- Paxos is a startup that lets other companies offer crypto products and services.
- It has inked deals with Wall Street powerhouses from Bank of America to Mastercard.
- The startup has raised $540 million and is valued at $2.4 billion.
- This article is part of Rise of the Crypto Economy, a series that explores how crypto is reshaping and driving innovation in the global economy.
Wall Street is finally turning a corner when it comes to crypto — and one startup that's established itself as a critical link between the two worlds is gearing up despite the crypto downturn.
Paxos provides blockchain infrastructure for businesses to offer crypto features and services, from tokenization to buying, holding, and selling crypto. It's part of a new class of fintechs that has emerged to help traditional firms access the new world of infrastructure and offer crypto services to their customers.
The startup has raised $540 million to date, is valued at $2.4 billion, and has established relationships with firms like Bank of America, Credit Suisse, and Mastercard.
"They come to us to be able to use our technology and our regulatory stack as both the technology, but also the licensing to be able to provide those services," Walter Hessert, Paxos' head of strategy, told Insider of its typical client.
PayPal and its subsidiary Venmo both enable their users to buy, sell, and hold bitcoin and other major cryptocurrencies by leveraging Paxos on the back-end. The same goes for LatAm fintechs Mercado Libre and Nubank.
Paxos' partnerships are similar to that of challenger banks and its back-end banking partners. While you've likely heard of Chime, it's less likely you've come across The Bancorp Bank or Stride Bank. But they're the reason the online-only bank can offer debit cards and checking accounts without a national bank license.
Just as neobanks need back-end banking partners that have the necessary regulatory approval and tech to offer financial products, traditional Wall Street firms need to pair up with a crypto partner to offer digital-asset features.
Wall Street eases into crypto
The boss of the nation's largest bank in JPMorgan could be one of the clearest signals of the industry's changing attitude toward digital assets and their underlying tech — and how nuanced it can be. JPMorgan CEO and Chairman Jamie Dimon went from calling the asset class "a fraud" in 2017 to praising crypto's underlying technology, blockchain, just five years later in his 2022 annual shareholder letter.
Indeed, finance incumbents, from Goldman Sachs to Citigroup, have begun to embrace the technology in the past year. And global venture funding into blockchain startups increased to $25.2 billion last year — a more than 700% jump between 2020 and 2021 — according to CB Insights.
Another driver of Wall Street's embrace of crypto is "that this is ultimately just another rail on which these assets can move — and there's a lot of complexities to holding and trading and moving digital assets or tokenizing non-digital assets into digital assets," Hessert added.
For instance, Paxos' equities settlement service, used by Bank of America and Credit Suisse, enables faster processing because of its underpinning blockchain technology.
Those firms are "leveraging us to be able to turn cash and US stocks into tokenized forms for more transparent and closer to real-time settlement than what's available today," Hessert said.
Looking ahead, Paxos is eyeing a bigger piece of the Wall Street pie when it comes to tokenizing assets. In 2019, Paxos expanded into gold-backed tokens with Pax Gold, and that's just the beginning.
"There's $700 trillion of financial assets in the world and Paxos, our big bet is that over time — it may take 20 years — but that all of those financial assets effectively will be replatformed on the blockchain," Hessert said.
Other prime candidates include getting into FX markets via the rise of tokenized fiat currencies, real estate, and digital types of properties, like non-fungible tokens, he added.
And while the bear market has put downward pressure on the crypto industry, it's not Paxos' first rodeo.
The fintech has been around since 2012 and endured the crypto winter in 2018. The current downturn has seen "ebbs and flows of interest and motivation to integrate these solutions," Hessert said. But the company views the accelerated integration of crypto and blockchain in the last two to three years as offsetting the current pullback, he added.
"There's definitely a different sentiment in the retail crypto market than there was two months ago," Hessert said, but having Paxos' core product focused on the infrastructure layer between institutions has helped insulate the company somewhat from cryptocurrency trading volatility.
"Just because there is a sharp crash in the price of the underlying asset doesn't mean it's any less of an exciting or important technology that's being adopted," Hessert said.