PYUSD

A new challenger enters the field

Stablecoins are coming

This is something that I have been saying for a while. Stablecoins are inevitable¹.

Our choice is not to prohibit stablecoins or allow them, it is to allow them elsewhere and out of our control, or to allow them here, under our control. This “here” applies to basically ever major nation where people want to use or implement stablecoins, as the horse is already out of the barn and has been for a long time.

For truly small nations², I would also add that my personal belief is the stablecoin may be the end of local currencies, either completely or for use as anything other than mechanisms to pay the government required amounts of money in that currency.

Why is this happening now?

Blockchains Create Options

Fundamentally, one of the most important impacts of public blockchains is that they will erode monopolies over time. My friend and crypto co-conspirator Omid Malekan has written about how crypto will lead to a re-imagining of the current highly centralized, highly opaque, very consumer unfriendly world of global value exchange, and I’m going to attempt to summarize the parts of his argument that I agree with here.

Platform Incentives Suck in Web2 and for Banks

Within a corporation, the first duty of management is to the owners. Be those shareholders, for public companies, or the partners and private owners, for private companies, these vehicles exist to generate a profit for their owners. This means that when walled gardens emerge, the natural tendency is to treat the customers within that walled garden like livestock: fatten them up (build the network effect) and then harvest them (charge as large fees as possible that don’t totally destroy your network effect). It is, essentially, an abusive relationship: they hook you in, and then they don’t let you leave. Consumers know this, and don’t like it. Most of the tech monopolies are not popular, and banks are especially not popular. Nobody wants to be lending to risky VC companies and funding commercial real estate for the rich just to use the payments system, and nobody wants to pay 30% for a privilege of buying an app on a phone you already paid $1,000 to own, but this is how walled gardens work.

Enter blockchains. Suddenly, there is an open-source, interoperable tool for communication, storage of data, and transfer of value. Where is the wall? Now the garden has escaped and it’s in the wild. Everything is the garden, so to speak. When users have the option of having their own control, they are likely to prefer this over time³.

Interoperability Matters

Part of the reason these walled gardens exist is that people build things to keep others out. Want to be in the app store for the iPhone? Pay your tax to Apple, go through their rules and procedures (which they can change whenever they want), and bow down to your corporate fruit-adorned overlord. Don’t want to? They kick you off the platform, or don’t let you on in the first place.

I want to be clear: I don’t think there’s anything illegal about that (so long as they aren’t engaging in some monopolistic practices), but I don’t think it has a right to exist or be profitable, either. I believe in markets solving these problems.

One of the big solves with blockchain is the interoperability. Companies that embrace the technology and allow it to work that way will now have the ability to be composed with apps from other companies, or find use cases they never expected. Settling invoices between Finland-based merchants with Afghanistan-based vendors using USDC on Sui? This is possible now.

Before, that would have taken a bunch of hops through banks, if any bank would even process that (and if they don’t, they won’t tell you why or let you appeal, mostly).

Why can this happen in this way? You now have a wallet provider (built anywhere) and a stablecoin issued from the United States that, thanks to the architecture of the system, can all be used for a peer-to-peer transaction to settle that can then be brought back into the local system through a stablecoin or exchange⁴.

Trust Assumptions

Another important feature is that trust no longer works the same way. With a blockchain, you don’t have to trust some nameless or faceless institution to handle your money properly. Instead, code is law. Now, this obviously has downsides, but the upside is very simple: if you use the blockchain in a valid fashion⁵, you know what is going to happen and your things work. The good news about this is you can be in control of your own tokens with self-custody, you can choose when and how things are sent out, and you can, in general, build a system that is not reliant on others⁶ to work properly. The bad news about this is you don’t have centralized entities to run to if there are screwups, so there is a balancing act between error rates in the crypto system vs. failure rates in the traditional system that is under-discussed.

However, as tooling and the user experience improves, reducing this error rate and complexity means that the crypto system should, in theory, be strictly better once fully developed. Again, I don’t think we are anywhere close to that, though we are moving in that direction.

PYUSD

This brings me back to PYUSD⁷. One of the ways that progress emerges is early adopters will become increasingly scaled, formal, and understand their use cases for which they are adopting the technology.

I believe this is the case with PayPal. The first thing to understand is that this is a remarkably forward-looking move for a company. Most firms, when faced with disruptive innovation, adopt the emu strategy of burying their head in the sand and pretending there is not a problem. PayPal, instead, has taken the challenge of technological evolution head on, which is good, because their old business model was going to have problems if the world went to an open-source framework.

You’d always rather disrupt yourself on your terms than have someone else do it to you on theirs.

The other point here is that this has massive ramifications for everyone else in the payments space. If you are at Visa, Mastercard, Amex, Stripe, or any number of large banks, today marks the start of a very important moment in time for you.

Do you follow PayPal quickly, attempting to learn from any mistakes they make and overtake them after drafting in their wake (fast follower)?

Do you think deeply about what they have done and reject it in favor of a different path, which may be a correct or incorrect decision, but is at least decisive (regime shift and/or building up the current moat)?

Do you get paralyzed trying to figure out what the right path is and really do nothing while slowly being eroded by your competitors because you don’t want to give up your current position (the classic innovator’s dilemma problem)?

This is a critical decision point that is going to lead to massive success or massive failure for all of the companies that need to react to what PayPal has done, and all of them are now playing from behind in this game.

So what do I think the impacts here will be?

Legislative Action

This sort of thing is what spurs people to act. There is clearly a (narrow) path for non-bank but professional issuers to do stablecoins right now. Having them be the only ones who can do this is fundamentally weird, and the fact that a company as large and important as PayPal pulled it off means that Congress will probably realize this issue is not going away.

They should act. This is not to say they will (nothing in Washington is certain), but the odds are likely growing by the day.

Regulators Asking Questions

Prior to legislation, our regulators are now in a particularly challenging position. The banking regulators have largely been anti-stablecoin or, at best, stablecoin tolerant, with the exception of a few notable states (NY, Wyoming, Nebraska, in particular). However, now you have to confront this issue. PayPal is simply too big to simply tell people not to do business with them, and attempting to that will make the political football far more toxic and dangerous to the regulators themselves. Instead, the regulators that have been pushing this away now probably have to ask themselves how they are going to start to manage it and live with this situation, because it’s clearly not going away in the United States, nor is it going away abroad, as if you think PYUSD is the only thing coming…

Talent Wars

As this starts to take hold, one of the realizations that a lot of people are going to have is that there’s not a huge body of people who understand how to do these things well. New technologies are disruptive by nature, and small groups of people with direct experience are usually the ones who drive adoption across a series of firms over time⁸.

Basically, stablecoins are a somewhat unique problem, and just like with other emerging technologies, those with specific expertise in the space are going to drive it forward. The team at PayPal, former Circle, Paxos, and Tether employees, and even those at some more normal fintechs or more crypto-native implementations will be in high demand as the space expands⁹.

Obviously, one angle is issuing stablecoins, but there are many others: integration, usage, risk management, vendor evaluation, business strategy, and so on.

I mean, I literally started a consulting firm¹⁰ to help people with these kinds of problems.

Dollar Expansion

Most important is the expansion of the reach of the dollar. Now, anyone with a PayPal account can get their hands on this token. That is not a small thing. Giving people, globally, the ability to opt out of their local system and into another system is incredibly valuable. I think this is one of the most understated impacts of stablecoins, and one of the most important in the long-run. Having global on ramps and off ramps with a trusted, battle tested platform like PayPal means people can use this, and they aren’t going to be subject to the whims of banks doing things like closing accounts because people dared to leave their walled garden and use crypto instead. Just send money to your PayPal account now.

Conclusion

This is a long-term positive for the space. A player like PayPal entering the field is material, for credibility, for access, for public education, and to force everyone else to start grappling with the reality of blockchains and the types of commercial applications they enable.

I predict we’re going to look back on this as a turning point in five years, for PayPal, but also for the usage of blockchains globally.

1. The assumption here, to make clear any bias, is that blockchains are here to stay and a global, interoperate omni-ledger provides value above and beyond our current highly fragmented, inefficient system of global value transfer.

2. Non-trade currency division, as I believe stable, well-managed currencies like CHF and SGD will continue to have a place in the world.

3. I say over time because right now the user experience in crypto is, to be blunt, bad. Then again, I am old enough to remember the internet pre-AOL, and that was really bad too. The improvements will happen, but take longer than people think.

4. Technically we are missing a way to exchange value without counterparty credit risk here, as using only send currently means someone sends first, but stay tuned on this space.

5. That is to say don’t screw up

6. The major caveat obviously being the operation of the blockchain itself

7. I remain personally disappointed it was not called USDPay

8. In one of my more niche products at JPM, with one notable exception, every single trading desk was one step removed from JPM and most had been started by ex-JPMers

9. My students often seem to know this

10. Feel free to reach out