In this discussion I moderated for Paxos, Robinhood CEO Vlad Tenev and Paxos CEO Charles Cascarilla discuss GameStop, the broken traditional financial infrastructure, and how blockchain technology may change the future of settlements. Show highlights:

  • why Robinhood stopped trading on GameStop and AMC stock earlier this year
  • what both Charles and Vlad think the feasibility of T+0 settlements versus Citadel’s and the DTCC’s aim of T+1 settlements 
  • how the GameStop scenario would have been different in a T+0 environment 
  • what it would look like if certain markets used T+0 settlements while others still settled on T+1
  • why Robinhood decided to add crypto back in early 2018
  • how Robinhood’s crypto operations work on the back end
  • why Robinhood does not allow users to move crypto off-platform
  • whether securities trading or crypto will be a larger portion of both Paxos’ and Robinhood’s business model
  • what Paxos and Robinhood have planned for the near future

https://youtu.be/7fKgOSxhTPw

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Episode Links:

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Vlad Tenev

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Episode 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.

Sign up for my newsletter where I will soon be making an announcement about pre-orders for my book: “The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze. Head to unchainedpodcast.com and the sign up for the email newsletter is right on the homepage.

Today’s episode is a discussion I moderated between Robinhood CEO Vlad Tenev and Paxos CEO Charles Cascarilla. The discussion was titled “Why Traditional Financial Infrastructure is Broken and How We Can Fix It.” It was an incredibly fun and substantive talk on one of the biggest news stories of the year: why the whole GameStop saga played out how it did, particularly for Robinhood, and how blockchain technology offers hope that it could be prevented in the future. We also talked crypto adoption and get into some of the intricacies of crypto trading on the Robinhood platform, plus, we take a peek on what might be coming down the pike with other financial players getting into crypto. I hope you enjoy this fascinating show!

EY:

Today’s episode is sponsored by EY Blockchain. Ernst and Young is committed to supporting the integration of the world’s business ecosystems on the public Ethereum blockchain.

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Kyber Network:

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Laura Shin:

Thanks to everyone for joining our panel: Why Traditional Financial Infrastructure Is Broken, and How We Can Fix It. It’s been quite the hot topic for this year. Here to discuss our Vlad Tenev of co-founder and CEO of Robinhood and Charles Cascarilla co-founder and CEO of Paxos. Welcome Vlad and Chad.

So before we begin, I would want to get a read on the audience. We have a poll that will kind of help us see what your background is. So for the attendees, why don’t you select which of these options best applies to you and your professional background. The question is, what type of company do you work for? And the options are a FinTech, an established financial services company or bank, a tech company, or non-financial services tech. The other two options are a crypto company and, lastly, just other. If you can make your selection now we will pull up the results. Okay, so about half come from traditional financial services or banks, and then FinTech and other compete for the second spot at 18%. And surprisingly, actually, the smallest percentage — the smallest percentage has come from crypto companies and then tech companies that are not financial services which is really interesting.

Okay. So it seems like a fair number of you will have pretty good familiarity actually with some of the meatier and I guess more detailed oriented aspects of this discussion. Why don’t we just start with the riveting financial events earlier this year during the GameStop saga, which really shined a light on how the back office of capital markets really works. And at that time, as we may all recall, this was big news. Robinhood, and some other platforms did stop purchases of certain stocks due to how this decades old financial plumbing works. Vlad, can you walk us through what happened that caused Robinhood to stop its customers from buying stock in GameStop and some other of the Wall Street Bets companies just as that frenzy was reaching its height?

Vlad Tenev:

Yeah, absolutely. And you’ll notice a lot more gray hair since the last time we had a conversation.

Laura Shin:

You’ve really been through the ringer in the last few months I would say.

Vlad Tenev:

I’d say it all started back in 2008. So 2008, there was a global financial crisis. In the aftermath of that, there was some legislation passed. A lot of people in the audience might be familiar with it. It’s called Dodd-Frank. The aim of this legislation was to prevent some of the kind of systemic problems that led to the financial crisis from reoccurring in the future. So among among several things that Dodd-Frank did and I’ve poured over some of this documentation — the events of the last year gave me an opportunity to do that. Whereas perhaps I wouldn’t have gotten very acquainted with it. Part of it actually specified clearinghouse collateral deposit requirements and some ideas and some sort of rules behind how those should be calculated with the idea being that to contain systemic risk, clearinghouse deposit requirements should be beefed up and we should make sure that all of our financial institutions have capital around to deal with unforeseen circumstances.

Part of what was specified was something called the NSCC clearing deposit requirement, which I won’t get into the calculation, but essentially it uses a value at risk model which has a tendency to increase the deposit requirements in times of extra volatility. So you saw this happen in March of 2020 — a little bit over a year ago, for example. You saw it happen also in January of this year. But for very, very different reasons. I think March of 2020 was sort of a systemic market shock that affected the broad markets. And you saw the major indices suffered dislocations. 2021 was something that we really hadn’t seen before, where, essentially a bunch of people on social media, Wall Street Bets, and Reddit had concentrated activity in a relatively small number of names.

You saw a lot of unidirectional buying activity that also had the unfortunate side effect of spiking deposit requirements industry-wide. Robinhood obviously had to contend with that. Robinhood securities, which is our clearing broker subject to these, made the call to restrict opening positions in some of the securities that were driving up the high VaR deposit requirement. So it was GameStop being one of them, but also a AMC actually had an even larger contribution. So I think we can argue about whether the system worked as intended. It’s hard to suppose the counterfactual of what would have happened in the case that Dodd-Frank wasn’t written the way it was or the VaR charge wasn’t codified in this way.

But I think what’s clear, from my standpoint, and I believe I’m sure Chad agrees with me, is if you look to the future and ask yourself what’s the ideal situation for the financial system we’re in? You look at the settlement cycle and it was T+5, so it took five days to settle a trade after the trade was actually matched back in the ’90s to the 2000s. It took about 20 years to get down to T+3, recently it went to T+2.

And so you kind of look at what the platonic ideal of settlement is, and you have to assume it’s going to be instantaneous. That’s just the only way technology and progress is going to lead us. And there are a lot of things that will happen as a result of that. One of them is it would make a deposit requirements obsolete to a certain extent because if things are actually settling in real-time, and you have these transactions happen instantaneously, then there’s actually no need to control some of the systemic fail to deliver or settlement risks, because those risks would basically cease to exist. So that’s why I became interested in the topic of settlement. Chad probably became interested in it for slightly different reasons, probably having to do with just general progress and innovation. But I think we’re very aligned with that long-term kind of platonic ideal.

Laura Shin:

Yeah. And so, Chad, do you want to elaborate on that? And I was curious if you had the same view on what the core issues were or if you wanted to talk a little bit more about what you saw as kind of the root of the problem here.

Charles Cascarilla:

I think Vlad touched on a lot of good points. What I thought was really interesting about the GameStop issue is that it did not happen during a financial crisis. It didn’t happen during a pandemic. It didn’t happen during any type of real exotic event. When we had the last really big systemic crisis, Lehman Brothers failed, so everyone said, oh, wow, Lehman Brothers failed, of course there was problems in the settlement system. But here nobody failed. There wasn’t even fear of a failure like with the pandemic. This was just a lot of trading that happened. It really exposed the plumbing of the system for what it is: a very antiquated and outdated system. And by the way, it was a really good system when it first started.

I think it solved a lot of problems. It moved us off of paper and it moved us to a way of creating liquidity — but it did it in a way that didn’t create a true chain of title, true understanding of who owns what, when. And so that means that you have intermediaries that are stepping in and guaranteeing trades because moving from paper to electronic couldn’t happen in as elegant a way as we could do now with modern technology. And we’ve, I think, reached the end of this old way of operating. That’s what GameStop showed us. We’ve now reached the logical endpoint here, and it’s time to upgrade the system. Just like we need to upgrade our roads and our bridges and our airports. We have old infrastructure all over the place. One key place we have old infrastructure is in the financial markets, and that really shouldn’t exist anymore.

Frankly, we know how to fix this, just like we like we know how to fix the problems with our bridges and tunnels. You just have to do it. And what got me interested was going back to the financial crisis and seeing how the plumbing exacerbated the system — exacerbated the problems in the system. And that’s why when I came across blockchain I said, wow, here is a way to solve these problems and upgrade and replatform the financial system. What I just never expected is that it would be so obvious that it needs to be done, that you could have a systemic problem caused by the plumbing. And there would be nothing else that was going on. And that’s what GameStop showed.

And I think Vlad is right. In the limit, we’re going to get to instantaneous settlement. But you don’t have to necessarily get to instantaneous settlement to have huge leaps forward. You don’t even have to stop at T+1. You could be at T+0 by settling at the end of the day or batches intraday because it’s hard for people to upgrade their treasury systems to manage real-time. That’s gonna not be something easy to get to, but I think Vlad is right, like, inevitably you’ll get to that point. Technology will enable it. The systems will be upgraded. Enough participants will be able to do it, that it will get there, but there’s so many wins to have. And I’d love to hear like what Vlad thinks. If you get settled T+0 today with a market maker, how much would that impact your business? How helpful would that be for you guys? Because I think that is a key place that we can get to.

And that’s not far-fetched at all, even though it might feel like it because we’re at T+2 we’ve done some T+0 trades. Our system can handle it. Frankly, it can handle even faster than just doing a T+0 trade at the end of the day. But you know, you want to have a product journey that we’re all going on, but that journey can’t take half a decade to happen or a whole decade to happen. Each time you want to shift things by a day, it needs to happen a lot faster than that. And I think that there’s ways to do it and still be backward compatible. That’s really what we’re trying to do.

Laura Shin:

Wow. Yeah. So we’re gonna just dive right into all this T+0 discussion. But first I want to get a beat on the audience’s knowledge of equities settlement infrastructure. So here we have the second poll. Again, the audience members should choose which best applies to you. The first option is when I read T+0, I assume someone misspelled the word two. Second one, I’ve heard of T+0 and T+3 in reference to stock trades, but don’t know what they mean. And the third option is I am familiar with how stock trades are settled and why T+3 is relevant. So if you can select which applies to you, then we can kind of better speak to the level of the audience. Okay. So there’s some familiarity. And in fact, quite a bit 82% are familiar and only about 18% say that they’re not really familiar.

Okay. So, you know, we’ll be sure to kind of carry along the people who are less familiar, but it means we can definitely dive into the details on this discussion. So in the Senate hearings, Vlad, you were quite clear about needing T+0 settlement times, whereas Citadel is viewing T+1 is a more feasible goal. And that’s also the goal that the DTCC is aiming to reach by 2023. And I just wondered what your take was on that goal as opposed to T+0: is that just something we don’t even need to stop there at that level, or do you think we’re ready to just jump right into T+0 settlement times?

Vlad Tenev:

I think it’s going to be challenging. With any change like this, you have different market participants, market makers, banks that are used to an old way of operating. And there obviously going to be a preference of incremental progress. The things are going to have to change whether it’s internal processes, procedures, technology has to be upgraded. And then there’s also the unknown: like what happens if we are in this world of T+0? Is there going to be lots of revenue loss? Would we lose revenue as a financial participant as a result of that transition? So I think any time there’s changes like this, there’s hesitancy. And so you’ll see much more of a willingness for incremental change. I don’t necessarily think that’s a bad thing.

Obviously, there’s been something akin to widespread agreement that T+1 is going to be an improvement over the current status quo, which is two day settlement. And I agree with that. I think it will be a big improvement. And I think it’s important for an effort that’s so fundamental like this, to make sure that all market participants are heard. And we bring everyone along and avoid creating new problems through the transition. I am very happy that DTCC and SIFMA recently produced a plan to get to T+1 from T+2. I don’t think obviously we should stop there. But I do think it’s good progress.

Laura Shin:

Yeah. I did want to add in actually that the DTCC did estimate that the T+1 settlement time would reduce margin collateral needed for companies like Robinhood by 41%, which obviously is significant. But Chad, can you also now talk about the solution that you are working on, which I know is kind of in a limited version at the moment, but why don’t you describe how that works, what that is, what your roadmap is to get that out to a wider number of companies and equities…

Charles Cascarilla:

The way our product works is, right now, we’re operating under a no action letter. That limits the amount of volume and the number of stocks that we can settle, but we’re settling live trades and had been for over a year now. We have three participants, and we’ve had a fourth go live. We’ll be talking about that at some point soon here, and we have others that are coming online. So it’s exciting for us to be able to be showing how this technology works and the fact that our technology isn’t limited to a particular settlement cycle. It doesn’t have to be T+2, it could be T+1, it can be T+0. Ultimately, this is a bit of a choose your own adventure. Our technology is very flexible. It’s up to the participants to find the agreement on what they want to be settling in.

But I do think that it’s possible to move faster than T+1. It’s possible to get to something like T+0 and to do it at the end of the day. That’s a very understandable path forward that we’ve been laying out with participants. But, just as importantly, the point of technology is not just to change settlement. There’s a lot of different areas that can be improved with this technology. One of them is changing settlement timeframes, which releases capital and is more cost-efficient. But also having investor protections. One of the problems with the GameStop issue was knowing how many shares were short. This wasn’t necessarily a feature of players acting nefariously. It may or may not have been, I don’t know if the SEC is looking into it. What happens is it’s possible because everything is held in omnibus accounts with unclear chain of title for there to be access share short for there to be more share shorts in the float.

But if you’re using a blockchain system where you know where every single share is at all times and who the beneficial owner is at all times, you have real investor protections that don’t exist today because everything’s just held in one giant omnibus account at the DTC. And this is a problem. And there are ways to upgrade this and create investor protections, while creating highly liquid markets, while actually being more capital and cost-efficient. What’s a little crazy — and sometimes people don’t know this — is that a lot of brokers are really just not having their clients trade on margin. They’re having them cash trade. So they’re settling with cash, but they have it in the account that can’t sell the trade for two days because that’s the settlement cycle. So the broker has to put the money up for the trade. So these are cash funded trades, and the broker is on the hook, and the capital call can fluctuate wildly depending on how much stocks are moving, but yet they have the cash sitting there.

And so you have a very procyclical problem going on where you’re getting giant capital calls that flex from $15 billion at the NSCC to $30 billion. That’s a huge, crazy call. I mean, who could have prepared for that? No one just leaves $15 billion lying around. So you have huge capital calls that are getting pulled, in some cases, not in very transparent ways. With our system, you can see all day long, in real-time, what your margin will look like with all of your participants. So, you know in real-time, real-time risk management. It’s not a crazy thing to have, but it doesn’t exist right now. Real-time risk management — you can see that the capital calls are going up, but why should you suddenly have to have $15 billion that you have to post if you’re having the cash from your customer in your account to bridge that two days.

And so the whole system really should be shifted in a different way. And that’s what we’re doing with our Paxos settlement system. And right now, again, this is a no action letter. We’re shifting from a no action letter and going to apply for a clearing agency. And when we have that, we’ll be able to operate in a regular way in terms of ramping, to being all stocks and accepting all market participants. And so that’s gonna take some time, of course, but that is where we’re going to be. We’re optimistically hoping that will be this year. I think that’s the plan for us. And I think that will be a big shift for the markets because now there’ll be competition for the first time in settlement.

Laura Shin:

All this that you said is so interesting. I actually have three different things I want to say about that. So first, this is for people who don’t listen to my show, I did a great interview with Caitlin Long of Morgan Stanley, who talked about this issue: about how, if you had blockchain-based stocks, then things like shorting by more than a hundred percent wouldn’t happen, or that you could make it so that it couldn’t happen. So people who are interested in hearing about that, you should check out that episode. And so Chad, I just also wanted to clarify, so for your solution, all of the stocks that you’re trading and that you say could be traded this way, they would have to then become blockchain-based stocks. There would be like a tokenized version of this stock? Is that how that would work?

Charles Cascarilla:

Well, we create a backward compatibility. Today we have a full participant account at DTC. That’s what allows us to do this. When we have a clearing agency we will be automatically connected to the DTC and they to us. What is enabled by this is a backward compatibility, so that if a share is tokenized and someone isn’t settling on our system and they’re settling a regular way, we can de-tokenize and it goes back. And so that’s an important point. We know that it’s very hard for people to be able to shift processes and certainly trying to do all or nothing is not effective. So we’ve deliberately made it compatible so that participants can do some of their trading in this fashion, or I should say settlement in this fashion. And they can continue to use their old methodologies when they need to.

Laura Shin:

And then when you were talking about how it’s a little bit like a choose your own adventure type, what is the fastest that your system can handle in terms of settlement?

Charles Cascarilla:

We haven’t tried to do something that looked like real-time gross settlement because really all participants think that’s impractical for the moment. But certainly intraday batches could be done every couple hours. You could do three or four batches during the day of T+0. End of day T+0 is what we’ve put out in some press releases and we’ve done it with certain participants already. So, again, it could be faster than that even, with several batches per day. I think getting a real-time gross is hard because you’re talking about hundreds of millions of settlements. And so that requires participants to pre-fund cash and pre-fund shares so that they’re in a position. And so you couldn’t do that now, but imagine a world in the future where say there’s a central bank digital currency.

So all cash is on a blockchain. And imagine a world in which all shares are on a blockchain. Well, now, things suddenly look a lot different in terms of even what an exchange could look like. But, also, that could very well facilitate the type of treasury management that would allow real-time gross settlement. But I do think that that’s clearly a ways off. That is part of the journey I was talking about that participants need to go on, you can’t get there overnight. But you can get there, I think, faster than the pace that we’re on right now.

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Laura Shin:

I wanna kind of just walk through what the GameStop scenario would have looked like under these different types of conditions. So we can talk about T+0, which is kind of the ultimate goal, but even something like, you know, Chad, what you described where you could do these intraday trades or settlement. So, and either of you can answer this, but I was just curious in the case of something like this, where you just have these stocks that are going up and up and up, you know you know, Vlad, I’m curious to know what would have been necessary for Robinhood to put up in terms of collateral like in a T+0 environment? Is it true that you wouldn’t need to put up any and that what was in customers’ accounts would be sufficient? I am just kind of curious to hear how you think improvements in this technology would have changed the outcome from the events this last winter.

Vlad Tenev:

I think it depends on the implementation. End of day T+0 would limit the collateral to basically what can accumulate during an entire trading day. It doesn’t completely make the problem go away, but reduces it by a significant margin. If you can settle in batches intra-day and those batches are dependent on factors like the size of the outstanding net by position — so they’re kind of event based rather than time-based — then I do believe that would solve the problem effectively. And I think that there are asset classes that effectively function like this. Cryptocurrency markets where you’re converting from fiat to crypto operate basically in that way where there’s kind of ad hoc intraday settlement which you can describe as T+0. And I think the DeFi, kind of crypto to crypto trading, is a good example of what Chad was saying earlier on what a future could look like, where you know, you have these stablecoins that are on blockchains, you have different assets on different blockchains, and you can do these like cross-chain atomic swaps that effectively approximate what real-time settlement would look like.

Laura Shin:

And Chad, what about you? How do you think that this world would look different?

Charles Cascarilla:

Well, I think it would be dramatically different. The way it works today. If you did end of day T+0, it would depend again, as Vlad said, how is it constructed? That would probably reduce margin almost all the way because right now your margin isn’t even getting posted until either at the end of the day or the next day. So you imagine if you’re settling by 5:00 PM on T+0, that’s gonna probably be most of what needs to be done. So you could imagine dropping from $15 billion of capital that’s needed to do guarantees because you have a centralized intermediary that’s guaranteeing every single trade to all the participants settling amongst themselves at 5:00 PM. And you just needing to hold a little bit in case someone doesn’t fund.

That’s a huge improvement. I mean, you’re probably talking 90+% capital savings. I’m going to guess 95%, if you did intraday batching, I think, you know, you’re basically getting all the way there. You’d still probably want to collect some margin anyways, just to be extra safe, but that’s not even how the system works right now. There wasn’t even a trade guarantee until very recently until the night of T+1. So when we were at T+3 settling, the trade guarantee kicked in on the night of T+1. So, you know, getting to T+0 is far better than what the clearinghouse was ever doing. And you have to remember, the clearinghouse has never been tapped before. You had the ’87 crash, you had the Asian financial crisis, you had the dot com bust, you had the Knight Capital giant kind of blow up.

Any of these things, never once tapped to obviously the financial crisis, never once tapped the clearinghouse fund. So this is a huge amount of money that is being trapped. And it’s a nice thing to have, but if it’s not ever used and, you know, I guess at some point it could be used. I don’t know when. It has never been used even through what is the biggest crises of all. When will it be used? We might as well move to a different point where we can release this capital. And it won’t be procyclical where people are getting a $15 billion capital call and it flexes from $15 billion to $30 billion. Instead, you could sit here and be using, say T+0 or batches, free that capital up to be used to grow businesses, to create new products, to create more trading, to create more liquidity to do all kinds of different things, invest in their businesses.

You know that would be a real win for frankly, all of society. And so that’s why this is such a big issue because that’s a lot. And by the way, that’s just the capital in the guarantee fund. That’s not the capital on settlement day. Settlement day is very long and slow. It’s $30 billion to $60 billion liquidity is trapped all day long with a lien on it. So that means across Wall Street, you have somewhere like $45 billion to $90 billion to a $100 billion of capital liquidity tied up in settlement processes that could be really released. Where could that go? I mean, well, you could think of a lot of places, $100 billion could be better utilized if you were getting to much more efficient guaranteeing and settlement processes.

Laura Shin:

Those are huge inefficiencies. And so I was curious because obviously, you know, Chad, you did say that you’re hoping that you’re able to open the solution out to a wider group within the year. And obviously Vlad is very interested in shorter settlement times. So what would a market look like if there were just certain platforms that were settling this quickly and others that were settling more slowly? Would that even happen? Is that possible for that to happen? If the DTCC is on this track to do T+1, and you’re saying that you could potentially release this out to a larger group within the year, then what happens? Do we just have two different systems for a while?

Charles Cascarilla:

Yeah. Basically you have a bridging mechanism. So there there’s a lending market that exists today. The lending market either on dollars or shares could help bridge participants. So some participants were settling in T+0, and they were trading to settle on T+0. And you could settle on T+0, you could settle on T+1. You can kind of put a tag in today in your trades and when you want settlement to happen. You can make different settlement timeframes possible just with the normal process, either through OTC trades, over the counter trades, alternative trading system trades or exchange trades. Exchange trades right now have to be a T+2. So that would be the SEC changing that, but other participants, other trades can be other timeframes. There are other timeframes. Participants could settle on those other timeframes and they just have to reallocate the inventory to deal with the rest of the process of settling out at whatever SEC rules allow. Again, SEC for exchanges is T+2, if that moved to, or maybe they create flexibility at T+0, then all participants could have the possibility of deciding when they wanted to settle.

Laura Shin:

So it does sound like if platforms manage to get there more quickly than that’s just a huge competitive advantage. It would cut a lot of costs it sounds like. So we could talk about this so much more. But we do also have another topic to discuss, which is another big thing that’s been taking off all this year, which is crypto. So why don’t we do the third poll because we kind of want to see where the audience members are at in terms of their level of experience with this. So for this question, it is, have you ever purchased crypto? If so, from where? The options are, I have never purchased crypto and don’t have plans to, I have never purchased crypto, but I’d like to, I have purchased crypto via the Robinhood app, I have purchased crypto via PayPal or Square’s cash app, and then the last one is I have purchased crypto via Coinbase, Gemini, or another crypto specific company. So go ahead and make your selection and we will see. So more than half have purchased via Coinbase, Gemini, or another crypto specific company. The second is I purchased crypto via Robinhood. The third is I’ve never purchased crypto, but I’d like to, and then lastly PayPal and then never purchased. So clearly, yeah, what we’ve been seeing in the news that a lot of people are getting into crypto is am bearing out also here in this discussion.

Charles Cascarilla:

That’s pretty good market share Vlad.

Laura Shin:

So Vlad, you were one of the first FinTech apps to add crypto. Why did you make that move back then before this big interest took off in the mainstream?

Vlad Tenev:

We added crypto in early 2018, which at the time felt somewhat late, but I guess now look at what’s happened in the last three years. The reasons that we decided to add it was mainly customer demand. We look at different analytics for what customers want to invest in on our platform. For example, we were seeing unfulfilled searches. So people searching for different things on the platform. Right around that time period, we started getting a lot of unfulfilled searches for cryptocurrencies. So we started looking at it. And then also it became clear that particularly in that phase of the cryptocurrency market, people were predominantly interested in it as an asset less so as kind of a medium of exchange to power transactions. And the use case of cryptocurrency as an asset to diversify your holdings is very much in line and was in line with what Robinhood’s core competency was. So we thought we could do something really, really special for customers and make it work very well. And at the same time sort of fulfill the customer demand. We’ve been very proud of the product that we’ve built.

Laura Shin:

And so how does Robinhood’s crypto operation work on the backend? When someone buys Bitcoin or another crypto asset in Robinhood, where are those coins coming from? And then when they sell them, where are they sold? And also, what is your revenue model for the crypto trading? Like, do you just make a little bit of money on the bid-ask spread, or how does that work?

Vlad Tenev:

Yeah, it’s structured similarly to our equities and options business. I mean, different market makers, but it is analogous. So we route customer orders through market makers, and then those market makers go and source liquidity through a number of different exchanges and market centers and we obtain the coins and sell the coins via them. And the revenue model is also similar. We collect rebates from our market makers on crypto transactions, kind of similarly to how it would work in an equities or options transaction.

Laura Shin:

Okay. So, payment for order flow model as well. You guys just published a blog post saying that you saw six million new crypto users on your platform and just the first few months of 2021 compared to 401,000 in a single month in 2020. However, I’m sure you’re well aware, you know, on Twitter, I see it, a lot of people are wondering, why is it that when they buy crypto on Robinhood, can they not withdraw the crypto to their own wallets? When do you think that you’ll be able to enable crypto purchasers to move their assets off the platform?

Vlad Tenev:

Yes, the wallets question. I’ve been hearing that one a lot lately. So I guess to the rationale: why we didn’t launch with wallets to begin with back in 2018. It was a consideration certainly we were kind of debating internally whether we should hold the launch and give people the ability to transact or put it out there without kind of withdrawal and deposit capability. We decided that there actually is a very significant use case, especially for people that aren’t particularly technology savvy and they don’t understand how public-private keys work. It’s kind of like using a password manager. I don’t know if you guys use password managers, maybe you do, but if you’ve tried to explain to someone who is not a computer scientist or a technical person, that they should have their passwords in this thing and have a master passphrase and everything should be sort of buttoned-up in that way.

It’s the right thing to do. And it’s obviously great for security, but you’ve just dropped the number of people that are gonna kind of go through with this by a significant portion. So we’re optimizing for making it as easy as possible to do what the majority of people wanted to do, which is to get exposure to these assets with the lowest possible cost. And that’s really kind of the pillars of Robinhood’s product experience. We want to give people the lowest possible cost we can give them. And we also want to have the best customer experience. That’s just like — it just works. And so I think we’ve accomplished that. And now with the scale and load that we’re dealing with, we’ve been staffing the crypto team pretty tremendously, and we’re committed to doing this. We want to deliver wallets to people, and we want to do it as safely and as expeditiously as possible while balancing just sort of the demands of a surging business that needs high quality customer support, service, availability, and reliability. We’ll get there, but it’s not as trivial as sort of like flipping a config file and all of these millions of customers can suddenly move their coins around.

Laura Shin:

And from my understanding of this business, I think also making things fraud-proof is really, really important in this kind of scenario. So I’m sure that may play a role.

Vlad Tenev:

Absolutely. Yeah. I’ve said repeatedly that Robinhood takes safety extremely seriously. It’s our top value. We’re a safety-first company and that means not just protecting customers, but making sure that we protect the broader financial system. And we work with our regulators and other counter parties to protect the system that their transactions rely upon.

Laura Shin:

We’re kind of running out of time, but since we started a bit late, I’m going to take two last questions quickly. Both of you have businesses that are pure crypto in that they involve the selling of the assets themselves. But you also have these businesses on the securities trading side, which could be potentially disrupted by blockchain technology. So I was curious just if you were to project out, you know, maybe five years or, or pick your number in the future, which business do you think will be a bigger business for each of you?

Charles Cascarilla:

Can you just elaborate: which business meaning crypto or stock trading will be a bigger business for us?

Laura Shin:

Yeah.

Charles Cascarilla:

As bullish as I am on crypto, it’s hard for me to imagine that crypto could have the same market cap as US stocks, which I think it’s like $45 trillion at the moment. And that is just US stocks, that’s not bonds or, other types of securities. I think that will always probably be a bigger asset class than crypto. But on the other hand the crypto has the possibility to really increase very significantly. It’s captured a lot of enthusiasm, and right now, the spreads are quite wide on it. So people are making a lot of money on it. I think the whole point of Paxos is we’re not trying to pick winners.

We’re trying to be the infrastructure. And so ultimately, if I’m wrong and crypto is the biggest, great. And you know, if I’m right and stocks are the biggest, great, because we’re working on both of those. And so our goal is we’re infrastructure. So we don’t have to know exactly which assets are going to be the right one. And what I want to make sure is that whoever wants to build a business to serve those end customers has an easy way to do it. And so if we do that successfully then whatever asset class perhaps emerges even that we don’t even know, we can also service to.

Vlad Tenev

I generally agree with that from a sort of direct to consumer business standpoint. We want to make sure we’re there offering the types of investments that customers want to invest in. I think from a technology standpoint, we are likely to see greater convergence. Whether you have some of these traditional financial assets being tokenized or through synthetics, there’s a lot of really interesting work happening in the synthetic space. Blockchain technology is likely gonna penetrate the traditional sphere a little bit more. And you’ll see some convergence between these two things. If you can’t beat them, join them answer.

Laura Shin:

All right. And lastly, what’s next for each of your companies? Bloomberg did report that Robinhood has filed to go public, although I’m expecting Vlad is likely not able to discuss this. And Chad, it was reported that PayPal may be launching a stablecoin, which is clearly in Paxos’ wheelhouse. And you also recently told The Block when discussing your $300 million raise that you thought you could add one customer the size of PayPal this year, but now you think you can add three to five. So what can each of you tell us what is next for your companies?

Vlad Tenev:

Well I would just say I can’t talk too much obviously about any public offering. But I can say that we’ve got a lot of work ahead of us. We want to make sure we continue listening to customers both crypto and and securities, equities, and options. And we’ve been growing the team to try to meet all of the demand and make sure we continue to innovate. I think innovation in this space is accelerating, and it’s going to be increasingly important to kind of meet the demands of the people.

Charles Cascarilla:

What’s driving that growth for us, that you were just talking about, Laura, that you mentioned, where maybe we could add one company the size at PayPal and now I think we could add three to five is this move from early adopter to mainstream. We’re talking about it a lot, and it’s happening far faster than I could have imagined. And that’s part of the reason why we raised that capital: it’s because we wanted to use this to take advantage of the chance here that is this window of opportunity to really invest in our business, take advantage of what’s happening with many large firms coming into the space. I’m really surprised at how it’s really shifted, I think partly because of PayPal. And, obviously, Vlad and Robinhood were really early in offering crypto, but PayPal really created a, I think, a shift where people were afraid before PayPal and they were afraid after PayPal just for different reasons — afraid to be first, and now afraid that they’re going to be left behind.

And there were obviously early adopters that blazed a trail that got PayPal comfortable. And I think Robinhood is clearly one of those. And now that’s creating a knock on effect. That knock on effect is something that we’re seeing because of our position as infrastructure. And we’re seeing that where firms want to come in and have a turnkey solution to be able to buy and sell crypto, but also, you know, be able to send and receive, as Vlad was talking about it. You know, that’s a complex thing. We do that for customers. And then they also see this as a way to be able to add all kinds of different assets. And, ultimately, you have a crypto native asset is really a blockchain native asset. And then you have non-native blockchain assets that we’re helping to put into a blockchain world because replatforming the whole system into a blockchain based world is going to be hugely transformative.

I just imagine if every single asset in the world today was sitting on a blockchain, what would the financial system look like? I mean, it’s almost hard to like fully do that thought experiment. It changes, you know, not just issues in the plumbing, which is what we’re doing, but issues around exchange, issues around getting loans, issues around how people can have access to the financial system that they otherwise wouldn’t. So there’s so much that’s going to happen here, and it’s exciting to see mainstream companies decide that they want to be part of this ecosystem because that’s what attracted me to it 10 years ago. We’re just still in the first out of the first inning, there’s only been $80 billion of assets that have been been tokenized. That’s basically dollars for crypto trading. We’re barely even started here. Imagine what this will look like when you get to real mass adoption.

Laura Shin:

Yeah. I love it that you sent that up because actually that was going to be a question, which I had to leave on the cutting room floor because of time. But I was curious to get you guys to kind of expound on what that world would look like because I am fascinated by that question. But anyway, thank you both so much again for giving us your great insights. Thank you to everyone who joined our discussion.

To learn more about Vlad and Robinhood and Charles and Paxos, be sure to check out the show notes. Sign up for my newsletter where I will soon be making an announcement about pre-orders for my book: “The Cryptopians: Idealism, Greed, Lies, and the making of the First Big Cryptocurrency Craze. Head to unchainedpodcast.com and the sign up for the email newsletter is right on the homepage. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thank you for listening.