Tech
In latest push into crypto payments, PayPal launches stablecoin
PayPal Holdings Inc. is launching a stablecoin, the first from a major financial company and a potentially significant boost to the slow adoption of digital tokens for payments.
PayPal USD (PYUSD) is issued by Paxos Trust Co. and 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 by leaning on technology that enables instant, lower-cost transfers without a central intermediary. PayPal shares have fallen 33% over the past 12 months, the sixth-worst performer on the Nasdaq 100 index, as a pandemic-era surge in online payments has faded.
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“The goal is that over time this becomes 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 are primarily used by traders to move digital assets between exchanges and have made great strides in consumer payments. According to CoinGecko, there are approximately $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 stepped up scrutiny of cryptocurrencies.
The company now believes the regulatory environment is “progressing towards greater clarity” and sees growing demand for an alternative stablecoin due to market concentration, Jose Fernandez da Ponte, head of the blockchain and digital currencies team, said in an interview of PayPal.
Last month, the House Financial Services Committee advanced a bill to regulate cryptocurrencies, supported by Patrick McHenry, a North Carolina Republican.
McHenry said in a statement on Monday that PYUSD demonstrates that “stablecoins, when issued under a clear regulatory framework, hold the promise” for payment systems. “Clear regulations and strong consumer protections are essential for stablecoins to reach their full potential,” McHenry said.
PayPal Crypto 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 finance purchases and will soon be available on PayPal’s popular Venmo payments app. Users will eventually be able to send their tokens between a PayPal and Venmo wallet.
The coin can also be moved to compatible third-party wallets outside of 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.
The company said last week that it would have to set aside more money in the second quarter to cover soured loans it had made to traders, triggering a 12% one-day rout in its shares. PayPal has expanded the services it offers to millions of consumers and merchants across its many platforms, including loans and working capital remittances.
PayPal shares rose as much as 1.6% in early trading Monday.
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Initially, PayPal expects PYUSD to be used primarily in the cryptocurrency and web3 sectors, such as for exchanging in and out of other digital tokens and in-game payments, before gradually gaining adoption in areas such as remittances and micropayments.
Proponents of stablecoins have long argued that they are a superior means of achieving instant and cheap money transfers and payments. But they have also faced opposition from central banks as they develop their own digital currencies and, in the case of USDT, speculation about the quality of reserves.
In perhaps the highest-profile setback for stablecoins, a TerraUSD call imploded in May 2022 when the complex algorithmic system underpinning it failed, triggering a broader collapse in cryptocurrencies. Its inventor, the South Korean citizen Do Kwon, was accused of fraud by the US prosecutor’s office, according to which the episode cost investors around 40 billion dollars.
“The events of the past year have cast serious doubts on the ability of stablecoins to function as money,” Agustin Carstens, head of the Bank for International Settlements, said in a speech in February. “Stablecoins must import 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’ oversight of its relationship with Binance.”
Paxos is subject to regulatory oversight by the NYDFS and PYUSD will be a regulated product in the state of New York. PayPal was granted a local crypto license by 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. “Right now in these conversations we’re at a point where people feel comfortable with a well-respected, well-regulated U.S. financial entity entering the stablecoin space and they think it’s an important initial move,” he said.
Starting in September, Paxos will publish monthly reports detailing the assets supporting PYUSD, PayPal said. Paxos will also publish a third-party attestation from an accounting firm on the PYUSD’s reserve activity.