The New Real Yield: Paxos' Bhau Kotecha

BHAU KOTECHA is product lead at Paxos, a Coinshift Personal partner and international leader in onchain asset solutions – particularly when it comes to global regulatory standards, user protection and risk management, and the future of real yield.

Bhau comes to Paxos from Cash App and Square, bringing game-changing FinTech savvy onchain to help usher in the future of what financial products and innovation can do when they meet serious due diligence. Stablecoins, and their ability to make high yields more widely accessible, are the crux of that potential. "As the industry matures," he says, "people will see that the rightful owner of that yield is the person who is giving the dollar." Paxos is providing the foundational infrastructure to make that expanded distribution a safe, widely beneficial reality. According to Bhau, it all starts with the ubiquity and availability of – and widespread trust in – the US dollar. In terms of how stablecoins progress from there, well, the sky is the limit.

CS: How did you get to crypto? It’s not something one studies in school.  

BK: When I was deciding what I wanted to study in college, it was between finance and computer science. I thought, “if only there was a thing that combined computer science and finance!” Blockchain didn't exactly exist as an industry at the time. I ended up picking computer science, but after I finished my degree, I worked in payments. I spent almost six years at Square and Cash App, where I got to combine the things that really interested me: technology, finance, and innovation. I learned how the financial system actually works, and saw how the fintechs of the 2010s truly built a better user experience – on the front end. I also realized how broken the backend was. It looked great on the surface, but the backend was 50 years old. I ended up joining Paxos in early 2022.

CS: We’re seeing a lot of people coming to web3 from fintech companies like Square, CashApp, Klarna. At Coinshift we are constantly talking about how important it is to bridge the perceived divide between web3 and web2 – to take that incredible front end UX and everything Fintech pioneered and build on a tech stack that’s just way better on the back end. 

BK: As much as I love to consider myself a web3 native and enjoy all the different dApps and communities there, I think the broader population will ultimately adopt crypto unknowingly, through the Cash Apps and Venmos of the world – existing and new platforms that can abstract away some of the complexities of crypto. Crypto is hard, confusing – even “scary” sometimes. “Misplace one thing and I lose all my money?!” Adoption will be lead by companies like Coinshift who are thinking about how to abstract away that tech layer while still getting the instant movement, the 24/7 availability, the better fees – all the great things that come with the technology. If you can abstract away the hurdles to the average consumer, that's going to be the winning strategy. Paxos really wants to enable the Coinshifts of the world to provide that amazing end-user experience on top of this new innovative stack that we're building infrastructure for. That’s 100% the future of how we will interact with blockchain applications.

CS: When you were in web2, were you also dealing with adoption issues? If you look at the history, you see massive chronological gaps between when a technology is invented and when people actually accept it.

BK: It really varies by geography. We did a ton of research into markets like China and India – markets that just skipped the credit card phase. They went straight to mobile apps and paying with QR codes and doing everything from phones. The US was totally behind in that respect.  

CS: When people talk about the “unbanked,” we always put these demographics “over there” – in the Caribbean, Latin America, the global south. These are the examples people use for crypto applications. We tend to forget about the massive divide – and the massive opportunity that presents – in the United States, home of the ubiquitous dollar.

BK: The Cash App user base was actually focused on the underbanked population of the US, before slowly moving into other geographies. People were able to access services in a much more efficient and cheaper way that was integrated with day-to-day operations. You do everything on your phone already, why shouldn't finances be there too? I was lucky to be there in times of explosive growth – to see Cash App start as a hack week project and rise to 20-30 million monthly active users. The reason that opportunity was there for these players was that big banks ignored entire segments of the population who were underserved from a financial services standpoint. The institutional view was that it's too costly to serve these customers. We were able to deliver them a great experience at scale by building great technology. And that technology ultimately became the moat between the innovators and the existing financial institutions.

CS: When you crossed into blockchain, how did that target user group compare? What pain points was Paxos responding to?

BK: When I first joined, the flagship offering we were probably most known for was our crypto brokerage service. So, if you go to PayPal or Venmo and buy Bitcoin, that transaction is powered by Paxos APIs on the backend. That was where the initial demand was coming from: platforms wanted at least Bitcoin, ETH, Solana – the gold standards – to be accessible in their app experience. But that very quickly started to pivot to conversations with enterprise customers about stablecoins. If the core of your business is about moving money around the world, then stablecoins will be obviously well-suited to making you more efficient. That's where we really started to have the conversation with major brands like PayPal about what it would look like to more deeply integrate stable coin into their ecosystem. We started with USDP, our original regulated stablecoin issued out of New York, and PAXG, our tokenized gold product. So when PayPal said they wanted to issue their own stablecoin, we already had a tokenization engine that was flexible enough to allow them to do that on top of our stack. Very quickly, the conversation turned toward stablecoins as the heart of the revamp of the financial ecosystem – the idea being that the renovation would then expand to other tokenized assets. Over the last year or two, we've been really focused on building out our stablecoin offerings, both as a white label services to players like PayPal, and by issuing our own token – like USDL, our yield-bearing stablecoin.

CS: Coinshift is certainly betting on stablecoins, and USDL in particular – for great reasons.

BK: We really see them as the tip of the iceberg. Paxos’ mission is to tokenize all the world's assets and, in doing so, to re-platform the entire financial system. Every asset in the world will be tokenized at some point. But the US dollar clearly has the best product-market fit, for now.  It’s the most accepted currency globally. Tokenizing a dollar and making it able to move at the speed of the internet takes an already strong, available asset and unites it with the power of blockchain.

Obviously, gold is one of the next big assets coming online, and we're seeing a ton of demand for PAXG. But getting dollars onchain is the first leg in everything else to come. It unlocks everything else.

CS: There’s a novelty discourse of “tokenize everything” – Boeing jets, the Mona Lisa, whatever. But that’s not the crux of what RWAs are, right?

BK: Totally. Our current focus is toward getting financial assets onchain – dollars, gold, and other fiat currencies as well. Imagine the interesting baskets of assets that will exist because of these existing building blocks and permissionless technology. Take USDL: it’s a tokenized dollar, but it essentially gives you yield from a treasury bill. Now you can imagine a USDL-plus-Pax G asset that combines your exposure to gold and dollars – which is incredibly appealing to many people in the world.

CS: Let’s zoom into USDL. It’s not Paxos’ first stablecoin – there are a lot of other assets in the mix. What was the conversation that led to the creation of this asset, and what makes it distinct?

BK: Paxos has been in the tokenized dollar game for quite a long time, and one of the key insights we gained in the market was that at the start of the stablecoin industry, issuers kept almost all the yield that was being generated by the underlying treasuries and investments that were backing the industry. It was such a novel product that people were willing to essentially pay to use stablecoins, willing to forego all their yield just because there were no other alternatives out there. As the industry matures – and we look forward to that – people will see that the rightful owner of that yield is the person who is giving the dollar. We believe that the end game of this market is the consumer receiving maximum yield. 

From that insight, the big decision was around how to construct a great product to deliver that experience. We learned a few things from our previous stablecoin ventures, and we knew we wanted to continue having a regulated entity issue the asset – to do all the things to make sure that consumer's deposit is fully protected.  

CS: Can you walk our readers through how and when these protections might come in for users?

BK: Let's say an entity decides to issue a stablecoin that is not regulated like USDL is. If that issuer were to go out of business or have any sort of insolvency event, ultimately the people holding that stablecoin are debtors to that bankrupt entity. They have to go through court proceedings to get their money back. That’s insane. We believe it should be encoded into law that if anything happens to an issuing entity, the dollars sitting in a given account still belong to the user – that stablecoins are immediately returned to the holder, no matter what happens to the entity.

 The way we're structuring stablecoins at Paxos makes them safer than some bank deposits, since many are not backed fractional banking, for example. That is the baseline design requirement for a stablecoin: regulatory oversight with consumer protection, and assets that belong to the user.

CS: USDL is also unique for its daily yield factor - why was that important?

BK: We really wanted to create a great product experience. We thought, what if the user not only got yield, but could see that increase every day? Even well-banked people in the US might only see yield in their savings accounts at the end of the month. Or maybe it will be calculated based on an average balance. With USDL, you get your yield every single day. That was the real design challenge.

CS: How did you tackle it?

BK: We decided to design USDL as a rebasing token to make sure the user gets their yield every single day in a programmatic way that is efficient and infinitely scalable. One approach to something like this could be airdropping yield every day, but obviously the gas and operational costs on that would be prohibitive. The product we’ve built completely avoids that excess. The level of access we provide is unparalleled. Very few people have access to daily yield and protections like these. We’re excited. We think USDL is the future of how stablecoins operate.

CS: You used the term “remix” earlier. Is USDL designed to be “remixed”?

BK: A stablecoin, or any tokenized asset onchain, is something that you can program on top of, by nature. As long as the base layer assets are issued in the right way, any web3 developer can build remixes on top of them. People can build applications and use cases; platforms can connect these products to their customer experience. Some of our partners are issuing debit cards on top of self-custodial wallets that hold USDL. Now their customers can spend from this balance anywhere that a debit card is accepted – while also earning until the moment they spend. Traditionally, you have to choose between your spending account and your savings account. If you earn yield until the second you decide to spend, you maintain your optionality no matter what. That’s why we're trying to build a robust, trusted, regulated base layer with really strong connectivity to the real world asset – to create the strongest possible foundation to build on top of.

CS: How bullish are you on self-custody?

BK: Generally, we believe that both self-custodial and custodial options are going to grow in the market. In the near term, custodial options provide a slightly easier onramping experience for crypto newbies, if you will – it's just less “scary” if you can trust someone else to handle the safety piece and manage wallet security for you. What becomes really interesting is self-custodial accounts, like Coinshift’s, that are really thinking about user experience. When the ease of use is on par with the customer experiences offered by centralized, custodial options, users will opt for self custodial wallets that allow you to interact with or any asset you want in the ecosystem. In a custodial environment, you're typically restricted to what you can hold or use. The old “walled garden” might be fine for many users, but people will increasingly want the flexibility to do whatever they want with their wallet – to join any dApp or community, to access a wider range of assets. The self-custodial word is improving rapidly. That’s going to drive adoption much faster than many people think.

CS: Would you say you are an optimist?

BK: Of course. I think you have to be an optimist to work in this industry. New, disruptive technologies are always fighting an uphill battle, and winning it requires a kind of optimistic shepherd to lead the way. There is no other industry in the world that is as large and entrenched as the current financial system. If you are trying to bring disruptive technology to one of the biggest, most ingrained systems in the world, you have got to be an optimist. In order to fulfill Paxos’ mission to re-platform this financial system, you have to be an optimist. People working on that mission see what could be – they see that better light at the end of the tunnel – and are pushing the world toward it.

** Note: Lift Dollar (USDL) exists to open access to US dollars that earn yield safely. It is not presently available to residents of the US and certain other countries. Learn more at https://liftdollar.com/