PayPal Stablecoin: The Key to Traditional Finance and Mainstream Adoption

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In early August, PayPal (PYPL) launched a U.S. dollar denominated stablecoin designed for digital payments and Web3, and to be compatible with the most widely used exchanges, wallets and Web3 applications. PayPal USD (PYUSD) is fully backed by U.S. dollar deposits, short-term U.S. treasuries and similar cash equivalents, and can be redeemed 1:1 for U.S. dollars. PayPal said that the launch showcases the company’s focus on becoming a crypto payment giant and aims to make PYUSD a key part of its payment infrastructure.

"The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar," says Dan Schulman, president and CEO of PayPal. "Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD."

The crypto stablecoin market capitalization is $125 billion as of this writing, primarily dominated by two players – Tether with a $83-billion market capitalization followed by Circle-issued USD Coin with a $26-billion market capitalization. The two major players supported the newly launched PayPal stablecoin.

Jeremy Allaire, the CEO of Circle, praised PayPal’s launch, calling it “incredibly exciting.” Tether CTO Paolo Ardoino said PYUSD would be positive for the crypto industry in general.

While the crypto ecosystem embraced the new stablecoin, some legislators were quick to criticize the effort. Rep. Maxine Waters, the leading Democrat on the House Financial Services Committee, expressed substantial security concern over PayPal’s introduction into the dollar-pegged stablecoin sector. She also suggested that the company should have waited for official regulatory approval at the federal level before launching its initiative.

Sen. Sherrod Brown (D-Ohio), head of the Senate Banking Committee said, in a statement that PayPal's decision to launch a stablecoin before the government establishes regulations for such assets could put consumers' money at risk: “As we've seen with other so-called stablecoin, digital assets that purport to be 'stable' can quickly become worthless," comparing the PayPal stablecoin to the fiasco of the stablecoin Terra (Luna) in summer of 2022.

But this is an inadequate comparison as not all stablecoins are created with the same mechanism. Stablecoins have been around for almost a decade, so what's different about PayPal's launch, and why is there so much excitement over PYUSD? In short, PayPal is strategically positioned to penetrate the traditional finance ecosystem, which is the key to mainstream adoption. Let's dig deeper.

What It Is and Key Features

PayPal's stablecoin is developed on the Ethereum, blockchain and eligible customers who purchase PayPal USD will be able to transfer the token to external wallets, send person-to-person payments, fund purchases at checkouts supported by PayPal, and convert cryptocurrency holdings to and from PayPal USD. It will be made available on Venmo in the near future, where users will be able to transfer it between the two platforms. The stablecoin will also be transferable with wallets that support PYUSD, such as Coinbase Wallet and MetaMask.

PayPal – a traditional financial institution

PayPal is the first major U.S. financial company to launch its own U.S. dollar-backed stablecoin. To be exact, JPMorgan was the first major financial institution to launch a stablecoin, dubbed JPM coin, in 2019. But JPM coin is only available to the bank’s institutional clients. PayPal aims to bring its stablecoin to the masses while tapping into the traditional finance ecosystem.

PayPal – a prominent online payment system

PayPal has more than 20 years of experience in the payments space and manages a regulated online payments business with a strong compliance framework and infrastructure. This is one of the company’s chief advantages in the stablecoin market, meaning they can make PYUSD available outside the PayPal ecosystem.

PYUSD is a fully U.S. regulated token

PayPal's stablecoin is fully regulated. It is issued by Paxos Trust Company, a fully licensed limited purpose trust company subject to regulatory oversight by the New York State Department of Financial Services. In June 2022, PayPal was issued a BitLicense by NYDFS after previously obtaining a conditional BitLicense. Reserves for PayPal USD are fully backed by U.S. dollar deposits, U.S. Treasuries and similar cash equivalents, and PayPal USD can be bought or sold through PayPal at a rate of $1.00 per PayPal USD.

By contrast, Tether is not regulated and thus only used outside of the U.S. While the stablecoin of Circle, a startup regulated in the U.S., PayPal is a tenured online payments company operating in a U.S. regulated space, and has been known to be compliant with all necessary financial regulations.

When entering the stablecoin space, PayPal has stated that one of its key areas of focus will be to work closely with regulators. PayPal understands the traditional financial regulatory and compliance landscape, and the need for it. This is vital to establishing consumer trust.

Stablecoin Regulatory Landscape

In July, the House Financial Services Committee passed seven pieces of legislation out of Committee that aims to establish a regulatory framework for payment stablecoins, protect self-custody for digital assets, overturn the CFPB’s small business lending data collection rule, and reduce the influence of ESG initiatives in the financial markets.

Included among this legislation is the Clarity for Payment Stablecoins Act, introduced by Chairman Patrick McHenry (R-NC), which recognizes several regulatory paths for approving and regulating stablecoin issuers while ensuring robust protections for consumers through necessary federal guardrails, passed by a bipartisan vote. McHenry called for comprehensive crypto legislation the same day PayPal announced its rollout of PYUSD.

“Clear regulations and robust consumer protections are essential to enabling stablecoins to achieve their full potential,” McHenry said. “We are currently at a crossroads to keep America at the forefront of digital asset innovation. Congress is making significant, bipartisan progress on legislation to ensure the U.S. leads the financial system of the future.”

He added that the bill sent a “clear signal that stablecoins – if issued under a clear regulatory framework – hold promise as a pillar of our 21st-century payments system” and made it “more important than ever” to keep moving the legislation forward. But the bill's passage is not a sure thing, given the concerns expressed by Democratic legislators earlier in this article.

Financial Industry Sentiment for Digital Assets and Web3

PayPal’s move follows a slew of initiatives from financial establishment players. BlackRock, Fidelity Investments, Invesco, and others are pushing the Securities and Exchange Commission to support newly revived submissions seeking approval of bitcoin exchange-traded funds. Meanwhile, Charles Schwab, Fidelity and Citadel are jointly seeking regulatory approval for a new crypto exchange. These institutions often build support in Washington before making these moves, as does PayPal.

Internationally, in late August, Swift, the financial messaging network, successfully completed a project that placed its financial infrastructure as a central point for the transfer of tokenized assets by banks across multiple blockchains.

These events signal that not only there is a positive sentiment among financial institutions for digital assets and the implementation of Web3, but also among legislators. It seems that we are at the verge of a tipping point and mainstream adoption might not be in the distant future.

PayPal's Strategy and the Key to Mainstream Adoption

Customer/merchant base

PayPal is in a good position in terms of the distribution and access for making PYUSD accessible to a larger segment of the population. It has an extensive network of over 435 million active accounts, a large base of consumers and merchants – a two–sided network. PayPal says PYUSD will also soon be integrated into PayPal-owned Venmo: PYUSD would allow PayPal merchants to be able to receive value from Venmo users, ultimately opening a base of millions of additional customers.

PayPal is in the” business of trust”

Sri Shivananda, EVP and Chief Technology Officer at PayPal said in an interview: “At PayPal, we have always been a customer champion. If we always start with the customer and we think about the customer and what’s in their best interest and how we build a long-term relationship with them and protect them on this journey, that will guide us to always do what’s right. We’re not necessarily in the business of payments, we are in the business of trust.”

To further consumer trust, in August, PayPal announced that it is about to launch three new products with ties to AI. For example, one product has a checkout feature that uses AI to keep track of all the permutations of user addresses and personal information that they might use, and use AI to predict the right one to use with the right merchant.

Another example is using AI to detect unusual patterns where fraudsters are trying to test consumer stolen card out to see if it can be used or not. The AI application will alert the consumer through the PayPal wallet so they can get that card shut down with their bank quickly. Detecting these patterns can get really complicated, as patterns can change on the fly, thus AI could help PayPal anticipate these changes and keep them ahead of criminal behavior.

These AI applications could be utilized across all PayPal payments services, including digital assets and its stablecoin – increasing consumer trust, which is especially vital in the digital assets space.

PayPal tapping into Web3 applications

PayPal's foray to the stablecoin space is a signal that PayPal sees Web3 and blockchain technology as the future of payments.

“Stablecoins are the killer application for blockchains right now,” said Jose Fernandez da Ponte, PayPal’s senior vice president and general manager of blockchain, crypto, and digital currencies, in an interview to CNBC.  “Stablecoins are something that we cannot just sit out,” he added. “There are inherent advantages in cost, programmability, settlement time,” and that the market is primed for new entrants that are fully backed and fully regulated. 

He also pointed to the company’s competitive advantage with respect to fiat connectivity. “We have always said that our role in crypto and digital currencies is trying to build that conduit between fiat and web3,” continued da Ponte.

PayPal plans to focus on payments in web3 and digitally native environments, including the $100 billion digital goods market within online gaming. PayPal may start with Web3 gaming, but it would not end there and would most likely expand to the vast spectrum of decentralized finance (DeFi) applications including non-fungible tokens (NFTs). For example, with PayPal, users can transact NFTs on a platform such as OpenSea directly from their PayPal wallet without the need to convert their fiat currency on a crypto exchange – a step that is cumbersome for mainstream users.

A fully regulated stablecoin launched by a trusted payments company like PayPal would allow everyday users to tap into all these limitless opportunities – the key to mainstream adoption.

“I don’t think the revolution will happen overnight,” said da Ponte. “I don’t think that you’re going to be paying at your neighborhood store with a stablecoin anytime soon.”

While revolutions do not happen in a day, this one is certainly gaining momentum.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Merav Ozair, PhD

Dr. Merav Ozair is a global leading expert on Web3 technologies, with a background of a data scientist and a quant strategist. She has in-depth knowledge and experience in global financial markets and their market microstructure.

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