‘Before they were afraid to be first, now they’re afraid to be left behind’: Paxos’ Charles Cascarilla
- With crypto securing a place in more wallets around the world, major institutions are embarking on incorporating trading in their offerings.
- By asking for permission and not forgiveness, Paxos provides financial institutions the regulated efficiency needed to compete in the crypto era.
The following was produced by Tearsheet Studios. We worked with crypto brokerage Paxos to create a podcast series about the mainstreaming of crypto, the genesis of Paxos, the rise of stablecoins, and crypto’s energy and environmental impact.
We’ve reached a point in history where there are no longer two distinct financial systems: the incumbent financial system and the world of blockchain and cryptocurrencies. Some of the most popular fintech apps like PayPal, Revolut, and Venmo have introduced access to crypto. Many of the largest banks have plans to offer crypto trading to their clients. And credit card companies are making it easier to convert crypto to fiat at the point of sale. We call this the mainstreaming of crypto.
Subscribe: Apple Podcasts I SoundCloud I Spotify I Google Podcasts
The following excerpts were edited for clarity.
Charles Cascarilla, Paxos: My name is Charles Cascarilla. I'm the CEO and co-founder of Paxos. Paxos is a crypto and blockchain financial market infrastructure firm.
Some of the big names in the industry pivoted from successful track records in parallel fields, while others matriculated right out of the classroom. But very few can say they’ve known that they wanted to innovate the financial world from childhood. With his first stock investment at only ten years old, Charles is among those few.
Charles Cascarilla: It was actually something my grandmother told me about, believe it or not. I'm from Cleveland, and there were a lot of public companies, including one that just came out of bankruptcy, LTV Steel, and I remember buying my first share of stock when it came out of bankruptcy, because I thought it would be a great company to support. Now, this was back in the early '80s, but what it really cemented for me was a real fascination with how the financial system worked, how ownership worked, and the way in which you could participate, even in small amounts, in financial markets.
Fast forward a couple decades, that worldview would manifest itself into a diverse career as an investor. Cascarilla had a keen sense of the possibilities of the new technological age and passion for the social and psychological mechanisms of market trends. Combined with a track record as an asset manager, it was only natural that Cascarilla would find himself at the forefront of crypto and blockchain innovation.
Charles Cascarilla: I think what it really cemented for me was an interest in being an investor, and just a fascination with different types of businesses, the ways in which technology and companies and management teams were able to create whole new businesses, and to really create things that were transformative. I was growing up at an interesting time, because the internet was just beginning, and computers were just starting to exist in a personal and a retail sense. I knew that I wanted to be an investor. And I thought what was so interesting about being an investor is that it's really a polymathic skill set -- it's a lot more than just about knowing numbers. It's about understanding, in some sense, social psychology and your own mental psychology, because there's such a behavioral aspect to what you're doing. Markets are dynamic.
I went to Wall Street after I graduated, and it was meant to be a way to move into being an investor on a professional basis. And that's actually what happened. I started at Goldman covering public companies, a lot of them financial services companies, but then started working afterwards as an investor. I also started my own asset manager to become an investor -- and so really focusing on financial services companies in the financial system. An unexpected twist for me, I really thought that I would spend most of my time looking at technology firms, because that's what had really captured my imagination. But at Goldman, get put into certain groups, and I developed an expertise in financial companies. It was really a great blessing because it's allowed me to marry those two together in thinking about how financial services and financial markets would change over time, eventually leading into crypto and blockchain.
The important role of crypto for the present and future of financial ecosystems is a mainstream opinion today, but it wasn’t always like this. The industry players who saw the potential in blockchain a decade back are the ones who understood the underlying dysfunctions in the financial systems as they were at that point in time.
Charles Cascarilla: Going into the financial crisis, what we saw was that the plumbing of the financial system was old and archaic. And that made the crisis so much worse than it needed to be. And in fact, in some ways, it was more than just a contributing factor of the crisis, it was a cause of the of the crisis, because it was impossible to know all the risks in the system from a regulatory perspective or even by market participants, because it was so opaque in the middle and back office. And even coming out of the crisis, we saw this problem where there was a robo-signing issue and MERS issues around how home mortgages were being executed. And all this led to a slower recovery and a lot of inefficiencies.
And when we came across Bitcoin and blockchain, it was very early days, May of 2010. I immediately gravitated towards it, because I saw blockchain technology as a solution to those plumbing problems. I could see how it solved who owns what and when -- that's very important in financial services and financial markets. That's mainly because it's about allowing information to move around, but yet be universally accessible. And so essentially, what happens is anybody can join it, but nobody controls it, yet it's cryptographically secure -- a really huge innovation. And because I came from financial services, I saw a solution to those problems. And we began to think: how could we take this technology and apply it to the problems that we know? And that's what led us to start Paxos.
With Bitcoin and many altcoins currently down by 50 percent, it’s clearer than ever that there’s a lot of volatility in the space. Cascarilla offers a big picture view behind some of the dramatic price corrections, and why the only constant we can confidently expect is change.
Charles Cascarilla: When you talk about the price of crypto, you have to think about what each one represents now. I think that's a really interesting development from the early days when it was just Bitcoin, and that was the only blockchain and that was the only crypto, to today -- it is a much wider type of asset class than it has ever been before. So you have different types of crypto assets representing different things. Certainly, the asset class moves in tandem and is generally moving in lockstep. Bitcoin goes up and all the crypto universe is going up; Bitcoin goes down and all the other crypto universe is going down.
We've had a huge price run up and a big pullback, as well -- more than 50 percent. You have to expect that in an early asset class like this, where there are so many different things that are being represented by it; they're being created, they're being tried, some are being discarded, some are being adopted, and that means ones that maybe have a more mature base, like Bitcoin, will be less volatile on the upside and the downside. But ultimately, all of them are still in very early stages here. I think there's really credible arguments, for instance, why Bitcoin could be worth $10 or $20 trillion; doesn't mean it will, but it could. That means there's still a huge amount of upside.
There’s plenty of talk about the volatility in the space, but one thing is for certain: crypto is not going anywhere. It’s graduating from the early adopters stage and making its way onto the main stage, front and center. And the big players in the financial industry are catching up.
Charles Cascarilla: Many large firms have had the PayPal moment, which is that they were afraid before, and they are afraid after. The difference is that before they were afraid to be first, now they're afraid to be left behind. And that's because PayPal is the fifth largest financial institution, at least by market cap right now. And their entry into the space makes it clear that you're hitting a mainstream adoption curve. This is a key point: the early adopter community is small -- maybe it could be ignored, you could wait until something happens, and that thing happened -- which was PayPal. And by the way, that's not to take anything away from Robinhood, SoFi, Square, or Revolut, which are all large fintech firms, but not mainstream in the same sense as PayPal and Venmo are.
And that shift to them coming into the space, which we powered, really set off a mainstream adoption curve. It's still early stages, but you've gone from an industry that maybe had tens of millions of users to now having hundreds of millions of users, on the way to billions of users. I think everybody [will become a user] in the next 18 to 24 months.
This past year, the largest financial institutions finally realized that incorporating crypto buying, selling, and holding into their offerings will not only keep them relevant -- but connected to what their customers want. Yet creating the infrastructure to do that in a highly regulated and reliable fashion is no small feat. The question is whether they are better off building it themselves or partnering with a service provider.
Charles Cascarilla: What we found is that firms really want to move fast, and need to move fast. They fear not being able to maintain parity with their competitors, which I think is very real and very valid -- meaning they want to necessarily not build it themselves. They want to rely on a service provider who can move fast, who specializes in infrastructure. And it also means that they have to spend time thinking about what processes they want to have internally versus externally. Where can they be really great? Where can they put their scarce resources to best use? And where can they rely on somebody who will give them leverage?
By and large, in financial services, there's a sense of the infrastructure layer being a common good, a utility good, that you rely on external providers for. Examples are certain exchanges, clearing corps, other money movement facilities like ACH, Fedwire, etc. that are a common good, that are regularly used by large participants. Because in financial services, there are a lot of different types of firms that users can go to -- there's a JPMorgan or there's a Bank of America, or you can go to a SoFi, or a Revolut, or whatever it might be. There are many different types of providers out there, yet they need to be able to have a common way of being able to build and move quickly. And that's where Paxos comes in.
This mainstream adoption shift is about how to move fast. How do you make it commonly available? How do you do it in a highly reliable and secure way? Paxos is exactly about that. We have spent the last seven years building a regulatory stack that gives us approvals to hold many different types of assets, but to be able to move and hold it in a regulated way, and to do it in a trust company, which is actually safer than a bank. So we're deliberately set up as an infrastructure firm, as a Trust Company, which is a special bank -- we don't make loans, we don't take deposits -- we only hold client assets, bankruptcy remote, fully segregated.
That regulatory wrapper around our business is very, very important, because it creates confidence for our customers to use us. And what we marry with that regulatory wrapper is our infrastructure platform. And so there's lots of infrastructure and lots of industries, you can think of AWS or you can go across and look at other analogs and other places. What's different in financial services is that infrastructure needs to be regulated in a very reliable way. And that's what we've done from the very beginning: we asked for permission, not for forgiveness. And that is what is enabling many large firms to come in to work with us. And we're going to have some exciting announcements in the back half of this year that I think will be on a scale similar to PayPal.
Some of the biggest financial institutions -- Paypal, Venmo, Revolut -- chose to forego building the infrastructure themselves, and instead power their crypto offerings with Paxos. Cascarilla shares some of the key insights Paxos walks away with after helping them launch their crypto products in the US.
Charles Cascarilla: They're all really excited to get into the space, and they recognize that it’s the future. And they recognize that there's a convergence of different types of financial activity into one common wallet. I think that means that crypto is something they're excited about, but it's not the only thing they're thinking about. They're trying to think about the strategic journey this is laying out here. A common thought exercise I give to people is: imagine not just crypto, which is native to a blockchain, is accessible in your app or on your phone, but that any asset is put on a blockchain and now available. That's an enormous amount of assets. By the way, globally, there are $700 trillion of assets. There's only $1.4 or $1.5 trillion in crypto. How does the world change? How does the financial system change if it existed in that format? And how could you converge your offering to your customers, as one of these companies? How do you converge your offering to create the most amount of utility and the most amount of capture of the financial life of a person?
That's very complex to do today, because there are so many different back ends you have to build in order to make stock trading available versus money movement, versus being able to hold commodities or real estate or collectibles. It's very operationally intensive. But if those assets were sitting on a blockchain, that starts to really go away. And so that is the vision that we believe is going to come to fruition.
But increasingly, these large financial institutions see this convergence happening, and they're trying to figure out how to make sure that their product offering today is relevant for their customers in a world where you can get almost anything at the click of a button -- but not from a financial perspective. How do you address that in a way that keeps you relevant, as we move through the next five or ten years of some really significant shifts, the likes of which we saw, for instance, in e-commerce, advertising, and media, starting in the mid 2000s.
Fast forward to today, there’s hardly an aspect of life that escaped the impact of the global pandemic, and notably the move towards digital adoption. Yet a large portion of financial infrastructure is still built on COBOL; how long will it take for traditional banks to fully make the move to the cloud and blockchain based platforms?
Charles Cascarilla: There's a continuum, of course. You have certain firms that are trying to move as fast as they can, and then you have others that are just slower. The weight of history is very large. My pitch to these institutions is: Paxos is here to help you. And you shouldn't be afraid of this, unless you don't adopt it, because it's going to happen; it's going to change; you can see what that system would look like because the crypto ecosystem is rapidly innovating and developing new ways of creating, lending and borrowing, trading, community, holding assets, doing it in a programmatic way, in an always-on fashion, 24/7.
How do you make sure that you're offering those types of products to your customers, and do you have a path to get there? Because that's a nonlinear shift. It can't just be just following the standard path that we're on -- you have to move on to a whole different forward curve. As I mentioned, there's this continuum of firms who understand that. And it's not easy to have large organizations take that type of shift, internalize it, and react to it in a way that gets them the right result. But they will. Absolutely some firms will, and I think some firms might not, because these types of changes are not easy to execute.
But on the other hand, all of those firms have the end customer today -- all the end customers, all the end retail consumers, all the end businesses, all the end institutions -- they have relationships with banks and brokers today. And it'll just be about: can you maintain your relevance for them as a customer or not? This is not going to happen overnight, because people's behavior doesn't change overnight. Still, the community of people who are using these products is still relatively small -- not insignificant, but still relatively small -- five or ten percent of the population. They're really holding it as an asset. They're not really using it in a way that's changed their financial lives yet. But you can imagine that will be the case, and over the next five or ten years, you naturally have all of the millennials and the Gen Z's that are coming up, and they're used to having life through their phone; they're not going to go into a branch, they're probably not going to use physical currency, and they're going to feel very comfortable in a purely online world. How can you maintain relevance when that is what your customer base looks more and more like?
For major financial institutions, the move to blockchain platforms is a huge shift, and many will decide to allocate precious build resources towards working with a specialized crypto brokerage, like Paxos. But how should a financial giant approach introducing their customer base to a third-party provider?
Charles Cascarilla: I think they should look at it through a spirit of partnership and specialization, and the fact that as an infrastructure provider -- and only an infrastructure provider -- it's not a hobby for us, it's not something we're doing in addition to our other customers. And that's a good thing, because not only is it not a hobby, it means that we're not a competitor. And that means we can be a partner. And our goal is to be the best possible partner, because our vision, if we're successful, is to have replatformed the financial system, and the mission of the company is to enable the movement of any asset, at any time, in a trustworthy way.
To achieve that, you have to do it by creating a win-win for everybody. And that's what I think we're very capable of doing. We've shown it with customers today like PayPal, Venmo, and Revolut, and we'll be showing that with others. We have, across the firm, a wide range of different companies that use us from Credit Suisse, SocGen, Bank of America, and Instinet -- a large number of different firms that recognize the value of using a specialist to help them create new types of products, and to help them upgrade the current products that they have. And that's what we're here to do. We do it in an API-based way, it makes it a turnkey solution, it's highly regulated, we've raised a significant amount of capital: $540 million. We have an independent board of directors. All of these things are done to make sure that our customers, regulators, shareholders, employees, and everyone can have the confidence that we're going to be around as a partner to help them succeed.
Paxos is building modern infrastructure to help banks transition into the crypto era. But it’s not just the banks that are evolving -- consumers are, as well. They’re the other side of this equation. Cascarilla believes everyone will have a digital wallet in as early as 18 months.
Charles Cascarilla: You have access to basically all the information in the history of the world at the touch of your finger; what an unbelievable shift in how information is able to move. And financial information is just information. It's very valuable, it might be regulated, but it's just information like anything else. There is going to be an expectation that your financial information should be able to move just as fast as anything else does. It'll be really clear that in a blockchain environment, one of the powerful aspects of what happens is that anybody can be a part of that system, simply because they have a phone or a computer and some internet access. That's really huge. You don't need to have a bank account. You might want a bank account, you might want a service provider in this blockchain world, but you don't need to have one; you just have to download a wallet from an app store, and then you can suddenly hold a stablecoin in there, or crypto in there, or gold, or whatever it might be.
And you now have a way of being able to hold and move assets that does not require an intermediary. Today, one of the biggest things that holds back participation in the financial system is how costly it is to be in the lower end of society as an unbanked or underbanked person. Even in the United States today, 26 percent of the population is unbanked or underbanked adults. It's almost mind boggling, and we're a first world country. Just imagine it's billions of people globally. And having a phone and internet access will allow you to have a wallet that isn't tied only to a financial institution that onboards you -- it’s not going to then create the high fees and high costs for you to be able to move your assets around the world, which is how it works today. Big, big shifts, and profound ones for society and for the way in which people are able to have control over their financial lives.