The challenges and opportunities for stablecoins in traditional finance with Paxos’ Mike Coscetta

Welcome to the Tearsheet Podcast. I’m Tearsheet’s editor in chief, Zack Miller.

As the industry looks at what’s happening in crypto, there’s emerged an idea that the way the financial industry bridges the old world with the new one is via stablecoins – crypto tied to the US dollar, for example. 

Is that true? To explore this idea i sat with Mike Coscetta, head of revenue at Paxos. As an infrastructure player, his firm works with many of the top brands with crypto offerings, like PayPal, for example. I wanted to know more about stablecoins and some of the trends at play. 

The following is my conversation with head of revenue at Paxos, Mike Coscetta. 

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The following excerpts were edited for clarity.

Plotting where we are in the cycle

At a very high level, we are still extremely early. It's a new market in many ways. I think people are learning not only what the infrastructure has to be to power this market, but what the assets within the market have to be, and the use cases for them. As you think about these things, the consumer changes, businesses change, regulations change, macro events happen and could be catalysts or could be hindrances to the expansion and development of these markets. 

So in a nine inning baseball game, we're probably in the second inning. I think we're still getting our players adjusted and aligned. We're still trying to figure out the game we're playing, because the field is changing, the size of the field is changing, the shape of the field is changing. I think that makes it incredibly fascinating and interesting. At the same time, it could be terrifying. And for a business or a person who's been in this space for decades, this could be really vertiginous and drive you a little mad, trying to figure out what the game is we're trying to play. 

Hurdles to adoption

Games tend to have pretty clear dimensions of the shape and size of the playing field. And they tend to have a very clear set of rules. So, here,  it's a place where I think regulation is not only inevitable, but I actually think it's really desired. I think regulation gives clarity. I think regulation in many cases gives people the opportunity to showcase trust, stability, certainty – things that people typically want associated with money. When money loses stability, certainty and trust, you tend to see a lot of inefficiencies and a lot of problematic things that start to happen in the world. So I would say we need a clear set of rules. 

For companies exploring the space and thinking about what is possible, identify short term opportunities, what are quick wins, what are quick opportunities that can be solved and fulfilled using new technology, whether it's blockchain broadly, whether it's cryptocurrency, very specifically, whether it's a stablecoin – to do things that the company has always envisioned doing. So I think curiosity and creativity are also needed right now, because this is a new era. There are possibilities here that maybe no one ever thought were possible, but with blockchain, they truly become not only possible, but probably also inevitable.

Creativity within an evolving regulatory environment

First and foremost, creativity has to happen from a company asking, “What is the goal I'm trying to achieve and what is in the best interest of my customer, whether that's a business, a merchant, a partner, or an end user?” What’s the benefit to that individual or to that business that I, as a provider, can give to them and think backwards as to what some of the opportunities and advantages are to eliminate some of the inefficiencies and some of the challenges with moving money globally today. 

It's not an unregulated field, because all of our customers are regulated. Many of the people who listen to your podcasts are probably very regulated. Therefore, even though the crypto universe in general may not, by definition, be regulated, these companies can only work with partners who are regulated. So regulation shouldn't be a hindrance, it shouldn't be a hamper – it should just be a clarification and a trustworthiness kind of anointment of any partner. Be creative with what the end customer needs. At the same time, look for and work with regulated and reliable partners who can give you that clarity and certainty that they're treating the business, money, and your customers with the same level of certainty and trustworthiness that you provide to your own customers.

The role of stablecoins

I think it's one of the places where businesses and customers truly understand what they're talking about. I don't think stablecoins are in the mainstream yet or even fully understood. But when you explain to someone that a stablecoin is $1 – in our case, $1 equals $1 of digital USDP – that's something people can wrap their brains around, I think for stablecoins, it's not a matter of if anymore, but when and how and what are the use cases that come up for stablecoins to really be viable. 

When you look at how digital dollars have started to evolve, it's a great indicator that to the Fed, privately issued stablecoins could really further the strength of US dollars broadly, and then provide additional use cases, additional value and utility to the viability of a US dollar. 

If you think about moving money fast and free globally, and eliminating inefficiencies along the way, and providing that really good use case to an end customer, I think that's what the Federal Reserve wants with a digital dollar. I think that's what we would want. And I think for many of the customers we speak to, especially the very, very regulated ones, that's exactly the type of experience they're looking to provide to their business customers, to their consumer customers. 

As a great example, we're working on this right now with Mastercard. It's a public pilot that they've been running to build the infrastructure to allow them to settle faster with their merchants and issuers using stablecoins. So a small business owner can get paid faster from those credit card receipts, and the end user will get a better product as a result. It's a very good example of a very traditional business that's found a way to take stablecoin and bridge the gap between the acquiring world, the issuer world, and the network world – and at the end of the day, provide a better experience for everyone.

Examples of brands moving into stablecoins

PayPal is going to be launching a stablecoin using our white label USDP as the infrastructure. If you think about what PayPal is, it's one of the largest networks in the world of consumers and businesses. So the ability for individuals to send money to anyone around the world in their network, and to be able to do that instantly, the ability for an individual to pay a business with stablecoin, the ability for that business to potentially pay someone, whether it could be an employee or a customer – it could be a loyalty program or cashback program – to be able to do that digitally, it's one of the simplest examples that we've seen. 

It's a very exciting time, because we've seen a lot of others come into the pipeline for our team, now starting to really fully understand what stablecoin can do to not only open up markets broadly, but to add security and safety. Even if you look at the remittance corridor between the US and Latin America, it’s an amazing opportunity for people to be able to send money back and forth to family members, to friends or acquaintances, and do it in a really safe, secure way. So I think we'll see the proliferation of these use cases expand dramatically. 

We're seeing gaming marketplaces come into play. We're seeing regular ecommerce marketplaces come in, because I think they all view stablecoin similarly, which is the ability to do commerce faster, easier, more global, and more secure than they probably are able to do today.

Building things out

As a sales guy at heart, it's weird to see that we have such inbound demand. I don't want to make this a commercial about us, but the reality is, when you see one person move in the financial space, it opens the door and gives that hope that hey, if one can do it, anyone can do it. And sometimes that's because there may have been concerns about regulation or whether this would actually drive adoption. I think when [prospects] see how regulated Paxos is, and the level of transparency that we have, both with the federal government with our OCC trust and with the New York State Department of Financial Services and our trust through New York and MTLS.

I think the reality is customers want to work with regulated partners. There's a lot of scrutiny coming to stablecoins today, about the reserves makeup of certain companies (stablecoins could include money being reinvested, whether it's being lent out). We have a belief that stablecoins should be 100% backed fully with cash and cash equivalents -- that they shouldn't be re hypothecated, they shouldn't be lent out. And I think that gives certainty for other companies to say, Okay, if it truly is $1, and I can remit for $1, at anytime in exchange for $1, then that's a company I would want to work with.

I think we continue to be chosen by some of the largest most respected fintech and financial service companies out there because of the way we treat regulation.

Banks in a crypto world

Banks have to answer three questions at all time. Number one, how do I retain my business customer? How do I retain my end user, my end consumer customer? And how do I retain the maximum amount of deposits from those individuals and businesses at any time? You have to provide value. One of the most common things we've heard from very traditional banks and financial service companies is that they see users leaving; they see deposits leaving; they see direct deposit going into competitors, digital wallets, and digital bank accounts. So when asked, a lot of them point to crypto. A lot of users point to crypto, because they want to convert some of their pay into crypto; they want to be able to easily purchase crypto or access US dollars in a digital way. They can't do that from their traditional interface.

The demand that we see from banks tends to come around, how do I give access to my users, my end customer, to crypto? Outside the US, we tend to see a lot of banks who want to be able to provide dollar access to their end customers. And that's not always easy in some of those countries. Gaining access to a stablecoin could be one of those ways. And I think banks are also always looking at how they move money around their own ecosystems in a faster, more efficient way. So settlements and large money movement in general is a great opportunity for them to use stablecoin, either with their merchant partners, their acquire partners, or even within the bank itself.

Evolving FIs

This is not a bank becoming a brand new company in a brand new industry. This is a bank offering financial type products to its end users and its end customers, businesses, to be able to do similar banking activities that they've always been able to do with just regular fiat cash. There are regulations around who can custody that and how that gets moved around. And that's very obvious. 

That's why we have a very strong business because we're able to provide that custody security and infrastructure and depository kind of provenance for people to feel really good about how that money is being moved, where it's being moved, and how it's being protected. I think banks should look at crypto as an added opportunity to really enhance the experience of their customer, because the customers keep saying the same thing. They don't necessarily want to go to all these other apps or platforms – they would probably prefer to keep their money all in one place. And the more money they have in one place, the more that consumer can enrich their own value from the bank. They can borrow against some of these assets, maybe they can get a mortgage against them down the line. Maybe they buy a house with crypto, and the bank can participate in that transaction. 

Whereas today, most of those banks are sitting on the sidelines watching that money move without their participation in it.

A public announcement went out from Israel a few weeks back that Bank Leumi, the second largest bank in Israel, is now offering the ability to buy, sell and hold crypto through its app, Pepper. That's all powered by Paxos. It's an example of a very traditional bank, a very traditional institution, publicly traded on stock exchange, say, what if we don't think about this, and if we don't incorporate this, we're going to be looked at like a dinosaur. We don't want to fossilize when there's a chance to really move forward and do it very quickly. 

But as you can imagine, banks tend to have the highest level of regulatory scrutiny, and therefore can only and will only partner with companies that have a similar perspective on regulation. I think it's been really fun to watch this process evolve from the inside of seeing banks now become not only more amenable to the idea, but very excited about it. And then to be very creative about the ways that crypto and blockchain and stablecoin can enhance the user experience, the banking experience, and at the same time, give them an opportunity to really build on technology and to provide a better experience overall, to everyone in their ecosystem.

Infrastructure challenges

We're trying to hire. We're growing like crazy. We are an amazing business, and I think we're building really long term technology and doing it in a very nascent industry. So to me, that's a very exciting time. It's a very exciting place to be. But I think almost every technology company out there right now is dealing with the same challenge, which is just hiring enough really good people at the speed to meet the demand that we're seeing. 

Second thing is that these customers are huge. They have extremely stringent due diligence processes and checks that we have to go through, whether it be security, physical security, information security, custodial security, how our crypto keys are managed, all that stuff. So we need to have all hands on deck to be able to support these deals, not only to win them, but most importantly, to help those companies become successful launching whatever the product is, in our ecosystem that they're using. We're looking for people who really love to serve and support the success of our partner customers to grow their business, to drive adoption with their end users – the future of finance.

Moving from Square to Paxos

I wanted to get back into true fintech for a while. Square is an amazing business and you can't work under Jack Dorsey for four years and not become a believer in the world of blockchain. He's been right too many times. I love what Jack has done. 

I went off to Compass to take on a much broader set of roles and responsibilities, really running business units and p&l and building service organizations and doing more on the operational and revenue side in a business that has just exploded in size. I think the company will do $7 billion in revenue or something this year. So getting to see it double, triple along the way and to see through an IPO was incredible. There's no cooler sound than the bell of the New York Stock Exchange. To be there and see it and hear, that is incredible. 

I wanted to get into the crypto world. To me, what Paxos represented was an opportunity to play the long term, to focus on the space of building financial infrastructure and really to help form the infrastructure of the future of finance. I think the financial infrastructure system was old – it's built on technology that I don't think anyone would build today. So it was really to fulfill the mission that Paxos talked about: to enable trustworthy and instant movement of money, or really any asset, at the speed of the Internet.

I love the infrastructure-only perspective. It positions us as a partner of our customers versus competing with them for their end customers. And it's a way of thinking through, long term, how do all assets move to the blockchain, not just crypto? I think crypto is the first step, but how do you move dollars? How do you move gold? How do you move real estate? How do you move securities? Many of these things we're doing today, and we'll look to continue to grow them. And that was exciting to me. I think that would probably excite a lot of people, but it definitely hugged me.

Different types of stablecoins

Listen, there are definitely different goals that people have in the world for their money. Some people want to gamble it, some people want to risk it, some people want to be in for the really high beta oscillations that will happen in the market, because they want to catch something on the upswing. 

I think for us a stablecoin is a stablecoin. It's meant to be stable. And it's meant to be $1, so that when you go to withdraw, there’s no uncertainty or risk that if everyone wanted their dollars at the same time, that people would be able to get them. We're regulated by the New York DFS, which means our issuance reserves of our stablecoin, everything related to stablecoin, is overseen actively by the DFS. To change any of that would actually require expressed regulatory approval. I think that's what most people want with their dollars. 

Now, that doesn't mean people might not want a chance at a 5,000% return. But I think the way you treat that money is different from the way you treat your cash and the money that you want to have there the next day. Our reserves are audited. They're backed by one to one cash and cash equivalents. 

With algorithmic stablecoins, I think it's a fascinating space. But it would be very hard for me to go tell my mom, go put your $100 in here, because maybe it'll be $200 in a year, or maybe it won't exist in a year. That's a hard place to be. It doesn't mean there's not room for that. But I think people want certainty. They want stability. I think that's why we've seen such massive demand, especially recently, for our stablecoin, because I think it's something people understand they can trust. 

Regulatory playing field

Regulators are our partners. They're meant to be enablers of new technology and spaces, but at the same time, they are the people ensuring the security of the end customer, of the money at stake. They're also there to ensure transparency so that people are aware of what they're doing, why and how they're doing it. I think that's actually a really critical role of regulators everywhere. 

That said, we seek to continue to be a partner to help educate regulators all over the world. We work very closely with many of them. We're licensed in the US. We're licensed in Singapore and Latin America, and these licenses are not easy to get. I think the way you get them is by being very transparent and by being that partner. Our goal is to really build long term infrastructure and to help the entire financial ecosystem move at the speed of the Internet.