Tech
In Latest Push for Cryptocurrency Payments, PayPal Launches Stablecoin
PayPal Holdings Inc. is launching a stablecoin, the first from a major financial firm and a potentially major boost to the slow adoption of digital tokens for payments.
PayPal USD (PYUSD) is issued by Paxos Trust Co. and is fully backed by U.S. dollar deposits, short-term Treasury securities and similar cash equivalents, the San Jose, California-based payments company said Monday. It is pegged to the dollar and will gradually be available to PayPal customers in the United States.
With PYUSD, CEO Dan Schulman is trying to solidify PayPal’s dominance in digital payments, banking on technology that enables instant, low-cost transfers without a central intermediary. PayPal shares have fallen 33% over the past 12 months, the sixth-worst performer in the Nasdaq 100 Index, as a pandemic-driven surge in online payments has faded.
“The vision is that over time this will become part of the overall payments infrastructure,” Schulman, who is preparing to step down in the coming months, said in an interview.
Stablecoins, cryptographic tokens pegged to an asset like the dollar, have been around for nearly a decade, but they are primarily used by traders to move digital assets between exchanges and have made limited headway in consumer payments. According to CoinGecko, there are about $126 billion worth of stablecoins in circulation, the largest by far being Tether Holdings Ltd.’s USDT.
Some have been controversial: A high-profile attempt by Meta Inc. failed last year after intense regulatory backlash. PayPal itself suspended work on PYUSD in February as regulators tightened scrutiny of cryptocurrencies.
The company now believes the regulatory environment is “moving toward greater clarity” and sees growing demand for a stablecoin alternative due to market concentration, Jose Fernandez da Ponte, head of PayPal’s blockchain and digital currency team, said in an interview.
Last month, the House Financial Services Committee introduced a bill to regulate stablecoin cryptocurrencies, championed by Patrick McHenry, a Republican from North Carolina.
McHenry said in a statement Monday that PYUSD demonstrates that “stablecoins, if issued under a clear regulatory framework, hold promise” for payment systems. “Clear regulations and strong consumer protections are essential for stablecoins to reach their full potential,” McHenry said.
PayPal Cryptocurrency Expansion
PYUSD is designed to be redeemable for dollars at any time and can also be exchanged for other cryptocurrencies available on the PayPal network. It can be used to fund purchases and will soon be available on the popular PayPal payments app Venmo. Users will eventually be able to send their tokens between a PayPal wallet and a Venmo wallet.
The currency can also be transferred to compatible third-party wallets outside the PayPal network.
PayPal, which has more than 431 million active accounts globally, first launched cryptocurrency services in 2020. It allows users to buy, sell and make payments in a handful of tokens like Bitcoin through its platform.
Last week, the company said it had to set aside more money in the second quarter to cover bad loans to merchants, triggering a 12% one-day plunge in its shares. PayPal has expanded the services it offers to millions of consumers and merchants across its many platforms, including working capital lending and remittances.
PayPal shares rose as much as 1.6% in early trading on Monday.
Read more: PayPal Sees Margin Pressure as Loan Reserves Rise
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PayPal initially expects PYUSD to be used primarily in the cryptocurrency and web3 sectors, such as trading other digital tokens and in-game payments, before gradually being adopted in areas such as remittances and micropayments.
Stablecoin proponents have long argued that they are a better way to achieve instant, cheap money transfers and payments. But they have also faced opposition from central banks busy developing their own digital currencies and, in the case of USDT, speculation about the quality of reserves.
In perhaps the most notable setback for stablecoins, one called TerraUSD imploded in May 2022 when the complex algorithmic system that supported it failed, triggering a broader cryptocurrency crash. Its inventor, South Korean citizen Do Kwon, has been charged with fraud by U.S. prosecutors, who say the episode cost investors about $40 billion.
“The events of the past year have cast serious doubt on the ability of stablecoins to function as money,” Agustin Carstens, the head of the Bank for International Settlements, said in a speech in February. “Stablecoins must take their credibility from sovereign fiat currencies.”
In February, the New York State Department of Financial Services said it had ordered Paxos to stop issuing a stablecoin branded by cryptocurrency exchange Binance, known as BUSD. The New York regulator said at the time that its decision was the result of “several unresolved issues related to Paxos’s oversight of its relationship with Binance.”
Paxos is subject to regulatory oversight by NYDFS and PYUSD will be a regulated product in the state of New York. PayPal received a local crypto license from the regulator in June last year.
PayPal has had extensive discussions with U.S. regulators and policymakers as it prepares to introduce PYUSD, Schulman said. “We’re at a point in these conversations where people feel comfortable with a respected, well-regulated U.S. financial entity moving into the stablecoin space and think it’s an important early move,” he said.
Starting in September, Paxos will publish monthly reports detailing the assets backing PYUSD, PayPal said. Paxos will also publish a third-party attestation from an accounting firm on PYUSD’s reserve assets.