Dialogue with PayPal Senior Vice President: Stablecoins are the "killer application" of the current digital currency market

Original video: Unchained Podcast Ep.530: Will PayPal's PYUSD Steal Market Share From Tether and Circle?

Interview: Laura Shin, Unchained Podcast

Guest: Jose Fernandez de Ponte, Senior Vice President at PayPal

Compilation: bayemon.eth, ChainCatcher

Laura Shin: Hello everyone, welcome to Unchained, I am Laura Shin, author of The Cryptopians. I started reporting on cryptocurrency eight years ago, and as a senior editor at Forbes, I was the first full-time journalist covering cryptocurrency for mainstream media. This is the Unchained series for August 11, 2023. Today's guest is Jose Fernandez de Ponte, Senior Vice President and General Manager of Blockchain and Digital Currency at PayPal. Welcome, Jose.

Jose: Hi Laura.

Laura: Recently, PayPal launched the stablecoin PYUSD on the Ethereum network. What is PayPal's vision for PYUSD?

Jose: Over the past four years, we have been active in the cryptocurrency space, and PayPal's vision has always been to be a bridge between fiat currency and Web3, bringing mainstream applications to the payment system. We are a payments company, so we are very focused on relevant applications. The launch of PYUSD is a "natural evolution" in this journey. We enabled traditional cryptocurrencies in our app, then supported on-chain transfers and international remittances, and now we have added a fully reliable and regulatory-compliant "stable value tool" for payments. This is essentially the first phase of PayPal's crypto journey.

We believe stablecoins are the "killer application" in the current digital currency market and are the closest to payments.

Laura: Does PYUSD have specific niche areas? Will it serve as a basic payment method, or will it mainly be applied in specific sectors like DeFi?

Jose: We believe that the characteristics of digital currencies are very suitable as payment methods, and they have inherent advantages in terms of cost, programmability, and scalability. Interestingly, many of the discussions we participate in focus on the cost of each transaction, while we are actually more interested in settlement time. We often say they are faster and cheaper, but for users, faster means cheaper to some extent, and establishing an advantage in settlement time is also crucial for PayPal.

We think it will take a few years for stablecoins to become mainstream for everyday payments, but clearly, the timing for applications in certain areas is already very mature. Currently, there are about $122 billion in stablecoins, mainly used for cryptocurrency trading and Web3 use cases, including the DeFi you just mentioned, and we are also looking forward to PYUSD being applied there. We have also identified some early use cases, such as remittances, which is an area we are very interested in. PayPal entered the remittance space a few years ago by acquiring a company called Xoom and has been active in it for a long time, so we have the right to participate. In the B2B payments space, we see an increasing adoption of stablecoins, especially for international import and export companies, where instant remittances replacing wire transfers that take three to five days to settle is very meaningful.

In addition to cryptocurrencies, we believe there are possibly four areas that will adopt stablecoins. First is digital goods. For economies like Minecraft or Roblox, there are about $100 billion in digital goods transactions annually. For a developer selling digital goods in a game, under the current payment setup, funds may take 15 days to arrive. So, if we can achieve digital-native and instant settlement, there will be a significant advantage. In fact, a large portion of the current commercial pool can already adopt stablecoins.

Laura: So do you think DeFi will further develop as a result?**

Jose: I believe DeFi will be part of the first wave. One of the use cases for cryptocurrency users using stablecoins is DeFi. Currently, users can only obtain PYUSD in the PayPal wallet, and the team is gradually improving the product. But our goal is definitely to launch the product on major exchanges and apply it in traditional use cases as PYUSD is issued.

Laura: The press release mentioned that PYUSD can be sent to PayPal-compatible external wallets. You also know that some self-custody wallets have been legally classified as prohibited for trading, so I want to confirm this statement.

Jose: Yes, PYUSD can be sent to PayPal-compatible external wallets. PYUSD is an ERC-20 token deployed on Ethereum, and it can be sent to any wallet that supports ERC-20 tokens, which is what compatibility means.

Laura: Some user terms state that PayPal can revoke transactions, but I think this only applies to certain transactions, such as those within the PayPal Venmo system.**

Jose: I'm not quite sure which specific user term you are referring to, but that is indeed part of transactions. As you just mentioned, PYUSD is issued in New York and has already received approval from the New York Department of Financial Services. New York has very clear requirements regarding KYC and anti-money laundering regulations, so PayPal needs to have the qualifications to control PYUSD.

Laura: There are many stablecoins designed similarly to PYUSD (like Tether and USDC) that are already very popular in the Web3 world. How will PYUSD differentiate itself from other similar stablecoins?**

Jose: The differentiation of PYUSD lies in many different aspects, which make PYUSD a very strong value proposition.

First, is the PayPal ecosystem. While more stablecoins may be launched in the future, PYUSD is currently the only stablecoin accepted in the PayPal ecosystem, allowing it to reach PayPal's millions of consumers and merchants in a bilateral network. PYUSD can become a funding tool for PayPal transactions, meaning consumers can use their PYUSD balance in their wallets to pay millions of merchants for goods, which I believe is something other stablecoins cannot achieve.

The second point is the connection to fiat currency. Since PYUSD can circulate within PayPal, it can effectively leverage the commercial connections that PayPal has built with banks over the years. As everyone knows, the exchange between fiat and stablecoins is a very cumbersome process, usually involving transfers from wallets to exchanges, as well as mandatory fees and complex withdrawal processes, which can take days. However, with PayPal's support, PYUSD balances can actually be freely managed, sold, transferred to PayPal balances, and withdrawn to bank accounts. Therefore, we believe this is an inherent advantage for both entering and exiting funds.

The third point is compliance and regulation. PYUSD is issued by a New York trust company, based on PayPal's experience in handling and preventing online fraud and financial crime over the past 20 years.

Laura: Yes, regarding regulatory issues, stablecoin legislation has recently passed the preliminary committee stage in the House of Representatives for the first time. Is PayPal launching PYUSD at this time a coincidence, or does this stablecoin legislation enhance PayPal's confidence?**

Jose: We have been closely monitoring the legislative process for a long time. I agree with your point; I think it's a good thing that progress is being made in legislation. It is evident that there are still differences among parties regarding the legislation of this bill, but that is the normal agenda of democracy and Congress, and it is normal that no specific bill is the "trigger" for PayPal to launch a stablecoin.

Globally, a clear framework for stablecoin regulation is emerging. In recent months in Europe, and recently in the UK, Japan, Singapore, etc., clear regulations regarding stablecoins have appeared. It is exciting to see that the U.S. is also moving in this direction. PayPal is very focused on a strict and robust framework, which is why we chose to complete the issuance in New York, as that is the strictest stablecoin framework in the U.S. today.

Laura: House representative Maxine Waters issued a statement expressing her concern that PayPal chose to launch its own stablecoin without a federal framework to regulate these assets. What is your response to this?**

Jose: I did see the statement from the senior committee member. From her letter, I understand that her main point is to see clear legislation that allows stablecoins to be federally supervised. As we just mentioned, Congress is debating this. In Congress, both Republicans and Democrats have differing views on whether to adopt state-level legislation, and these debates are part of the legislative process. We strongly support resolving issues through legislation, and PYUSD, regulated by New York's strictest legal framework, will clearly observe and comply with any laws established by Congress.

Laura: Does PayPal believe that the completeness of federal oversight and state-level stablecoin regulation is necessary?**

Jose: PayPal is a payments company, and payments companies in the U.S. are governed by state laws. This means that the regulation of payments is conducted in different ways. Some places in the U.S. have very clear definitions regarding stablecoin payments. In our view, if stablecoins are related to payment activities, then they should be regulated within the payment regulatory framework.

Laura: I remember a few years ago, Facebook (now Meta) launched Libra as its attempt in the stablecoin space. It was not directly pegged to the value of the dollar, and Libra's failure was largely due to regulatory reasons. How did those failed explorations influence PayPal's decision-making in issuing stablecoins?**

Jose: I believe Libra's failure did not affect our issuance process; that was four years ago. Our development in the stablecoin space is similar to our approach in other business areas. We are a technology company and also a regulated financial institution. PayPal has a history of 20 years, and we have always prioritized compliance and regulation. Sometimes this means we may act slower than others, but we place great importance on regulatory and compliance frameworks, and we value our relationship with regulators. As mentioned earlier, PayPal is very active in over 200 countries globally, and only a few payment companies can achieve this scale worldwide. We will adhere to regulatory regulations in exploring any field; this is in PayPal's DNA and is "Who we are."

Laura: Currently, PYUSD is issued in the U.S. How will PayPal expand globally? Will it anchor to other fiat currencies in the future? Does PayPal have plans to launch stablecoins for the euro or pound?

Jose: So far, PYUSD can be purchased through the PayPal wallet, and our next plan is to enable it on the Venmo wallet. Therefore, to a large extent, we will still base ourselves in the U.S. and gradually consider international expansion; we are not currently considering any other stablecoins pegged to local currencies. The focus now is to ensure the successful launch of PYUSD and to have it provide feedback to the crypto ecosystem.

Our roadmap does not currently include plans for stablecoins related to other fiat currencies, such as euro stablecoins or pound stablecoins.

Laura: Will PayPal issue monthly reserve reports? What will they specifically include? Will they show reserve tax fees?**

Jose: Paxos Trust is the issuer of PYUSD, and the reserve report is also part of the New York regulatory framework, which is one of the requirements they must follow, and it must go through a regular verification process. This is the same for other stablecoins issued by Paxos. The regular verification requirement allows the public to see third-party verified audit reports, showing the total reserves and their composition, but there is no functionality for users to check if their tokens still exist in the reserves. I think the best way to understand the reserve report is to visit the Paxos website, where you can clearly see the relevant information about the reserve report on the stablecoin webpage.

Laura: You also mentioned earlier that PayPal will focus on some digital-native ecosystems, such as online gaming. In my view, the audience for these ecosystems is different from PayPal's existing audience. How will you attract users from these areas?**

Jose: The "online gaming" we are considering refers to video games, not certain games involving real-world currency. We are very interested in payments in the video game industry, which may be perceived by external observers as targeting a specific demographic, but in fact, from an overall perspective, it is a very large industry with very high and strict requirements for payment calculations. From a technical perspective, considering millions of concurrent users in an instant-rendering environment is a very tricky technical challenge, so many technological innovations in the payment field first occur in video games.

We are also thinking about use cases that stablecoins can achieve but fiat cannot at this stage, such as streaming payments, where users pay by the second or minute while watching video clips, rather than paying for the entire content, or purchasing digital goods within a running game environment. We have already seen some very exciting experiments where there are NPCs or AI agents in the game, each having a wallet, and the characters, NPCs, or AI agents in the game can buy and sell items within the game. These are use cases that cannot be built through "paper talk" on a whiteboard, but in the video game space, as long as a platform is built, developers will create new use cases based on it.

Laura: I think this is also why PayPal designed PYUSD as an ERC-20 token, as these interactive processes seem to rely heavily on smart contracts and the programmability of tokens.**

Jose: Yes. At the beginning of PYUSD's design, we had to consider whether to create an open-source protocol in a traditional permissionless environment or to create some proprietary systems, but ultimately we quickly chose the open approach. As we have said in the past, we believe you should follow developers rather than tell them what to do. Therefore, due to Ethereum's complete and active developer community, I think choosing Ethereum is a very clear decision, and by designing PYUSD as a multi-chain structure, it means we will also consider applications on other protocols or scaling layers in the future.

Ethereum has many advantages, but it also has higher fees than other protocols, which may be more expensive for some micropayments or high-speed, high-throughput use cases. Therefore, we will definitely consider Ethereum scaling layers in the future, but clearly, Ethereum is the preferred environment for deploying PYUSD.

Laura: For PayPal, PYUSD clearly brings in additional revenue, especially by keeping deposits in products like treasury bills, and there are also fee aspects, with deposit or transaction rates at 1.5%.**

Jose: Traditionally, the stablecoin industry's profit mechanism has been realized through the income from reserve assets, which has been a considerable source of profit in this interest rate environment, and that is acceptable. However, we do not believe this is the only profit mechanism; the external environment for payments and profits will change. Therefore, our approach is to achieve profitability through methods closer to traditional payment businesses, which also means that when merchants want to accept stablecoin settlements, there will be a certain merchant discount rate, and individual users will incur certain related fees when exchanging different types of stablecoins.

To answer your question, we currently do not charge fees when buying and selling PYUSD on the PayPal app; the only part users need to pay is the Gas fee required by the Ethereum protocol, and PayPal does not charge any fees during the transfer process. In summary, other currencies purchased within the PayPal ecosystem will incur transaction fees, but PayPal does not charge users fees when exchanging stablecoins.

Laura: Returning to the profit question, what scale does PayPal expect stablecoin revenue to ultimately reach?**

Jose: In the long term, we believe this field has considerable profit potential, but for next year, our expectations are relatively conservative. Interestingly, the stablecoin market is expanding very rapidly; currently, the total amount of stablecoins is around $120 billion. PayPal will occupy a certain market share while also helping to expand the market size.

A few days ago, I saw an analyst report that indicated stablecoins will grow from the current $122 billion to $2.8 trillion over the next five years, meaning it will grow 22 times in five years. If this happens, the status of stablecoins will become crucial in the international financial market. If this question were posed to me, my view is that a long-term strategy needs to be developed, and before "running at full speed," we must first "walk normally." Importantly, we will promote the large-scale adoption of stablecoins in a "correct" way that complies with regulatory regulations and achieve growth in use cases. I believe the market will grow as expected, and we also need to put in long-term efforts; this will be a journey lasting several years.

Laura: How will PYUSD attract users in specific applications? Is it just one option among payment options, or will PayPal have relevant incentive mechanisms to drive large-scale adoption?**

Jose: Essentially, we will attract users' attention in two different places. First, in the app, there is a cryptocurrency section where users can find PYUSD in the list, just like they can find Bitcoin, Ethereum, BCH, etc., and perform operations like buying, selling, and transferring to external wallets. Secondly, in the payment service, we place great importance on consumer choice, so we will not predefine which specific payment method they should use. PYUSD will only be a payment option, not the default payment method.

Laura: Are there any other points you would like to add regarding issues not mentioned above?**

Jose: As I mentioned at the beginning, due to the significant advantages in settlement time, cost, and speed, we believe stablecoins are the killer application in this field. We believe that large-scale adoption in payments will still take some time, so we will first experiment in the cryptocurrency space before exploring some retail use cases. Regarding competition, I believe we will certainly capture some market share, but I also believe there is a strong demand in the market for fully compliant stablecoins, and I hope PYUSD can have a positive impact on the entire industry.