Can my friend use his character on my PS4 in Co-op if he brings it over on a USB drive? Would he have to set up his PSN account of my PS4?
From what I understand, yes.
My best friend and his girlfriend usually come over and we play 4 player couch co-op. He uploads his character before leaving the house and then downloads both (he has his and his girlfriend’s accounts on my PS4).
Always, always, ALWAYS back up files. Horrible things have happened to people downloading and uploading characters and not realizing.
Also make sure not to overwrite characters unless you’re certain the right one is uploaded.