Traditional payment companies continue their integration with crypto.
Over the past several years, both VISA and Mastercard have ventured into blockchain experimentation, Square has rolled out Bitcoin support, and PayPal has enabled payments using Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
This week, PayPal latter has taken another significant step in its crypto commitment.
On Monday, the company announced the launch of its own dollar-pegged stablecoin under the ticker $PYUSD. Users will be able to convert the stablecoin to and from the cryptocurrencies available on the platform, transfer it to a PayPal or external account, and fund purchases by selecting it at checkout.
Venmo, a social payments service owned by PayPal, will also adopt the new stablecoin.
The crypto community’s reaction to PayPal USD has been mixed, with some incredulous about yet another centralized stablecoin, and others hoping for a major boost to the web3 ecosystem.
To develop a perspective, let’s compare $PYUSD to other stablecoins and assess its potential impact on the crypto space.
What is PayPal USD?
PayPal’s stablecoin is an Ethereum-based token issued by Paxos, an American blockchain infrastructure company known for having previously minted $BUSD for Binance.
Earlier this year, Paxos ended this collaboration to avoid being sued by the SEC for “violating investor protection laws”. It continues, however, the support of $BUSD until February 2024. PayPal, its new partner, doesn’t (yet?) have a target on its back, so this new association totally made sense for Paxos.
According to PayPal’s press release, $PYUSD is fully backed by “US dollar deposits, US treasuries, and similar cash equivalents”. The company intends to publish monthly public attestations issued by an independent third-party accounting firm and conducted per standards set by the American Institute of Certified Public Accountants (AICPA).
Technically, $PYUSD’s smart contracts allow the freezing of the coins and even their seizure. This is a common feature for centralized stablecoins, allowing their issuers to comply with law enforcement directives.
What implications for the stablecoin market?
The current stablecoin market leans heavily to an oligopoly, with one player – Tether – representing a stunning 66% of the market, and the runner-up Circle covering another 21%.
More precisely, Tether’s $USDT commands an $83.5 billion market cap, Circle’s $USDC - $26 billion, Binance’s $BUSD - $3.4 billion, and the biggest decentralized stablecoins $DAI and $FRAX - $4 billion and $0.8 billion, respectively (source: Coingecko).
Tether has been a stablecoin leader since the beginning of the crypto market, despite numerous allegations of inadequate reserves and dubious recordkeeping. At one moment, Circle’s more transparent approach and better compliance threatened Tether’s dominance, but after the company unhesitatingly froze the tokens related to Tornado Cash, many users started pulling out the funds. Indeed, a proactive compliance attitude is a double-edged sword in the crypto community, which praises independence highly.
Since last Autumn, USDC’s market cap has lost $17 billion, while Tether’s has gained the same amount, increasing even further its dominance.
In this situation, a new centralized stablecoin entering the market will surely benefit it by offering more diversification. Even better if PayPal will be able to strike the right balance between financial transparency, compliance, and web3 values.
What consequences for the crypto space?
With over 430 million active accounts, PayPal is one of the largest payment processing services in the world. With the right incentives and education, it could convert a significant share of its user base to $PYUSD.
As the tokens are issued on Ethereum, their circulation would add to the blockchain’s transactions and generate fees for the block validators.
Moreover, with wider adoption of a stablecoin, more people will be able to easily use web3 services, be it crypto games, decentralized social media, or DeFi. This possibility, however, is rather distant at the moment: at first, $PYUSD will only circulate between PayPal and Venmo accounts. This limitation prompted some crypto analysts to call the stablecoin a “nothing burger”.
However, the company mentioned its intention to eventually allow users to hold $PYUSD in third-party wallets.
All in all, the new stablecoin brings positive implications for the crypto market. It will foster competition, offer a trustworthy alternative to users, promote crypto adoption, and maybe even push US regulators to create a legal framework for the stablecoins.
Furthermore, the growing involvement of a prominent TradFi player in the crypto space sends a compelling message about the industry's credibility and contributes to legitimizing cryptocurrencies among the general public beyond the crypto sphere.
Written by D.Center