectivity and support in the crypto ecosystem with the new types of utility and payment use cases they're adding, and the regulatory standard that they have cemented into the market. Whether you're calling it a payment stablecoin or a crypto trade, it is really just a better stablecoin.

Goodwin: You talk about the innovation from USDT to USDC and I think one of the main differences I see is their ability to have an algorithmic yield-based product, getting access to the yields from the Treasuries backing these stablecoins. Do you see PayPal, or rather, PYUSD, integrating any kind of yield product that incentivizes holding your value in this coin? Is that something you see that is even really possible in the regulatory regime that we have at the moment?

Hessert: I think what you're going to see is PayPal is going to kind of continue to do things from a regulatory perspective in a different way. It's just a different approach. They have an enormous incumbent business. They've built an enormous amount of trust and different types of capital as the result of being one of the leaders in digital payments over the last 20 plus years and being a public company. They launched by having the right types of thoughtful conversations with regulators and bringing the different regulatory groups at different levels along the journey. You're going to see the same thing when it comes to rewards or yield for customers. I mean, PayPal, as you can imagine, isn't going to move into that space, I would think, until there's regulatory clarity to do so. I think that's good for the market, right? Because they can kind of create that outcome and drive that innovation in other trustworthy ways that the other stablecoin players just can't. They're just not a part of that conversation.

Goodwin: You mentioned earlier a trillion dollar plus stablecoin market, which I totally agree with, but how do you see that affecting bitcoin's use case or market cap? Do you see it as a competitor to bitcoin or more of a complementary asset?

Hessert: I see it as complementary and enabling bitcoin very much. I think of the U.S. dollar and, I'm sure at some point, other fiat backed stablecoins, as the on-and-off ramp for a lot of the global population into other cryptocurrencies. And the primary beneficiary of that, I think, is going to be bitcoin. And I don't mean on-and-off ramp explicitly in regards to how people talk about on-and-off ramp, like how I get my dollars on, but rather how I get introduced to the technology. It's how I start interacting with it. It's how I get comfortable with it, something that's familiar, where I can just think of it as a dollar moving via a different type of technology, the same way that I understand that a digital dollar shown in my PayPal balance isn't a different product or a different dollar, it's just a different way of interacting with a dollar. And I think that as we get more liquidity and more regulated stablecoins into the market — I think PayPal is the leading candidate to really enable that and to be the catalyst — I think that you're going to have bitcoin continue to grow, grow in interest, grow in access, grow in trust, as a result of that. 

You can just imagine, similar to the way PayPal pioneered crypto brokerage in their products to buy, hold and sell bitcoin in the PayPal and Venmo apps, seeing a huge wave of interest that sweep across fintechs and even financial institutions. In the U.S., it was hard for financial institutions to do that, but overseas banks started to add bitcoin brokerage into their wallets, their wealth managers, etc., and I think similarly, now you're going to see that with the U.S. dollar via stablecoins. Now that PayPal and Venmo have added this functionality, you're going to see a huge wave of other companies starting to add stablecoin products to their applications. That becomes an enormous amount of exposure and new interaction points for the mass market to start interacting with blockchain products, and I think a lot of that will lead to more education, understanding, and ultimately investment in bitcoin.

Goodwin: In regards to the infrastructure backing these assets, in the press release announcing PYUSD it was said PayPal would be holding Treasuries or cash equivalents to back this new dollar instrument. Can you give me a quick overview on how that's structured? Do you guys have a banking partner holding these treasuries? Do you guys have a specific plan for dealing with bond duration and T-bill buying in this high-rate environment?

Hessert: In addition to being the most regulated issuer of stablecoins, Paxos is definitely one of the largest issuers of stablecoins to date. We've issued about $120 billion regulated U.S. dollar stablecoins on a gross basis. We've managed at any given time up to $25 billion at a single point of issuance where we're managing the one-to-one backed reserves. So it's an area where we have developed a real expertise, and we are leaders in the market from a reserve management and risk management perspective. Paxos has stood out among all the others. And part of that is because what we do is very vanilla. We have defined the right way to manage these reserves, one-to-one backed fully in cash or cash equivalents. We have taken short duration T-bills and overnight over collateralized repo, and then U.S. dollars in FDIC-insured institutions, and that's the same way that we'll manage PYUSD. 

Of course, the difference with Paxos from a regulatory perspective is that it's not just Paxos, as a private company, that decides how we manage the reserves. We have a prudential regulator that has chartered the trust company that issues the token. And so they supervise all of the activity out of that trust, as a bank regulator, overseeing everything that we do, including the management of those reserves. So that can create the level of trust that you really need for these stablecoins to expand out into other types of use cases and other parts of financial services and other parts of the economy. And that really is our reserve management strategy, tightly intertwined with that oversight.

Goodwin: Would you mind naming the banking partner that you guys are working with that are holding your T-bills?

Hessert: We work with some of the largest banks, publicly available in our attestation. We work with very large U.S. and global financial institutions on the banking side.

Goodwin: There is obviously a significant difference between proof of liabilities and proof of reserves. How do you insure the public of a common audit process? How do you insure to the public these audits are done without bias? How do you intend to communicate and audit your reserve and liabilities statuses to the public?

Hessert: We were the first to disclose all of our reserves, and we've done that since we issued our first stablecoin back in 2018. We do it on a monthly basis, through an attestation, with a major auditing firm. That's something that we've done monthly for all of the regulated assets we've issued since. We also created a new report which discloses all of the different investments, down to the CUSIP, that we have at any given time and we release those more frequently. That's something that other stablecoin issuers in our footsteps have to do. So I think Paxos has always led, not just in regulatory oversight, but also in doing whatever we can to create transparency for the market. What we're trying to do is remove the need for any given end-user or enterprise to have to trust Paxos. You can trust us because you trust the New York banking regulator. You can trust us because you trust the attestations the auditing firm is producing on the reserves at any given time. Transparency is a big part of that, and that's been a big focus for us over the last five years.

Goodwin: In regards to holding Treasuries, which are yield-producing bills, do you have any strategy for having a bitcoin treasury? Do you have any plans to invest the yield into any instruments that you're holding or, or will it strictly go into operational costs?

Hessert: As part of our corporate treasury, which is fully segregated from the reserves of the assets, we do hold bitcoin, but the reserves are always held in cash and cash equivalents. The yield from that is shared among our partners, in some cases our white label partners, depending on the product, and they are invested into the business.

Goodwin: Do you have anything to address in regards to concerns that some people have with the potential for censoring, seizing, or blacklisting any of these transactions? In the past, there have been concerns with regulators reaching out to centralized issuers. Do you have any comments on that?

Hessert: Every stablecoin, including USDC or USDT, have centralized issuers, and thus have the ability to seize and freeze stablecoins. I think what you get with Paxos is transparency. We have a policy that we're not just setting or changing on a whim as some private company with shareholders. We have a banking regulator that oversees that policy that we share with the market and how we conduct ourselves according to it. We're not going to avoid the ability to have the reason to freeze. I think that the market should generally be happy that it's there, even though it might seem incongruous with other aspects of decentralization. But they should be happy there because it ultimately will enable global mass adoption. It comes down to who is doing it in the most transparent way and in a way where you don't have it being misused. And so I think that’s an important standard that Paxos has set, as a part of the way that we've set up the company, and as a part of the way that we issue our tokens, with regulatory oversight via the New York Trust Company.

Goodwin: Is there anything that you want our readers to know about Paxos or PYUSD, or any other products coming in the pipeline that you think we might be interested in?

Hessert: There's a lot coming that I think you'll be interested in and would love to stay in contact as those start coming to market and to fruition. We should stay in close touch.

Goodwin: Thanks so much for your time, Walter.

Hessert: Thanks