Jose Fernandez da Ponte, PayPal’s senior vice president and general manager of blockchain, crypto, and digital currencies, discusses PayPal’s crypto game plan, how CBDCs might be implemented, crypto regulations, and more. Show highlights:

  • Jose’s path to becoming the GM of blockchain, crypto, and digital currencies at PayPal
  • what factors led to PayPal’s decision to launch its crypto offering
  • what sort of customer makes up PayPal’s crypto demographic
  • how users are engaging with the various PayPal crypto services, like crypto-rewards cards
  • whether the introduction of crypto had anything to do with Venmo’s 36% jump in volume during Q3 2021
  • how PayPal interacts with Paxos on the backend to settle crypto transactions
  • why Jose thinks PayPal has decided to not add cryptocurrency to its balance sheet
  • how crypto transactions work within PayPal’s internal ledger and how that might change once PayPal launches support for withdrawals off-platform 
  • the three types of directions that Jose believes stablecoins and CBDCs could be built
  • what solutions would need to be built before PayPal would consider issuing its own stablecoin
  • what scaling technologies, be it L1 or L2, PayPal is interested in
  • whether stablecoins and CBDCs can/will co-exist
  • Jose’s thoughts on how long it will be before CBDCs are being issued
  • why Jose thinks that new regulation might be necessary for cryptocurrencies
  • whether PayPal will be participating in decentralized activities, such as on-chain governance
  • why Jose thinks that PayPal’s crypto offering could help improve financial inclusion — especially for smaller companies
  • why Jose and PayPal are excited about NFTs
  • how PayPal will decide to support new cryptocurrencies on its platform
  • what Jose thinks PayPal’s crypto offering could look like in the future

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Episode Links

Jose Fernandez da Ponte

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Transcript:

Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and, as a senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. This is the November 9th, 2021 episode of Unchained.

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Laura Shin:

Today’s guest is Jose Fernandez da Ponte, senior vice president and general manager of blockchain, crypto, and digital currencies at PayPal. So let’s start with your background. How did you come to be at PayPal as general manager for blockchain, crypto, and digital currencies?

Jose Fernandez da Ponte:

Well, it’s a long winding road. I am Spanish, born and raised. I’ve been in payments, especially in emerging markets, for the best part of the last 20 years. I did a lot of work in Latin America, the Middle East, and Africa. And I have been in the Bay Area for the last 10 years.

I started to get involved in digital currencies probably around 2015 or so. Back in my banking days, we were trying to move money across borders using blockchain protocols. And that’s what started to pique my interest. We started to get very, very involved in earnest about crypto on the PayPal side, probably three to four years ago. We started small, as we think that most of us have started in this field, with mostly just research and engineering activity, and then it started to grow and grow until we went public with our first retail product about a year ago. And then we created the unit that I have the privilege of running today, which is our blockchain, crypto, and digital currencies division.

Laura Shin:

And so you say PayPal got started in earnest three or four years ago. What happened at that time to get PayPal interested? And why did PayPal ultimately decide to offer this ability to buy, sell, and pay with crypto?

Jose Fernandez da Ponte:

I think that what we saw one of those combinations of events that every now and then happens at the same time. We saw a technology that was getting ready for prime time, with incredible demand and interest on the consumer side, and also where merchants were getting more interested into these as a payment instrument, and there was more clarity on the regulatory side. So when you combine those three things, and you have a platform of PayPal’s size, where we have more than 400 million consumers, it is an incredibly powerful platform to be in. And we thought that it was part of our responsibility to help in making this asset class more accessible to the public.

So at that moment in time was when we were seeing that everything was kind of coming together. If you remember, we were coming out of the crypto winter in 2017. So we were having this conversation around 2019 or so, as things were getting more stable.

Laura Shin:

And so, as people are probably aware, your CEO, Dan Schulman, famously said that after you guys offered crypto, users who had bought crypto on PayPal tended to log into the platform twice as often. And his expectation was that this would make the users more loyal and increase the amount of overall payments they made through the app. Have you seen that play out that people who buy crypto on PayPal, then actually just make more payments in general with PayPal?

Jose Fernandez da Ponte:

We see that it’s actually a two way street. And that’s one of the beauties of the platform. We see more engagement from our crypto users, as Dan has said, we see a very high increase in engagement with the app. And now we are also seeing it work the other way around. As you know, we have very significantly now revamped the PayPal app and are adding a number of new services in our strategy to become a super app.

And what we are seeing now is one of the side effects is we are seeing the improvements in the super app drive more engagement on the crypto side. And we are seeing significant increases in crypto adoption in our base since we revamped the app. So that’s one of the benefits of being in this ecosystem. There are network effects between different PayPal properties and we see that on PayPal. And when we go international. We see that when we light up the product on the Venmo side. We see significant effects on both sides. So the answer is, yes, we are seeing both more engagement on the PayPal side, but also a activity on PayPal is driving more engagement for our crypto users.

Laura Shin:

And when you talk about those features that are the super out features, what are those features?

Jose Fernandez da Ponte:

So the company has been a launching and we are in the process of rolling that out. Now, an environment where you can go to the PayPal app and you will see your traditional payment activity that you love about PayPal, but now we have made more visible our commerce properties and the ability to find deals in the app, your crypto activities there, the rewards, you can do your bill payment from the app. We have announced that very quickly, we’re going to be going live with a product that will provide high yield deposits savings. So there’s more and more of a place where you can handle all your financial life in one unique place.

Laura Shin:

Oh, that’s fascinating. And so you’re seeing that people on that who are transacting in that way, then just get more engaged in crypto naturally?

Jose Fernandez da Ponte:

Indeed. When we think about our role in the crypto ecosystem, there are three things where we think that we can help. The first one is the one that I referred at the beginning, which is we have a very massive distribution and we can help in providing access to crypto assets for users who are intrigued, but they are not experts. And they don’t know, and they don’t want to know what sha-256 cryptography is. They don’t want to deal with a hardware wallet. They want to have a curated experience into crypto under the umbrella of a brand that they trust. So that access is the first part of where we can help.

The second part where we believe we can, we can move the needle is on providing more utility. I think that we all agree that these assets, the only thing that we do is sit on them. They are less interesting then. And our main point of interest is how we can make them useful in the real world. We understand to do that through our distribution. As you might know, soon after we enable our buy, hold, and sell capability on the PayPal app, we enabled a crypto checkout, which means that in your crypto transactions at PayPal, when you’re paying with PayPal anywhere that PayPal is accepted, you can select as a funding instrument, your bank account, your debit card, your credit card, your rewards, and you can select your crypto balance. So all of a sudden we have been talking about payments with crypto for a long while. All of a sudden, if you carry crypto with us, you can pay in any of our millions of merchants and we will settle with the merchant in fiat. So the merchant doesn’t need anything. We believe that having that crypto offering in the middle of a commerce and payments experience with these distribution adds pretty massive utility to it.

And then the third one is that we have been a regulated financial services player for a long while, and we are very happy to contribute to the conversation around regulation and crypto. And also we are doing a lot of work around central bank digital currencies.

Laura Shin:

You basically just covered all the topics that I want to get to in this podcast. Well, I do have a few more questions about this user uptick. I did notice in the earnings that you said that, or PayPal said that, the Venmo app began supporting crypto in April, and that in the third quarter you saw payment volume jump 36% in pay in Venmo to $60 billion. And I wondered, did it look like the introduction of crypto there had something to do with that big jump?

Jose Fernandez da Ponte:

I wouldn’t say yes. The introduction of crypto and Venmo is fairly recent. As you were saying, it is a few months back. We are seeing really, really high engagement from the Venmo demographic, which is interesting because we see different behavior patterns between the PayPal population and the Venmo population? I think that the Venmo team is doing a fantastic working in growing the volume on the Venmo site. I will not claim any credit on the crypto side yet. I think that is another feature that we are adding into Venmo. And we will be adding more.

One thing where we are seeing more engagement on the Venmo side, as you might know, Venmo has a credit card, a physical credit card that people can use to fund purchases with their Venmo balance, and that credit card has a reward program.

So one of the things that we introduced very recently is that users can choose to have their cashback from the Venmo card denominated in the crypto of their choice. Meaning that you are spending with your card and you get your 2%, as opposed to getting two dollars at the end of the month when you just spend a hundred, you can get $2 worth off any of the tokens that we support: Bitcoin, Ethereum, Bitcoin Cash, or Litecoin. And we have seen that to be a fantastic feature that people love. And it’s a really, really good first experience, as we say, for many folks who are curious about crypto, but they don’t know about it. And this is like getting a free crypto in a way and removing all that friction into a first experience.

Laura Shin:

And so when you said that you’re seeing different behaviors between the PayPal users and the Venmo users, what kind of behavior are you seeing on the PayPal side?

Jose Fernandez da Ponte:

When we look at investment amounts, the demographic tend to skew younger, and we are seeing smaller transactions and faster adoption in the curve.

Laura Shin:

And that was for the Venmo users, you said. And so in general, how do you view the PayPal and/or Venmo users of crypto? And how would you differentiate them from, for instance, the crypto customers at Coinbase or Robinhood or Square?

Jose Fernandez da Ponte:

I cannot tell you much about the crypto users at those other companies, because I don’t know their profiles. But we have gone into know quite a bit about our crypto user population. And it has been actually surprising. When we started, when we went live in October last year, I think that my preconceived idea is that probably crypto users on the PayPal side would maybe skew younger or maybe skew more affluent. And what we have seen, which I think is good news for the prospects of crypto adoption as a mainstream instrument, is that actually that they cut across the board. I don’t think that we can point of when a specific demographic or socioeconomic segment that is more active on our side. We are seeing engagement across the board. So I can tell you that our crypto population is actually a good reflection of our overall PayPal population, and not one specific segment, which I think again is fantastic news for our sector.

Laura Shin:

Okay. And are you finding that the crypto offering has brought new customers to PayPal or Venmo? Or is it just getting existing customers to buy crypto for the first time? Or are they already users elsewhere?

Jose Fernandez da Ponte:

There are some new ones, but as I said, our value prop is a lot about for people who know and trust the PayPal brand. So our typical adopter is someone who’s comfortable using PayPal. They are using PayPal for their payment activity. They see that there is an offering on crypto and they have been crypto curious for awhile and they tend to adopt more. Logically, we have only been in the market for about a year. So it makes sense for us that the early users tend to be more on the PayPal population. And it’s an engagement activity more than a user acquisition active.

Laura Shin:

Okay. Yeah. And it sounds like actually, you guys are bringing new people to crypto…

Jose Fernandez da Ponte:

Very much. When we do surveys with our users for a relevant percentage of them, we are their first crypto experience, which is fantastic. As we said, we care a lot about access and being able to add more and more users to become crypto adopters is something that we care a lot about.

Laura Shin:

For listeners, who aren’t aware that you have Paxos’s Itbit work all of that on the backend. Do they take care of any hedging that happens when you’re transacting in what is a very volatile environment? And also one in which the value of these assets is increasing. Do they just take care of all of that for you?

Jose Fernandez da Ponte:

So Paxos is our partner as you were saying. They are a fantastic company we’re very happy with the partnership. They provide liquidity and custody to us. What happens when somebody is buying a crypto on the PayPal site, they will place the order with us. So the customer relationship is with us. We are not sending them anywhere else. And then we’re using our collaboration with Paxos to go to the market, acquire the crypto and then give that to the name of the user.

At this stage, we don’t carry crypto on the balance sheet of PayPal. That is a question that we get quite often, as other companies have been using crypto for treasury purposes. We don’t carry that on our, our balance sheet today. It might happen in the future if we need that for operational purposes.

One thing that we have learned also, and we have been telling a lot of people in the space, is that when you operate on a payments environment, a payment is more than a transaction. So something that is relatively straightforward when people want to send value from an Ethereum wallet to a different Etehreum wallet. When that is part of a payment transaction, there are many things beyond the value movement that come into play there. You need to deal with refunds and with disputes. And you need to deal with the payment stack on the merchant side and financial reporting. So in my view, that in the course of our a payment activity, it might make sense for us to hold crypto on our balance sheet. But at the moment we don’t have that.

Laura Shin:

And so why in this time, when a lot of corporate, or I dunno if a lot is really the word, but a good number of companies have decided to add crypto to their balance sheets. Why has PayPal decided not to do that?

Jose Fernandez da Ponte:

Because again, from an operational point of view, we don’t need it yet. And from an investment perspective, our treasury team is deploying the funds in different strategies. We don’t carry that. And we will probably not carry that for investment purposes. We deploy our treasury as an operational instrument. And again, in our current construct, we don’t need to have crypto on balance for operational purposes.

Laura Shin:

Okay. So going back to the transactions, how has the fact that crypto transactions are not reversible changed the way that PayPal thinks about security, fraud, and similar issues when it comes to executing those transactions versus obviously like a bank or a credit card transaction.

Jose Fernandez da Ponte:

That goes back to these very, very important point that our payment is more than a transaction. We spent quite a bit of time thinking about it. Our product today exists inside the PayPal environment. When I say it exists is inside the PayPal environment, means that to transact in crypto with us, you buy the crypto from PayPal, and when you want to sell it, you sell it back to PayPal. And when you’re paying for a service with your crypto balance, you are doing that with a PayPal merchant as well. So as long as all that, of course, is inside the PayPal environment, all our usual product features apply. So there is buying protection and seller protection and all those things.

It’s going to be a very interesting, as we have announced, a few months ago, when we enable on-chain transfers and the ability to withdraw crypto from your PayPal balance or bring it from an external wallet, all those things that you are saying very much come into into effect. So it does have a impact on how we look at a transaction, which means that we are very intent on how we’re going to do be the intersection monitoring and validation of the merchants who are doing the transaction. It is a different ballpark, than a traditional credit card from section.

Laura Shin:

And so for the first part of your answer, I did notice that if somebody buys using crypto, then there’s a little note that says, if you end up returning this or reversing the charge, you’ll be refunded in the dollar value of the crypto at that time. So that’s the reason why, ’cause you’re just using kind of your internal ledger for that?

Jose Fernandez da Ponte:

Yeah. And we are settling with the merchant in fiat. So what is happening when you pay for a transaction with crypto is that PayPal will sell the equivalent amount of your crypto balance and we will receive dollars in this case, in the us. And we will give dollars to the merchant, which means that you can totally refund your transaction, but you’re commitment with the merchant in that dollar dominated amount.

And it’s also tricky when you’re operating in a highly volatile asset that that you don’t want to create an incentive in which people will buy with BTC and then Bitcoin goes up 30% in value. And then people have an incentive to say, hey, I want to cancel my transaction and I want my Bitcoin back. We want to make sure that it is a more useful and easier to transact with, but the moment that you are locking in that value for a commerce transaction, then you are locking in that value.

Laura Shin:

This goes back to obviously for instance, things like the Bitcoin pizza that now would be worth hundreds of millions of dollars. In terms of that ability to withdraw some crypto that a user bought on PayPal to their own wallet, is kind of the holdup the thing that you’re working to you know develop further would be these security and fraud protections in order to release that kind of capability?

Jose Fernandez da Ponte:

We would make it easy for people to send that to other wallets. Obviously, it will be different when they are using that for a commercial transaction, they want to pay with Bitcoin at some other commerce where there is a PayPal flow, or they just want to take it to a hardware wallet. So in commercial transactions, our protections do apply. With a transaction where you are withdrawing a crypto because you want to put it in your wallet. Basically, we want to make it easy for you to do it, but there’s not really a refund there because it is not a payment. You’re just moving your value around.

Laura Shin:

I did also notice that the crypto page and PayPal at the moment says that if a people’s account is hacked, that PayPal will replace their crypto. And I was wondering how that was going. Cause hacks are kind of a dime a dozen in crypto. There’s all kinds of phishing scams and other types of scams. So why did PayPal decide to do that? And are you finding that there’s kind of a lot of usage of that feature?

Jose Fernandez da Ponte:

So PayPal, one of my colleagues likes to say that we present as a payments company where we are very much a cybersecurity company that happens to move around value. So we been in this business for for a very long time. So we are very used to keeping the money safe and crypto is an extension of that. Yes, it’s an important time commitment. We stand by our commitment. I think it’s a very important part of our promise to the users, that they can trust us. And if something happens to their account, we will stand by them.

Laura Shin:

Wow. Okay. That’s quite a promise. So for a long while now there’s been chatter that PayPal may launch its own stablecoin, which you have denied in the past. We’ve seen obviously, there is another large company that has been attempting to do this, which is Facebook, (and disclose, I do write a newsletter for them). But watching what has happened to Facebook’s efforts with Diem, particularly in terms of the reception from regulators, how does that affect PayPal’s own plans or even thoughts in this area?

Jose Fernandez da Ponte:

So first of all, it is too early for us to be discussing specific plans on the space. But but I’m very happy to have a few ideas of how we are seeing the world. You were talking about diem and talking about the regulatory environment. It’s obviously a very, very active moment now in the discussion around regulation of stablecoins. And it feels like we have part of the blessing of operating a platform that is live in 200 countries, is that we are in a position to see what’s going on in different parts of the world.

What I see, in terms of stable representations of value, would include both CBDCs and stablecoins. It feels like the world is evolving in in three directions. On the one side, you see something like the China model. Meaning this representations of value will be issued by the central bank. So you have the electronic Yuan. So that is one wallet, no private stablecoins, just CBDC.

You have the recommendation that was issued by the PWG a few days ago, where basically they are thinking of something that I would call more like depository stablecoins. They’re taking the approach in which there are some characteristics of the deposits of stablecoins that liken them to a bank deposit. And so a stablecoin issuer should be basically a bank, let’s say an insured depository institution.

And then there is a model, which is maybe where Europe is going, that they’re talking about e-money stablecoins. So this is not a bank or deposit. This is kind of a store of value. And then you can be any money institution or a payments company and issue a stablecoins.

I think that those three approaches can coexist. It’s unclear on how different regions are going to go in one way or the other. That’s part of the debate that I think that we will see happening over the next months, or maybe even years. How that evolves, I think is going to be an important part of which companies would be willing and able to do what. We do believe, and we see this as part of all of the requests that we hear from our clients is that there is a demand for these digital representations of value that are stable. We believe that they are a fundamental part of both digital assets becoming more mainstream, but also being more accepted for commerce and payments.

We have been very, very vocal that we want to be supportive of CBDCs when they are available. Dan Schulman, our CEO, has spoken about that. We are quite active in the space. We are collaborating in the task force that the Bank of England and the Treasury in the UK have put together to think about how the digital count will look like. We are part of the MIT’s Digital Currency Initiative, where we contribute engineering time to developing.

Because one of the things that we see specifically in the CBDC space, is that the ratio of PowerPoint written to code written is very favorably skewed toward the PowerPoint, and we want to contribute to the code base. So we think that the stablecoins again, are a fascinating space which is really, really, really important that it gets regulated in an appropriate way in which consumers and merchants can have the right guarantees and investor protections, and there is a prevention of illicit finance in a way that also is not stifling innovation in the segment.

Laura Shin:

And so it sounds like you aren’t necessarily, at least at this moment, interested in PayPal issuing its since stablecoin because you kind of want to play in all these different areas. But I’m sure you’re well aware, there are a lot of commentators who have said that it would probably make a lot of sense for PayPal to do something like that. Is there something kind of in the regulatory world or maybe in like a type of business opportunity you’d have to see, or something in the infrastructure, or something else, that would finally have that make sense for PayPal?

Jose Fernandez da Ponte:

Not specifically about PayPal ourselves issuing something or adopting something that is the market. I think that for that to happen, especially for even thinking about adopting one of the stablecoins that are already out there, there are a couple of things that would need to happen.

On our side, as you know, we are very much a commerce and payments company. We care about the commerce and payments use cases. The stablecoins that we see in the market today. I’m sure the audience of Unchained are very adapted using the stablecoins in their daily lives. Most of those use cases are mostly for trading or for DeFi protocols. And if you think about stablecoins deployed on Ethereum, they have a fantastic use case if you’re going to do a few transactions of a large volume. For our use cases, we are much more interested in being able to support 10 million transactions of $10 each, more than 10 transactions of $10 million each.

So we need two things to happen in the space. We have not seen as stablecoin out there that is purpose built for payments yet. We see a lot of activity in some of the new protocols and our engineering teams are keeping a close eye on how some of these layer one protocols or the layer two solutions built on top of theorem that will support the throughput and scalability that you need for payments at scale.

And so the technology getting ready, especially in terms of security, throughput, and scalability is one aspect. The other aspect, as we just said in the prior question, is that there is clarity on the regulation. The regulatory frameworks and the type of licenses that are needed in this space.

Laura Shin:

And so earlier when you were talking about the scalability issues for stablecoins that you might adopt, are there any particular layer twos or any particular chains in general that look especially promising? Or scaling technologies that you’re especially interested in?

Jose Fernandez da Ponte:

We have been obviously quite a bit of work on Ethereum in general for many of our use cases. This is such a fluid space that if I give you names today, then those names will be different six months from now. Anything that supports a interoperability is relevant for us. So we have been quite intrigued with things like Polkadot. We have been very impressed with the way that that Solana ecosystem has been growing. We have been quite impressed with the growth around Algorand.

I guess that one of the things that we keep an eye on is we tend to follow developers. So where we see interest from the developer ecosystem and developers spending time, is where we think that that good things can happen. And we steer our engineering teams who are working in the space towards those same areas. I’m sure that if you ask me six weeks from now, I could give you four or five different names. This is how exciting it is.

Laura Shin:

Yes. I totally understand. Welcome to my world as a journalist who definitely can’t keep up. Not that anybody can. This is fascinating because as you saw from my question, I was thinking it was certain other issues that might hold you up on that. But of course, I hadn’t thought about the scaling issue, which of course is what everybody’s talking about now. So in a moment, we’re going to talk a little bit more about central bank, digital currencies, regulatory issues, and other things, but first, a quick word from the sponsors who make this show possible.

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Laura Shin:

Back to my conversation with Jose. So CBDCs have been coming up throughout this conversation. As I’m sure you’re aware Fed Chair Jerome Powell did say this past summer that one of the reasons for the Fed to create a CBDC would be that then stablecoins wouldn’t be necessary. I know that you’ve said you think stablecoins and CBDCs will coexist. So can you talk a little bit about more about how you see that space developing?

Jose Fernandez da Ponte:

If you look at, if you work by analogy with what we have today, we have electronic money. So there are balances, people have their PayPal balance and balances in other wallets, which are built on top of a fiat money, or money that is deposited in banks. There is no reason why the same analogy does not exist to the stablecoin world. I do believe that we will see stablecoins that are backed by fiat money deposited in commercial banks. And I do think that we will see stablecoins that are backed by CBDC when there is a CBDC out there. When you think about what central banks are doing and what they’re trying to optimize for, in general terms, they’re thinking of CBDCs as an instrument that can be advantageous for financial stability and financial inclusion.

And it’s more likely than not, that by design it is going to be issued centrally because it has to be issued by the central bank. From a technology point of view, I think it’s relatively unlikely that it will deploy those assets on public blockchains. So if you are thinking about where the implications. Let’s imagine that there’s a digital dollar or a digital pound or digital euro issued by the central banks in those regions. For developers and companies want to use that for payments or for the decentralized finance or for other aspects…it’s very unlikely that the Fed, the Bank of England will deploy a digital euro or digital pound or digital dollar on Ethereum. So somebody will do that work. And you can think of a stablecoin backed by a CBDC as kind of wrapped version of that CBDC.

This is obviously a different claim. For a CBDC, the main aspect of it is that it’s a claim on the central bank, that you can take your CBDC and go to the central bank and get your money. But it can also be used as a reserve for a private stable coin that then can be deployed across all these protocols that we have been discussing. I don’t think that the central banks are going to go would be doing that directly.

Laura Shin:

We’ll have to see all of that plays out. One other thing was he did talk about how you’re working with some of the digital dollar efforts. Can you talk a little bit more about what you see as the main issues there that need to be resolved before such a digital dollar could be issued.

Jose Fernandez da Ponte:

It is an extremely complicated project to work on, which takes me back to my comment on we believe that it’s a good moment to start moving from the PowerPoint to the code, because you will only surface some of those problems as the code is live.

Part of the conversation these days is still a relatively high level, right? So if you follow the discussion around stablecoins, a lot of that is about, is this going to be a two-tier system or a one-tier system, meaning that is the central bank point to distribute directly to the public, or is going to go through distributors who must be related financial institutions or telcos or others?

Those are foundational conversations and principles that will impact the development. But when you start to get into the nitty-gritty of it, there are many, many detailed questions that need to be solved.

For instance, one of the things that we keep scratching our heads is in an environment where there is a CBDC that is issued and that you carry that in a wallet in your cell phone. What happens if the network is down? What happens if there is no mobile connectivity? How do you update the ledger? Because one of the requirements is that you should be able to transact in any circumstances similar, like you transact with physical cash today. And that is just only one example.

Another discussion that is very lively and relevant is privacy around stablecoins. So what is the presumption of privacy if you’re interacting with a form of money that is issued by the government, and there is a central ledger? There are ways to address that, but those are both policy and technology conversation that still need to happen. I am very, very optimistic that we will see digital money issued by central banks. But also I believe that this is going to play over a number of years. I don’t think that this is something that we’re going to see in six or nine or twelve months.

Laura Shin:

Yeah. And about the privacy question, what do you think will end up being the most likely way that that’s handled? Because I know a lot of people working on this have talked about that as kind of one of the main questions. As I’m sure people are well aware, a lot of the criticism of the digital Yuan is that it’s almost like a surveillance tool. Central banks like here in the US or in other democratic countries would be sensitive to that concern.

Jose Fernandez da Ponte:

I’m sure that that would be the case. And there are technical ways in which we can enable that privacy. I think that we all think that privacy is a good thing and assume that anonymity might be a different thing. So there are, as we say, it’s important to have controls in place that prevent illicit finance activity going through these instruments. So there have to be ways in which you need to be able to monitor that activity and prevent that activity from happening.

But there are ways in which you can enable flows where the data is stored in different places. The access rights are different. The technology will be there. I think that we are still need to have, or the central banks need to have the policy debates as well. There will be a menu of options and you will be able to have more or less privacy.

Laura Shin:

Okay. So another theme that has been coming up throughout the conversation is regulatory issues. I’m sure you’re well aware that that is probably one of the biggest topics on everybody’s mind, especially in the crypto community in the US. To my mind, one of the biggest core tensions is this issue of whether or not to apply regulations that have been built for a model that uses intermediaries to crypto, which obviously the purpose of it is to replace intermediaries with software. Some people are advocating that there be new regulations. I’m sure you’re aware that there are some regulations or some guidance on regulations already that is kind of pushing for crypto to keep the model using intermediaries. What do you think is the best approach? I know you’re very active also in this contributing to that World Economic Forum report on regulation.

Jose Fernandez da Ponte:

So I think that there are a few things that are relevant here. First, for the ecosystem to develop and for digital assets to become mainstream, there has to be regulation of the space. It is important that there is clarity and if you to talk to many actors in the space who are thinking about jumping in or adopting more broadly, part of the deterrent is, hey, we don’t know how the relation of this environment is going to be.

Regulation is a prerequisite for this sector that we love and believe that has a ton of promise to flourish and develop. So it has to happen. Your question explicitly on, do we need a new framework or can we adjust the existing framework? I think that the legal experience is that we have so far, because this sort of has happened in a short amount of time, is that the places that have developed specific frameworks for this have been more successful in driving that innovation.

Maybe the most prominent example in the US in New York with their virtual currency framework and the infamous BitLicenses where there might be people in favor or against, but there is clarity. So you understand what do you need to comply with. Maybe an international equivalent to that is Germany, where they went exactly in the way that you were suggesting in your question or stating in your question, which is, hey, this is not exactly the same instruments that we have seen in the past. And it’s not just about fitting these new instruments into the old rule relation, because that would be a little bit of a square peg in the round hole. Maybe we need to make sure that there is a new framework developed for this, and that is informing the German regulation in Europe. And it’s also part of the recommendation that the PWG was issuing a few days ago where they were saying, Hey, it looks like we need a new framework for these. And they were requesting from Congress to issue legislation.

It feels to me that there are places that will benefit a lot from being purpose built for the specificities of digital assets. It doesn’t mean that we need to start everything from scratch. If you’re in the US, there are very good instruments that are already in place, both from the state regulatory system and the federal regulatory system that might be very applicable to what we are all trying to do. But these assets are different and working by analogy might help us at the beginning, but there’s going to be a moment in which these digital assets, they start to have use cases that are not just working by analogy and are totally brand new use cases and existing framework might not be as easy for that.

Laura Shin:

So we’re seeing companies like Coinbase enable you to stake or to participate in these networks in that fashion. Would PayPal ever offer its users that opportunity?

Jose Fernandez da Ponte:

We are considering what we should be doing in a world that moves more and more to work proof of stake, what is the best way to provide access for that? We have not formed plans about it yet. Not only in terms of office taking, but as the environment moves from asset accumulation, if you want, to the management of those assets, and what is the ability to both derive returns from those assets, but also participates in the ecosystem is a demand that the public will have. So we need to be ready to address that. We don’t have a formal plans on it yet, but we are seeing that as more and more something that will be relevant in the midterm, maybe even in the short term.

Laura Shin:

And similarly, other centralized crypto companies like Coinbase, Robinhood, they’re also developing non-custodial or self hosted wallets for crypto users. Does PayPal ever see that it would also create products like that?

Jose Fernandez da Ponte:

We believe that it’s important that the users can move their crypto outside the PayPal ecosystem. And that’s why we announced that we are going to be enabling transfers from from their PayPal wallet to crypto wallets that they host outside. And it feels to me that that’s like 90% of the functionality that you would have with an unhosted wallet. Most of our users, what we are seeing, part of the reasons that they’re interacting with us is because they like the trust on the PayPal side. So they don’t want to get into the complexity of handling their own digital key or their own private key.

So we don’t see a ton of demand on our side for us to offer a standalone wallet. We believe that we can provide that connectivity to the protocols and the rest of the ecosystem by enabling on chain transfers from the wallet that we have today.

Laura Shin:

Ithere was demand from your customers, you would consider doing something like that?

Jose Fernandez da Ponte:

Our product roadmap is very much driven by the demand from our consumers. So when the environment changes, we definitely adapt to that. And it’s one of those where you can say, never say never. But it’s not something that we are seeing right now.

Laura Shin:

About this ethos of decentralization and also participation, what role do you see centralized companies such as PayPal playing? We are, I’m sure you’re aware, seeing that some companies are doing things like participating in governance of decentralized networks. Would PayPal ever consider doing something like that?

Jose Fernandez da Ponte:

Decentralizaiton is something that obviously is very core to the ethos of the system. But decentralization is not a binary state. So there are different degrees of decentralization. We want to support the decentralized environment. We think that is within the benefit of this is that is built on an open-source. We don’t think that it is our role to be relevant actors in the governance of a specific protocols. So that actually is not our role to play and probably would have received by the community. In my conversations with the community, I don’t think that they feel like the place of corporates is embedding in the governance of these protocols.

We want to enable our users who choose to work with that with us to be able to exercise the rights there. But I don’t see ourselves being very active in the governance of any of these protocols, anytime soon.

We want to support it. As we said, decentralization doesn’t mean optimization. It means that there is no central point of failure. PayPal by design is centralized, we are a corporation. We are a centralized entity. Coinbase is a centralized entity and Robinhood is a centralized entity.

The push towards decentralization happens when you are able to make the cost of contracting cheaper. The reason that I work at PayPal is because it would be really, really cumbersome to show up at the office every day or at our remote office, and negotiate a contract about what I’m going to be doing that day. And then do that again, and again, and again. That cost of contracting that pushes towards centralization. So there is an advantage in centralization. What is important is that we have the right degree of centralization that supports all that activity and that there is not a high level of concentration. So there will be, again, I think that we should discuss between decentralization which is beneficial and full brand optimization, which might be something that we are far from.

Laura Shin:

I think what you’re talking about is kind of spot on with some of the feeling in the community. I think this was for the ENS governance token, but Coinbase was named a delegate, and I did see some commentary on Twitter, like, why would you delegate to Coinbase and people criticizing that. So I think you’re right, that there is some sensitivity around centralized corporations. But I find it fascinating that they are participating. And you know, Andreessen also did publish something about how it’s thinking about participating governance. So clearly this is a question.

So one other thing that I found fascinating was your CEO has talked about some problems of the legacy of financial system, saying that it can be more expensive for poorer people to use and cheaper for wealthier people use. And I know earlier in your career, you were head of emerging markets at PayPal, and I wondered what opportunities you saw for crypto and for PayPal through its crypto offerings to address those kinds of issues.

Jose Fernandez da Ponte:

As you were saying, we are a company that has financial inclusion at heart and our CEO and all the company feel very strongly about it. I do believe, and one of the reasons that drove me to the space, was this promise about the ability to help with financial inclusion and especially creating financial opportunity in emerging markets. It’s a nuanced question though. I’ll tell you what I do think that I see impact now and where I see impact in the future.

I think that in the short term, where these instruments are going to be a most effective is in helping on the small business side and supporting entrepreneurs and companies in these markets who can accept payments from abroad at a lower cost and faster. In the past, in my capacity as head of emerging markets and strategy for PayPal, but also running our business in the South American markets, the Spanish speaking markets, I’ve seen firsthand the impact that we can have for a small merchant that is running a scuba diving in his school in Costa Rica and he wants to accept payments from tourists in the us. And the local bank is going to charge them hundreds of dollars per month to accept credit cards. And the travelers from the US don’t want to give them their credit card number, because they don’t know the merchants on the other side. So for that, when you can enable either through CBDCs, stablecoins, you name it, if you can provide a way in which that business can export more and get more business and get more revenue by adopting digital currencies, that’s what I see the short-term impact on financial inclusion and opportunity.

A lot of the conversation around digital assets and cryptocurrency in the context of emerging economies has to be more about remittances and how you can send funds from the US to Kenya and people can receive that on a mobile wallet. That exists. What we have not been able to solve yet is the last mile. So imagine that I can send funds from the US to my family in Kenya, and people will receive that in a mobile wallet. If that value that I have send them, if they cannot use it a widely in the market, and still they need to go to a cash agent in Kenya to convert that digital value to cash, because that’s what they can use in their day to day, then we still have 80% of the cost.

Basically we’re reduced the cost of the long haul, which is not what the problem was, and we still have the problem of the last mile.

That’s why, for instance, things like what is going on in Nigeria. When have a CBDC that is issued by a central bank in one of these markets. And that CBDC can be legal tender, meaning that the public will be more used to interact in digital value, and merchants will be accepting that so that you don’t have that intermediate and expensive space step of converting into cash. That is the prerequisite that we need for the consumer side of emerging markets.

Because then it’s different. Then I can send any stablecoin to that wallet in Kenya or in Nigeria and they can either use it directly or converted into a digital token that is accepted in the market. But until that last mile of acceptance is implemented in the market, I think that the consumer part of it will take a little bit to develop.

Laura Shin:

And so you’re saying that it would need to be a stable coin in the local fiat currency…

Jose Fernandez da Ponte:

And that is accepted in this digitally native form. I think that we need to have acceptance in the day-to-day of non-cash, non physical cash forms of value for that work.

Laura Shin:

Yeah. Yeah. I’ve seen a crypto people talk about this. When people talk about stablecoins, they are typically just talking about US dollar pegged stablecoins. And I’ve noticed when I interview sources in Europe or Asia or whatever they will, they will say, oh, at that time the value of BTC or ETH was X. And they quoted to me in US dollars, not their local currency.

Jose Fernandez da Ponte:

Payments are very, very local. And one thing that happens. I live in Silicon Valley. Sometimes you see the perspective from Silicon Valley is a little bit simplistic in that sense, in assuming that what you are going to invent from here is going to apply everywhere.

Those components that you’re saying, so local currency, local regulation, the local last mile, and the distribution network, and the merchant network of those digital currencies. They are issues that are quite frankly not technology issues. Some of them are business issues or they are policy issues. For that to be effective, even in the case of mobile money, money in Kenya is alway highlighted as the success story for non crypto, but mobile money. But even when you look at other cases in Africa, Kenya is a little bit of an outlier. So their money has been very successful there, but mobile wallet seeing other markets have been less successful.

So we are all making steps toward the main goal, but I think that I see short term impact on the business side before I see that on the consumer side in these markets.

Laura Shin:

We’ll have to see how this plays out. I feel like the ideal of crypto is all this democratization and we haven’t seen too much of it yet. But something that is all the rage now is NFTs and the metaverse. I just thought I would throw this out there. I don’t know how PayPal might get involved, but do you see a role for PayPal or would you just limit yourself to kind of the financial areas of crypto?

Jose Fernandez da Ponte:

I totally see a role for us in NFTs. And it’s interesting, as we discussed at the very beginning, we’ve been on the PayPal side, working on this maybe for the last three or four years. I’ve been in the space maybe for the last six. And I have to say that NFTs is one of those that grew way faster than I expected it to grow. It feels like it was only, only one year ago we were thinking about it as something that, yes, it will happen eventually at some point in time. And then all of a sudden the storm unleashed. And I think that we’re just at the very, very beginning of it. I personally have really, really high hopes and high expectations that it will extend way beyond where we are seeing today in terms of collectibles and art.

We will see a digital token that can unlock experiences in the real world, whether they are your ticket to a concert is issued as as a token or any other of a zillion use cases that the developers are hardworking.

What do we see as pain points and places like where we can contribute? In the spirit of how we built our initial retail product in terms of making easy experience for a non sophisticated user to begin with, I think that applies very much to buying an NFT today. The experience of buying an NFT today is the number of hoops that you need to go through. So you need to know that let’s use the ERC-20 case. Do you need to know that you need to buy ETH. Then you need to get ETH into a wallet. And then you need to go into an NFT marketplace. Then you need to buy something there, and then you’re token exists in some version and you don’t really know what to do with it.

Laura Shin:

Then you get rug pulled.

Jose Fernandez da Ponte:

Yes. So that goes to the protection side as well. So that is something that is definitely on the early adopter side. It is not yet a mainstream experience for curious, but not sophisticated user. So I think that we definitely have a role to play on how do we enable a seamless payment experience for NFTs at the end. It’s something that we feel like we have a role to play

Many of our merchants and partners, and especiallyon the media sector, they are asking for that. Saying, can you please make it easy for our users to engage with these NFTs?

And then the other part of it is how can people interact with those NFTs, and where are they going to live? So it’s something that we are monitoring very closely. We think there is a space for us. It is a very, very rapidly developing ecosystem. We are in the very early stages, but definitely do we feel like we have a role to play there.

Laura Shin:

I guess now that I think about it, of course I did have someone from Visa on my show, Cuy Shefflied, the head of crypto there ,and he also talked about, and so it does make sense and yeah. I’m starting to imagine all kinds of partnerships you might do.

But speaking of future things or things coming down the pike, I’m sure the listeners will be curious. When are you going to add new cryptos, and how are you deciding which ones to add?

Jose Fernandez da Ponte:

When we started, we wanted to make sure that we were capturing a significant part of the market cap of crypto. But also that the assets that we were putting in front of our users were of very high quality. And we considered that we have this responsibility of providing a great experience. In the short year that we have been in the market, I think that we all have seen that a lot of the growth in the markets has happened outside the traditional tokens out there. So Bitcoin dominance has decreased significantly. We expect, obviously that Bitcoin will continue to be there for a long time, but we are seeing a ton of growth outside those more traditional tokens. So we see that that demand from our consumers.

So people want to see more tokens on their PayPal wallet. So we will be looking into that. Our product roadmap is very much driven by our consumer requests. And the best way to influence our product roadmap is to reach out and say, hey, we would like to see this. It is very important on our own on our side that when we make the decision to add additional tokens, that they are very high quality and a really high standard. So we’re going to have a very high bar. I don’t expect PayPal to be the place for users to see 150 different options. We want to make sure that we can address the main themes and that we can take care of our users as they explore where they want to next.

Laura Shin:

So you’re not going to try to take on Uniswap or anything like that.

Jose Fernandez da Ponte:

We see that we see the demand from our users saying we love what we see, and we would love to see more of a larger offering of tokens on the app.

Laura Shin:

So what is your vision for what PayPal’s crypto offerings will look like? Maybe let’s say three to five years from now.

Jose Fernandez da Ponte:

I was trying to figure it out if you had asked me that question three years ago, I would not have been speaking about CBDCs or NFTs or anything like that. I think that we need to open-minded and humble in first in our role in the system and on how much do we know.

I have no idea whether three or five years from now, we are going to be talking about decentralized computing and all the reage is going to be how you can be processing. Or whether we are going to be talking about a federated identity or what is going to be the next bend of the road. What I know is that we are here to stay. So we are a company that cares a lot about financial inclusion and opportunity.

And we think that these assets are a fundamental part of driving that. The next wave we think that is a really intriguing opportunity to actually have significant payment activity on new rails, whether that’s CBDCs or private stablecoins, or something else, which is very close and very core to our business. And we believe that identity is going to be a very important part of that, and that we have a role to play around digital identity as well. So if you were to ask me, I think that in addition to NFTs, CBDCs, stablecoins, and all of that, one of the places that are in the most intrigued about these days is the digital identity and how that is going to play in a decentralized world.

Laura Shin:

Oh, that’s fascinating. And so basically, you think that maybe PayPal would kind of basically offer some kind of digital identity for its users?

Jose Fernandez da Ponte:

I don’t know how it will look like, again, this is the three to five years from now. It’s a different planet. But this is one place where, what I think that we see a demand again from consumers, but also from regulators and also from merchants. So somebody will need, I don’t think that five years from now, when you want to have a transaction in two wallets, what we’ll do is to send someone an inordinate string of characters on protocol X or protocol Y. There has to be some type of interoperability and portability of credentials that you can use to identify yourself.

Laura Shin:

And then just jumping off from that. I did want to maybe circle back to this super app vision for PayPal. And I don’t remember how clearly we defined it earlier in the show, but this the vision of something like a WeChat, but here in the west, where it would support messaging, saving, shopping, et cetera. And one thing when I was thinking about that, I was also thinking about how in crypto, as I’m sure you’re aware, things are very community-driven. Sometimes it is almost a little bit religious, and I’m sure you’re aware that a lot of crypto communities will congregate in different Telegram groups are in Discord channels. And I wondered how you saw that kind of like cultural aspect of crypto maybe, or how you saw PayPal as the super app kind of capitalizing on that cultural aspect of crypto.

Jose Fernandez da Ponte:

Again, I think that this goes back to our humility. We have the utmost of respect for the community. I don’t think that we want to interfere with the community. We’re here to serve the community and to listen to it. If the community chooses to go and interact with PayPal on a messaging service that happens on the PayPal side, fantastic. But part of the benefit of that culture aspect of crypto is that the community will generate use cases that I am not able to think about on PayPal. So they bring a totally different lens there. And that our role there is to listen to what they have to say, and to amplify their voice and provide them with the tools and the infrastructure.

I’m really interesting on what we can do on the technical work to make sure that we provide the tools for developers and that we can provide the right environment and the right security for them to build a crypto products on top of what we can offer. And if they choose to use us from a retail perspective, that is fantastic, but they are the ones who are driving the system forward.

Laura Shin:

All right. Well, this has been a fascinating conversation. Where can people learn more about you and PayPal?

Jose Fernandez da Ponte:

So there, there are a number of places that you can learn more about us. There are landing pages on the crypto side. We obviously, we have grown our team significantly over the last year. And then we have spent quite a bit of time on outreach and finding candidates and explaining our story. Everybody can reach us on our landing pages and on our reports. And we are more and more present in the media as we continue to develop what we think are a worthy efforts to push the ecosystem forward.

Laura Shin:

Perfect. Well, thank you so much for coming on Unchained.

Jose Fernandez da Ponte:

My pleasure. Thank you for having me.

Laura Shin:

Thanks so much for joining us today. To learn more about Jose and PayPal, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening.