PayPal, an online payment platform with millions of users worldwide, is no stranger to the crypto space. In 2020, it debuted in-app purchases for a few digital currencies, namely Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), and Ethereum (ETH), but no stablecoins were available on the platform — until recently.
On August 7, PayPal became the first major US fintech company to roll out its own crypto token with a fully backed, regulated stablecoin called PayPal USD. Since PYUSD is the only stablecoin supported by the PayPal ecosystem, the announcement certainly got the whole industry talking — with 435 million active users, the payment processor has all the chances to eat into the competitors' market share. And the stakes are big — the market cap for stablecoins at the time of writing stands at $125 billion, with 85% of it dominated by just two issuers, Tether (USDT) and Circle (USDC).
Unsurprisingly, PayPal's foray into stablecoins received mixed reactions from the crypto community: while some were excited about their favorite fintech platform making crypto more accessible to the general public, others expressed their skepticism about the move, pointing out PayPal's centralization issues and the history of financial censorship on the platform. Then there was also a lot of speculation around its future impact on the crypto industry, with Twitter pundits either proclaiming PayPal's stablecoin as the turning point for the market or completely brushing it off as a nothinburger.
That being said, it can be indeed challenging to cut through all the noise surrounding PayPal stablecoin, and the mountain of information on the topic doesn't help either. In this guide, we will break down the key technical aspects of PYUSD, its benefits, weak points, and the potential impact on the crypto industry.
What is PayPal USD stablecoin?
Stablecoins are crypto tokens that are designed to track the value of a reference asset (hence the name 'stable'), which may be a fiat currency, exchange-traded commodities, or another cryptocurrency. Their primary objective is to provide the benefits of digital currencies without the extreme volatility often associated with cryptocurrencies like Bitcoin and Ethereum.
Being fully backed by U.S. dollar deposits, U.S. Treasuries, and similar cash equivalents, transparent PayPal USD stablecoin is designed to offer stability and reliability and can be redeemed 1:1 for U.S. dollars. The reserves ensure that each PYUSD unit in circulation has a corresponding dollar held, serving as a guarantee to users that they will be able to get back the USD value of their PYUSD holdings if it depegs from $1 in some unforeseen market event.
Notably, PayPal's PYUSD stablecoin is an ERC-20 token, which means that it's built on the Ethereum blockchain and can be stored in any cryptocurrency wallet that supports this token standard. This is meant to ensure that the stablecoin is available to a broad crypto community and can easily integrate into the existing DeFi ecosystem and other blockchain-based applications that run on Ethereum and its Layer 2 chains.
Currently, PYUSD is issued by Paxos Trust Company, a blockchain-focused fintech firm subject to oversight by the New York State Department of Financial Services, which makes PYUSD stablecoin a regulated financial product. Paxos is also known for being an issuer of Binance's BUSD stablecoin but was pressed to discontinue its support following regulatory action from the U.S. Securities and Exchange Commission and the NYDFS who alleged that the token is an unregistered security.
Beginning in September 2023, Paxos will start publishing a public monthly report for PYUSD that will openly list all financial instruments that make up its reserves. Paxos will also publish an independent third-party attestation of the value of PayPal USD reserve assets.
PayPal USD advantages explained
According to PayPal's announcement, qualified customers who purchase PayPal USD will be able to:
- Transfer PayPal USD between PayPal and compatible Ethereum wallets such as the Coinbase Wallet and MetaMask
- Make p2p payments to other PayPal using PYUSD for fast and commission-free transactions
- Pay for goods and services with PayPal USD by choosing it as payment method at checkout
- Effortlessly convert any of PayPal's supported cryptocurrencies to and from PayPal USD
In PayPal's vision, by building the bridge between fiat and web3 for consumers, merchants, and developers, PayPal USD will easily garner mass adoption thanks to PayPal's decades of experience in digital payments, large user base, and Ethereum's speed and programmability.
Although PYUSD is currently available for purchase only for US-based PayPal customers with PayPal Balance accounts, given the global nature of blockchains and upcoming exchange listings, the stablecoin will likely be ready to use globally very soon.
Why does PayPal need stablecoin?
By launching its stablecoin, PayPal is hoping to challenge Circle and Tether’s overwhelming dominance in the sector. But since stablecoins are pegged to the U.S. dollar 1:1, what exactly does it get from it?
Naturally, if PayPal issues stablecoin, it can be assumed that it intends to make a profit from it. The first revenue stream for the payment giant would come from transaction fees: although p2p transactions in PYUSD between accounts on the PayPal network are commission-free, there are applicable fees when converting between the stablecoin and other cryptocurrencies and when carrying out online purchases and withdrawals. The exchange rate and any fees charged for that transaction will be disclosed to users at checkout, the company said.
Another motive for issuing stablecoin is that PayPal would like to collect interest on users' U.S. dollar deposits. When customers transfer money to PayPal, they essentially give it money and receive an IOU (aka promissory note) in the form of PYUSD coins. A PayPal balance a customer leaves on the platform will be likely primarily held in the form of short-dated U.S. Treasuries that are now offering a whopping 5% yield, and PayPal gets to keep it.
Finally, PayPal's venture into Web3 is expected to further solidify its presence in the industry that is widely hailed as the future of both finance and the Internet. By gaining a first-mover advantage, the company seeks to establish itself as the major player, working closely with regulators and expanding its capabilities to support both digital assets and central bank digital currencies (CBDCS), which are basically stablecoins but issued by governments instead of private companies.
“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,” Dan Schulman, the president and CEO of PayPal, said in a statement.
PYUSD faces challenges on its path to adoption
Although PayPal's foray into stablecoins certainly made news, the pace of adoption has been so far rather underwhelming. According to CoinMarketCap, PYUSD current supply in circulation is 43 million, a far cry from Tether's 82 billion or Circle's 26 billion. As per Nansen, around 90% of the supply is held by no other than the stablecoin issuer Paxos and the number of PYUSD holders in total is just 349, according to Etherscan.
At the time of writing, less than 7% of PYUSD supply is on centralized exchanges such as Kraken, Gate.io, and Crypto.com, which obviously contributes to its failure to gain traction. The volumes in Uniswap PYUSD/wETH and PYUSD/USDC trading pools are also relatively small, with each pool containing fewer than 50,000 tokens.
The most plausible explanation for lagging adoption seems to be PayPal's centralized nature and the lack of trust within the crypto community. Over the years, PayPal has faced criticism for freezing accounts, censoring transactions, and other actions that many view as antithetical to the spirit of decentralization.
On top of that, the stablecoin market is already dominated by heavyweights like USDT and USDC, both of which have substantial market adoption and liquidity. For a new player like PYUSD to break into this space, it would need a unique value proposition or significant incentives for users, and so far there are none.
Finally, PYUSD not being listed yet on two major exchanges, Binance and Coinbase, may also play a role in PYUSD's failure to make waves on the market. Major exchanges play a pivotal role in boosting the liquidity and adoption of tokens, and the limited availability of PYUSD might be impeding its growth. However, as Coinbase has recently added stablecoin to its listing roadmap, the situation is likely poised to change soon.
What PYUSD stablecoin means for the future of crypto
While PayPal's entrance into the stablecoin market definitely sparked some short-lived excitement, several factors, including its history of financial censorship and strong competition coming from USDC and USDT, seem to be affecting PYUSD's adoption rate. With that in mind, currently, it's hard to estimate how much impact the PYUSD launch will have on the industry.
Obviously, PayPal would be interested that users hold as much money in the form of PYUSD for as long as possible, since larger collateral balances would produce more interest for the company. But the question is whether this new liquidity would actually spill into DeFi and not be just confined to PayPal’s coffers with PayPal accounts just sending each other money but this time on blockchain. Only time will tell.
