Payments company PayPal has launched a new cryptographic stablecoin that is linked to the dollar, which seems like good news for the crypto market. The company is experiencing a rough period due to disappointing financial performance, but perhaps a new crypto instrument without much purpose for the general public could generate profits for it from an old financial instrument – American bond yields. With the announcement, PayPal CEO Dan Schulman said: “The transition to digital currencies requires a stable device that is both digital in origin and easily linked to national currencies such as the US dollar.”
PayPal Coin, or PYUSD, is a cryptocurrency that runs on the Ethereum network and is issued by Paxos Trust Co. Ethereum is the popular blockchain network, which is managed these days on the basis of a non-polluting, but relatively centralized proof method. The currency that was launched is a “stable currency”, meaning that its value is linked to the value of a country’s currency, in this case one PayPal coin equals one U.S. dollar. PayPal customers will be able to purchase the currency at a one-to-one exchange rate without commissions. Those who wish to purchase the coin using other selected cryptocurrencies that the platform supports will have to pay a specific and variable fee. Users will eventually be able to send their coins between PayPal accounts and Venmo wallets.
Cryptographic stablecoins have been around for over a decade, and their total market value is about $126 billion. Different stablecoins use different mechanisms, with one such algorithmic stablecoin becoming infamous as the first domino of the crypto market crash last year with the collapse of the Terra Luna stablecoin project. A number of other popular stablecoins routinely ensure rate stability by maintaining full reserves for the issued coins. The best known of all is Tether’s USDT, whose market value is about $84 billion. In the case of PayPal, the company has announced that it will back up all issued coins one-for-one through U.S. dollar deposits, short-term U.S. bonds and cash. This method will ensure that at any given moment the company’s customers will be able to redeem their currencies back to U.S. dollars.
As of today, only U.S. PayPal customers (excluding Hawaii residents) can access the currency. Perhaps because the coin is on the Ethereum system, this means that it will be accessible to others as well, but as of now it is limited only to the closed PayPal system and its American users.
How can you trust the system?
PayPal is a veteran player in the fintech market, and it is evident from the program it has deployed that it has learned some lessons from past attempts by companies that have tried to do something similar. Not only does it back up all the coins it issues one for one, but it also promises to release monthly reports that will transparently present the composition of its reserves. An external accountant will be trusted to audit this report. This kind of transparency comes on the back of repeated calls from the public of users from companies issuing other stable coins, mainly Tether, the largest issuer in the market.
Why does that sound familiar?
Facebook tried to do something similar and failed in a particularly resounding way. For several years, Facebook has been trying to launch a domestic and international payment system that would be powered by a cryptographic stablecoin that it would issue. Although it worked in cooperation and continuous dialogue with various regulators around the world, in the end the regulators feared that this project could undermine global financial stability. The complete Facebook network has about 2 billion users worldwide, and from the point of view of the regulators, this aggressive presence can really challenge the dominance and usefulness of currencies like the dollar and turn Facebook into a sort of private global bank. In February, the Department of Financial Services in New York even informed Paxos, the same currency issuer used by PayPal, that it must stop issuing the stable currency of the giant Binance exchange.
What does PayPal get out of this?
PayPal has been looking to define its role in the crypto market for several years. In 2020, it launched for the first time services in the field that included buying, selling and payments using a small number of currencies. A year later it launched Checkout with Crypto, which allowed consumers to pay businesses that supported cryptocurrencies, and in 2022 it began allowing users to transfer the coins from their PayPal accounts to wallets and other crypto exchanges.
Why issue a stable currency? It can be assumed that if PayPal issues one, it estimates that it can make a profit from it. The company explained in the announcement that it estimates that PYUSD will initially be used mainly by seasoned users of the crypto market for trading or as a tool for developers, but in the future the currency will be more widely adopted for payment transfers and small payments. If PayPal really succeeds in stabilizing the use of its currency, and regulators around the world are convinced that the system does not challenge their financial sovereignty, the company will also generate a return for itself from investing in U.S. bonds.
PayPal’s assessment of the project is apparently strong enough to push the company to issue a cryptocurrency during one of the industry’s greatest periods of uncertainty, and one that is attracting the most attention from regulators. If you look at the performance of the company’s stock, it is possible that it feels almost helpless. PayPal’s stock is the third worst performer on the Nasdaq this year, down 14% since the start of the year. This is while the Nasdaq index has jumped 34%. With the announcement of the launch of the currency, its share rose by 1.16%.
What does the community think?
Opinions differ. Large sections of the community like the move. For them it is a huge and beloved fintech brand that makes the crypto market accessible to large parts of the public. Many avoid entering it for a variety of reasons, whether it is due to technological complexity, whether it is due to a lack of interest in new digital payment alternatives or a general reluctance from the ecosystem which is known to be an arena saturated with scams and fraud. The connection to the old brand can, according to them, create an extraordinary bridge for this large public, and from there perhaps even increase its involvement and use in the crypto market as an alternative to other traditional financial services.
However, other sections highlight the conflict between PayPal and the original crypto market goals. PayPal is one of the service providers that knew, when it wanted to or felt public pressure, to prevent use, close accounts or refuse to process payments on the platform. Among other things, it closed the PayPal accounts of white supremacist groups that organized the violent rally in Charlottesville in 2017, and in 2021 it made headlines again when it refused to process payments for activists in the Tor community (an encrypted and anonymous network).
Every time PayPal has implemented this financial censorship, it has done so with very little explanation, and provided no way to appeal the decision. This is one of the reasons for the rise and popularity of cryptocurrencies, which are designed to be immune to censorship by countries or other entities.
