Nov 6, 2023

PayPal received a subpoena from the SEC recently, requesting documentation about its stablecoin PYUSD.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. All right. Joining us now with more reaction on Sam Beman Fried is Columbia Business School, adjunct professor and former Pax, head of portfolio management, Austin Campbell. Welcome back to the show, Austin. Thank you very much. Good morning, Jen. Good morning. All right, we were just talking about Sam Breed with Nick. What's your reaction to him being found guilty on all seven counts? I think it's largely a positive for the industry. If you look around, there have been sort of hysterical narratives on both sides. Some people believing that crypto is a magical shield against illegal conduct, other people believing essentially all of this is just crime. I think SPF being found guilty specifically in the way he was kind of strips away both of those, which is if you look at what the prosecutors alleged and what apparently the jury found pretty easy to decide. This is just regular way fraud. You can't lie to people take their money and then do things you are not supposed to with it. And I don't think it's actually more complicated than that what do you think this means for the industry moving forward? Then do you think that it had as much of an impact on the industry as some might say? I think what you're going to find moving forward is this creates a roadmap for prosecutors looking at other bad conduct here. So I think in particular, as we look at fraud around many of these centralized entities, if you look at things like say the Celsius of the world or maybe what happened with Terraform labs or three arrows, this probably has pretty negative implication for people of that sort or conduct of that sort going forward. All right, let's turn now to a paypal. We know that you do a lot of thinking around stablecoins and paypal received a subpoena from the SEC recently requesting documentation about its stablecoin Py US D. You issue a series of tweets that we followed very closely here at coin desk. You said that Py US D is transparently a stored value project under the Nydfs stablecoin guidance. Adding that if Pyud is a security, so are Starbucks gift cards? Can you unpack what you mean for us? Yeah. So this is something that I've been thinking about for a while with regard to the SEC, which is if you understand the Howie framework, one of the key components of that is an expectation of profit derived largely from the efforts of others. In the case of the nydfs stablecoins, they don't pay interest and they are well within the framework of a banking regulator. These are things that look very similar to something like a prepaid debit card or if you will literally, you know your checking account to the bank, it just kind of sits there, the money is in it when you want to use it. When you spend it, it's gone. It's the same thing with minting and burning a staple coin. So to me, what made this so notable is that the SEC who has limited time and resources is spending a significant amount chasing around a well regulated stablecoin within a framework that's been in place since 2018 with multiple other stablecoins of that sort, none of which have ever had peg stability or asset problems with. And keep in mind the DFS is what the third or fourth largest financial regulator in the world by size of institutions, they regulate it. It's, it felt to me like a pretty transparent attempt at intimidation at a power grab, especially against another US regulator in your thread. You also noted that the paypal stablecoin is actually safer for consumers than the standard paypal emo. Talk to us about what's behind that. Yes. So if you have a paypal account, you have money with paypal and paypal were to go bankrupt. And I want to pause and say this is not a prediction paypal as far as I know is not in any sort of trouble, but if they were to go bankrupt, you are just going to be a creditor for paypal, right? You have given them money, they are holding it, they are using it under the NY DFS rules and regulations. The funds backing a Stablecoin are held bankruptcy remote in a limited purpose, trust for the benefit of the Stablecoin Holders so that you would expect in a bankruptcy would be severed from paypal and just returned to the token holders. That's a safer form factor. The other part is that the reserves that can back the stablecoin are more conservative than what paypal is allowed to do with the cash on its balance sheet. So in terms of the holdings, you are also in safer underlying assets. So again, sort of interdicting P USD is definitely anti investor protection. It's a safer form factor than paypal. And one of the two main jobs of the SEC along with capital formation is investor protection. You know, paypal has been around for a lot longer than some of the crypto native companies that are issuing stablecoins. We can assume that they probably have some good relationships with regulators. I know you previously said that this is maybe an intimidation tactic from the SEC. But why do you think the SEC went after paypal instead of, you know, some of the other stablecoin issuers that have popped up in? I don't know the last 5 to 10 years. So if you look at who they've gone after one probably, you know, at least somewhat correctly. It's onshore us actors. Um you know, going after somebody like a tether could be particularly difficult given how much they issue doing business with us persons. But in particular paypal seems to be notable because it is headline grabbing. If they had simply wanted to go after people within the NY DFS framework, I'll remind everybody that USDP, which is the original Paxos Dollar and G USD, which is Gemini Dollar launched in 2018. And paypal is the most recent, most notable in terms of the names in the space and probably the biggest brand name. This is part of the reason for my previous comments is it feels like they are targeting based on headline value rather than economic substance. Otherwise they would have been after the other coins for the past five years. Do you think we'll see them go after any other coins anytime soon? I mean, as previously stated, the SEC has limited prosecutorial resources and part of the reason I find this so egregious is crypto as SPF just showed us is a pretty target rich environment for bad actors. There are plenty of things the SEC should have been looking at pre emptively Celsius blocky F TX, Terraform labs, three arrows, Genesis, you know, the list goes on and yet somehow they managed to get into none of those early and stop consumers from being harmed. But now they are here chasing around paypal. So to be honest with you, it's hard to predict what they are going to do because again, it seems like grabs for power and headlines if they were really substantively thinking about investor protection. I think there's a lot of things that probably should have come before paypal. I want to talk now about the perception of the SEC subpoenaing paypal over the stablecoin. Do you think other trad five firms, other banks are looking at this news and maybe shying away from Stablecoin projects they had on their on their horizon. Well, what I can specifically say on that is more so they are shying away from doing those projects in the United States. And I think that is the big problem if you look at the activity that's happening in the crypto space right now, almost everything with regard to stablecoins is moving offshore USD M Mountain protocol launched recently out of Bermuda under the Bermuda Monetary Authority, which is a relatively large regulator in the reinsured space uses that framework. I would say you are seeing projects that are going to be launching out of Singapore, potentially out of the UK out of mainland Europe, out of Hong Kong, the United States is largely not on that list. So I think what the SEC is doing is taking the key bridge between traditional finance of the crypto space. And importantly, all of the customer and KYC information that comes along with that and ensuring that the US might not have access to it and that many people who might not necessarily be our allies will austin. You didn't know it, but you did a little foreshadowing there for us. You're helping me tee up a segment later on in the show where we'll be talking to chain alys about data that shows that most of the stablecoin growth that's happening is actually happening outside of the US. My question for you is do you think that has to do with regulation or maybe there are more clear use cases for stablecoins outside of the US? I think there's two parts to that one as you've just hit on is regulation. I think if we could offer better well regulated products that are an upgrade to the back end people would, right? Don't forget that large US companies have shown an interest in using this space to upgrade financial markets infrastructure like JPM onyx is still out there. It exists for a reason. I think they would like to do more with it and they are not allowed to. And to me that's a big problem for the United States in the long run. The other reason though is that stable coins are one of the best ways to get us dollars in the hands of people outside of the United States. So if you live in a country with a significantly less stable currency, maybe Argentina or Turkey given recent events and you can get your hands on a US dollar stable coin to prevent your wealth from being destroyed or expropriated. That's a large part of the demand. So, the other thing we are doing really is impeding people from joining the US dollar system and expanding the reach of the dollar. You know, and it felt like we may, it felt like we might have gotten stablecoin legislation and then that feeling kind of went away. Do you think we'll see any legislation when it comes to Stablecoins in the US anytime soon? Well, one of the important things to remember about DC is almost everything happens because people can exchange something of value when one party controls each chamber. So I would say if we are going to see Stablecoin legislation pass it probably as part of a budget deal or one of these must pass bills where the House Financial Services side will trade something with the Senate and will find a mutual coincidence of wants so to speak. So I don't think it's dead because there are many deals potentially to be made. And I know that Stablecoins are increasingly becoming a priority for us regulators overall. And I think more than the sec most capable of handling them are the banking regulators who are starting to say that. So I think the odds are maybe higher than people think specifically on Stablecoins. I'm less optimistic about the market structure bill. You think we'll see Stablecoin legislation before the next election if they make a budget deal where it's part of it. Yes. So I would put it at about a coin flip right now. All right, Austin, we're going to have to leave it there. Always a pleasure having you on. Thanks for joining. Thank you very much. Enjoy the morning. That was Columbia Business School, adjunct professor and former P head of portfolio management. Austin Campbell. I should note that coin desk reached out to the SEC for comment regarding Austin's post on X about paypal, but we did not hear back from the agency.

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