Paxos' Strategy Head Talks Tokenizing US Equities And Re-Platforming Trillions In Assets

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Today’s conversation is with Walter Hessert, the head of strategy at Paxos.

The following text was edited for clarity and concision.

Q: Hey Walter, nice to speak with you. Tell me a little bit about yourself and how you became involved in the business.

Hessert: I spent about a decade in the gaming industry building real money gaming software on a site called Derby Games. We raised a few rounds of funding and were based in New York and Armenia.

Through that experience, I encountered crypto as a product as early as 2012 when clients wanted to be able to fund their gaming accounts. That was my first exposure to crypto as a currency, and that led me to pay close attention and integrate it into our products over the following five or so years.

I left the company in 2018 and joined Paxos as their head of strategy.

What is Paxos?

Paxos is building an infrastructure platform that enables firms to access native digital assets like Bitcoin BTC/USD and Ethereum ETH/USD, among others we hold and tokenize.

How do you differentiate?

We’re one of the most regulated players and platforms in the space. We ask for permission rather than forgiveness because we’re powering the types of clients who rely on trust.

Second, we’re just the infrastructure. Firms use us to power access to crypto buy, hold, sell, and transfer. They use us to access stablecoins, dollar stablecoin, and tokenized commodities.

The common thread through all of those is that they’re building on top of our platform, connecting to APIs to be able to power B2B2B or B2B2C type solutions with digital assets.

We’re powering the likes of PayPal Holdings Inc PYPL and Venmo, as well as Mercadolibre Inc MELI.

What scale are we talking about?

We power about half a billion in user wallets, today, through our crypto brokerage infrastructure. We’re the largest issuer of regulated stablecoins, with $20 billion of stablecoins in issuance.

We, too, power the Binance USD BUSD/USD and Pax Dollar USDP/USD. We are the largest issuer of regulated gold tokens, backed one for one with an ounce of gold that sits in a vault in London.

What’s your fundamental belief and how are you really reducing frictions?

Our fundamental belief is that all financial assets are going to be re-platformed on a blockchain and tokenized. That may take 20 or 30 years, since there is $700 trillions in assets, because open systems have continually won out over closed systems.

Presently, we’re tokenizing U.S. equities for a settlement pilot, under the SEC, with a handful of other participants like Bank of America Corporation BAC, Credit Suisse Group AG CS, Nomura Holding Inc’s NMR Instinet, and more.

We’re also working with the likes of State Street Corporation STT to take traditional assets and tokenize them for more cost-effective, efficient and timely settlement. On the retail side, we have platforms like Interactive Brokers Group Inc IBKR using us to be able to create wallet infrastructure for all of their end users.

Paxos recently launched financial advisor crypto trading for broker dealers. What does this development mean?

We’ve been powering some of the largest brokerages in the space, like IBKR. We power their full crypto offerings – buy, hold, sell, and transfer – and it feels native on the platform. In the background, though, those customers are onboarding into Paxos Trust Company.

The financial advisor launch is important because a lot of the trading activity goes through these financial advisors (FAs) who are using platforms like IBKR. Now, broker-dealers and financial advisors can meet fair pricing commitments by buying crypto in bulk and distributing it to their customers, so they all get crypto at the same time.

Give me an example.

Say an FA puts in a buy order for $1,000,000 of Bitcoin, and it executes at a bunch of different prices depending on how it gets matched up on our order book with liquidity partners.

At the end of the day, after it’s all executed and settled, they would give $25,000 of Bitcoin to Bob and $75,000 to Sally, and so on. Bob and Sally would have the same cost basis.

This is one of the nuanced requirements for these broker-dealers or FAs. We’ve provided that functionality through our APIs so that IBKR and other platforms leveraging our technology can offer it to their entire network of FAs on their platform.

What’s the advantage of working with you versus a competitor?

Our level of regulatory oversight makes us unique.

There is no platform in the space that is as regulated as we are. We have National Trust, we have the New York Trust, and we’re the only firm that has a combination of those, plus oversight from the SEC and other agencies.

Second, we’re infrastructure only. We’re not serving an end user. Paxos isn’t in the business of creating conflicts of interest. The third is the technology and partnerships with firms like IBKR.

Talk to me about the volatility in the market as well as how that may impact Paxos.

In a way, the structure that we’ve set up is safer than a bank because we can’t take your assets and go lend them out. That’s the importance of the trust structure. We can only hold assets and do with them what our customers direct us to do.

The reason for all the work that we’ve done from a regulatory perspective is so that we can be the trusted infrastructure to enable tokenization and re-platforming of non-native crypto assets.

No counterparty risk?

When you hold an asset that Paxos has tokenized, it’s not really like you’re sitting with a private liability to Paxos. Our dollars are just T-bills held in the trust structure. So, the customer has the right to the underlying asset and by putting it in that type of structure, Paxos can’t touch it.

Our creditors, in the case of insolvency, can’t touch that asset.

Where do you see the business heading?

Banks are soon to follow and add closed systems to buy, hold, and sell crypto. I think we also see a lot of functionality innovated on-chain converge into these centralized wallets that in the past seemed super vanilla.