January 11, 2021
Although blockchain technology and Bitcoin, its best-known inhabitant, have been around for 10 years, the world is just now entering a seismic transition from holding account-based assets to a system that uses token-based digital assets. Whether it's crypto, cash, gold, diamonds, stocks or even cows, Paxos Founder and CEO Charles Cascarilla said the financial world is undergoing an adoption curve.
“So what we've done is build our business to begin to facilitate and tokenize other real-world assets,” Cascarilla said in a recent chat with PYMNTS. “This is a really seismic shift.”
For its part, Paxos describes itself as a regulated financial institution that builds infrastructure to enable movement between physical and digital assets. Put another way, it's the company that made it possible for PayPal’s recent announcement that it would allow its users to buy, sell and hold cryptocurrency.
“So it started with crypto — that's [its] native token — and it has moved to cash,” Cascarilla said, noting the current $25 billion tokenized cash market that grew fivefold last year. “But now [people] are starting to use tokenized cash for other things, namely goods and services, and then increasingly for asset settlements and wholesale settlements. You're just creating a new system, a new way of doing things and what’s so important is you're creating a new way for these assets to move around that hasn't existed before.”
It wasn’t all that long ago, Cascarilla said, that his own Wall Street career saw the transition from manual trading in 8ths and 16ths of a dollar, to a fully decimalized and digitized system that matches buyers and sellers in nanoseconds. However, when it comes to actually clearing and settling those supersonic trades, that part of the financial industry has barely improved at all.
“The actual clearing and settlement layers have not shifted in like 40 or 50 years,” he said. “We've gone from [trade + 5 days to settle, to trade + 2 days]. That's the best we've done.”
As much as “fully instantaneous settlement” might someday be a possibility, the regulated markets could easily get to same-day settlement or multiple windows of settlement say for equities, which would actually be more beneficial.
“And the reason why it might not make sense to do real-time gross settlement is, do you want to be settling trades in microseconds? Is that really needed? Or does it make it more efficient to do it every two hours and you batch everything and net it down,” he said.
At a time when “you can order toilet paper faster than you can settle shares of stock,” said Cascarilla, putting assets on a blockchain could solve that problem tomorrow.
“You can immediately know where shares are moving, even if you haven't settled them,” he said. “Having T2 today is just so anachronistic. You have to basically guarantee the trades and then on the settlement day, you take all day for the settlement to happen and it just doesn't make any sense.”
From his viewpoint, instead of just installing newer tech to replace the 1970s Cobol systems that are still in place, a fresh token-based technology would create the benefit of speed, clear chain of title, better understanding and protection for investors and allow the owners of assets to really know what they own and who they're facing as counterparties.
Hamstringing American Innovation
While Cascarilla repeatedly said Paxos not only is — but wants and needs to be — a regulated platform, he thinks a recently proposed rule relating to unhosted digital wallets put out by FinCEN, the Treasury’s Financial Crimes Enforcement Network, was rushed and problematic for such a complex issue.
“Paxos is probably almost fully compliant with this rule, yet we oppose it because it's not being done in the right way, and because it hasn't been given enough time,” he said.
Not only would it create an unlevel playing field for token-based movement of assets, compared to the account-based system, it would also hamstring the U.S.'s ability as a country to effectively innovate.
“Innovation is going to keep happening. It doesn’t stop. It's global. And so now you're going to hamstring American innovation, the American ability to succeed by protecting the incumbent way of doing things,” he said.
Furthermore, he said the proposed change would “actually push people out of American institutions into overseas institutions,” which in turn would “hamstring law enforcement's ability” to monitor what is happening.
There’s also the fact that different federal agencies are simultaneously drafting and enforcing conflicting regulations.
“For example, Bitcoin is not money. I think it might be great if it was considered money, but the IRS calls it property,” he said. “So now we're basically going to treat property like it's money for one purpose, but for tax reasons, another."
Clearly, there are different risks between Bitcoin, a Picasso, a piece of land or a field of cows, he said. That underscores his point that the financial services industry needs to think holistically about making sure the right regulatory frameworks are in place to take advantage of these changes. Add in the government’s present push for financial inclusion for the country’s estimated 25 percent of citizens that are unbanked or underbanked, and he says it becomes even more important to give people access to the financial system.
“Far more people have smartphones than bank accounts globally,” he said. “So if you're only thinking about trying to control the risks and not understanding how to do it in a way that adopts this new technology, you're actually just going to create another wall garden that will prevent people from being able to access it and push them overseas and I think that's a real disservice to the United States.”
He said unlike some banking regulations that have been in the works for 5, 6 or 7 years, Paxos and others were given just 12 days notice to comment.
“And you think you're going to create good policy [that way]? It's just too complex,” he said.
Financing And The Future:
Simply put, Cascarilla said PayPal chose to align itself with Paxos for a reason.
“I think [PayPal’s crypto decision] is the biggest thing that's happened to the industry and certainly the most important thing has happened to Paxos so far,” he said, pointing to partnerships with Credit Suisse, SocGen, Instinet, Nomura and Mitsubishi Sumitomo, as other examples of very large companies entrusting his firm.
It has also caught the eye of investors, who have just put another $140 million of fresh capital into Paxos, more than doubling its total fundraising.
“We need capital for three reasons really,” he said. The first reason being that we want to be able to invest in our regulatory infrastructure,” such as applying to become a national trust and clearing agency. “[We also] need capital to create the right level of confidence for our customers,” he said, inferring the need for them to know Paxos will be around in 10, 20 years and longer.
“And then lastly, it's about being able to build out the technology, build out the team,” he said, given that the aforementioned large companies have expanded its pipeline from many millions of people, to billions.
“So it's just a whole different world that we're in,” Cascarilla said.
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