PayPal's new stablecoin... what's the point?

Big, big new this week. PayPal just launched a stablecoin, anchored to the dollar, in partnership with Paxos. The coin, creatively dubbed PayPal USD (PYUSD), will be issued on the Ethereum blockchain and will be “fully backed by U.S. dollar deposits, short-term Treasuries and similar cash equivalents."

The rollout is supposedly incremental, starting this week, but soon PayPal users will be able to:

• Make transfers using PYUSD

• Make purchases using PYUSD

• Have the ability to convert “supported cryptocurrencies” into or from PYUSD

And users of the popular payments app Venmo will soon be able to use the stablecoin too.

Now, there’s a lot to dissect here. In typical crypto fashion, some people are calling this news bigger than any Bitcoin ETF and the biggest news of 2023, while others are claiming that it is one big nothingburger. To help cut through the noise, we’re going to summarize the important implications and give a little more insight of our own.

Why People Are Excited

The hype is largely because its PayPal, a dominate force in traditional finance, that’s beginning to fully embrace today’s brewing crypto economy. In other words, with 431 million existing users, PayPal has the power to start boosting crypto adoption almost immediately. They don’t need to build a customer base, they have one. And that huge customer base just got one more push into crypto.

But beyond the headline, there are several other positive catalysts to consider:

• More utility, less speculation: PYUSD could increase crypto’s regular use beyond speculation. Apart from a potential uptick in crypto transactions and transfers, PYUSD will be available to an already large and growing community of external developers, wallets and web3 applications.

• The more competition, the better: Although Circle (USDC) and Tether (USDT) are already crushing the stablecoin game, more competition breeds better products and reliability.

• The Ripple effect: This announcement underscores the potential of stablecoins, especially when issued within a well-defined regulatory framework, to be foundational in modern payment systems. Such a step could inspire more fintech/payment companies to venture into the digital assets realm. It further emphasizes the urgency for regulators to streamline their approach.

What People Are Not So Excited

• Perceived Limited Utility: Some see the stablecoin's functionality as redundant, noting that users can already hold U.S. dollars in their PayPal accounts.

• Centralization and censorship: At the end of the day, PYUSD will still be constrained to PayPal's terms and services. With PayPal having the ability to reverse or pause transactions, freeze addresses, and so forth, many look at PYUSD as just another central bank digital currency (CBDC) that’s behind a publicly traded tech company, rather than the government.

• Ethereum gas fees: Many are criticizing PayPal by choosing Ethereum, a platform known for its high transaction fees, over the dozens of rollups that cost no more than pennies. As a result, this could potentially make PYUSD transactions more costly for users, especially when interacting outside of PayPal's ecosystem.

• Trust and regulation issues: The history of the collapse of Terra’s UST and the subsequent regulatory actions can make some wary of new stablecoin ventures. PYUSD's launch comes after PayPal paused its stablecoin ambitions due to reports about a probe of Paxos, which might lead to some trust issues.

Our Take

For starters, we are firm believers that PayPal’s stablecoin is a boon for the industry. The announcement definitely deserves the hype. But, on that note, it does warrant some skepticism.

Is a PayPal stablecoin rollout good for adoption? Yes. Can it eventually boost synergies in payment networks across both traditional and decentralized finance? Absolutely. But will it have an immediate impact, rapidly boosting adoption and prices? No way.

Overall, we feel that PayPal is simply making a bet on the future of fintech and a more robust crypto ecosystem.

Not to mention, offering stablecoins is an awesome business. For context, Tether made over $800 million last quarter from stablecoin issuance. If PayPal can seize a good chunk of interest payments, it could drastically boost their net income, furnishing a consistent, low-risk stream of free cash flow.

Moving on, one of the most common critiques of PayPal’s stablecoin venture is the resounding cry of “what’s the point?” After all, if I can already send fiat instantly to a merchant or to a friend with PayPal in its current form, why on Earth would someone need to do it via stablecoin?

It’s a valid argument. However, we do want to highlight the unique snippets of utility that these stablecoins do bring to the table.

1. PayPal's stablecoin allows payments even if a merchant doesn't have a PayPal account. Simply, a merchant can get paid in PayPal's stablecoin through a viable blockchain address. This does makes spending a PayPal balance a bit easier and more universal.

2. Through PYUSD settlements, PayPal can greatly reduce the costs associated with global transactions. If PayPal can keep settlements in USD, international transactions made with PYUSD could remove the high conversion fees that merchants typically face when dealing with different currencies.
   
   Example: Say if I was in nomading in Italy, trying to book a train ticket and the merchant couldn’t accept my Amex… but did accept PayPal. If I were to convert my fiat to PYUSD, PayPal would settle the transaction in USD instead of needing to convert to local currency. This would negate the need for PayPal to pass an extra charge to the merchant (which can go as high as 4%) on the USD to Euro conversion. Overtime, with more PYUSD transactions, PayPal could decrease its cost basis.

Now, these are two small examples of PayPal stablecoin utility. Nevertheless, it does show us that PayPal’s venture (for consumers and merchants) isn’t completely pointless.

Now, this bring us to our final point.

There are certainly unique advantages to PayPal’s stablecoin and it will be interesting to watch how it all plays out. But, at the end of the day, we can’t forget that a stablecoin like PYUSD is just another digital token backed by an often-criticized and arguably corrupted US dollar.

The real innovation in the crypto space is in decentralized, non-pegged assets like bitcoin… not in "dollars on the blockchain", quasi-CBDC like offerings from major tech companies.

That said, we still would like to reminds folks that holding onto stablecoins in your portfolio – and, now, even on your PayPal account – is pretty pointless.

In other words, we truly believe that if you’re not using them, don’t hold them.