On Monday August 7, PayPal announced that it will launch a US dollar stablecoin, called PYUSD. This step is not surprising, because it has been known for quite a while that PayPal is working on its own stablecoin. Still, it is a tremendous step for the whole crypto sector. In this blog post, we will take a close look at the PayPal stablecoin.
First, let’s break down the key components of the stablecoin initiative.
💵 Reserve: PYUSD is redeemable on demand at par and fully backed by US dollars, i.e., US dollar bank deposits, short-term US treasuries and similar cash equivalents. From September onwards, monthly Reserve Reports will be published as well as third-party attestations by independent accounting firms on the reserve assets. This transparent approach is similar to one of the largest stablecoins, USDC. And interestingly, USDC adopted their reserve structure from the work originally done by the Libra / Diem project.
⚖️ Compliance focus: PYUSD seeks to be fully regulated. Currently, US lawmakers are debating regulation on stablecoins, which, however, will take some time to be in place. The timing of the PYUSD announcement is interesting in that the legislation has only made it through the initial committee stage in the House of Representatives and its passage in the Senate is not assured.
On the other hand, this marks the first time a major US financial institution is issuing its own stablecoin and could have a ‘signaling’ effect on the legislative process with the clear message that given proper compliance guardrails and clarity, a USD stablecoin is in demand. The stablecoin is issued by Paxos Trust, which is subject to regulatory oversight by the New York State Department of Financial Services and currently under investigation by the SEC. It will be interesting to see how the SEC reacts to PYUSD.
The EU has, of course, taken the lead with its Markets-in-crypto-assets (MiCA) regulation. Note that MiCA limits the use of non-Euro stablecoins in the EU, but potentially PayPal could also issue a EUR stablecoin given they have a bank license in Luxembourg.
Here, too, it is interesting to note that this legislation was written in a great measure as a reaction to the Libra/Diem project. And in the US the project ultimately died when the Fed and US regulators did not approve a stripped down proof-of-concept even though Libra/Diem was one of the few projects that took a “ask for permission and not forgiveness” approach.
🔧Technology: PYUSD is issued as an ERC-20 Token on Ethereum which provides for a lot of transparency since their activities can be publicly observed. Here, you can see the smart contract that mints the PYUSD. At the time of writing, PYUSD was issued at the value of approx. 27 Mio. USD. For details of the functions of the smart contract, see this tweet by Jamiel Sheikh. Besides minting, transferring and burning, the smart contract also allows you to freeze an account.
🔥Roll-out: The roll-out will take place over the coming weeks to eligible US customers.
🔍Functions: What can users do with the stablecoin? First, they can send money to other peers. This is one of the key functions of PayPal today. Second, users can transfer the stablecoin to „compatible“ external wallets. For example, this could be interpreted as sending the stablecoin to a hardware wallet, where one stores crypto. Which wallets are considered „compatible“ is currently not clear. Third, PYUSD can be used to fund purchases. Lastly, it can be converted to any of PayPal’s supported cryptocurrencies.
👁️🗨️Target groups: The stablecoin will be available for consumers (e.g. to send, convert or pay), for merchants (e.g. to receive money), and, interestingly, for developers. One could imagine that developers might someday be able to include PYUSD in their smart contracts and use PYUSD as the form of money for such applications. But also here, details are not clear yet.
PayPal intends to roll this out to its Venmo wallet which is used primarily by younger consumers under 34 - a prime overlap to crypto users.
💡Why PayPal is doing it: PayPal’s stated goals are to reduce frictions for in-experience payments, facilitate fast transfers, send remittance or conduct international payments, direct flows to developers and creators, foster expansion into digital assets.
As a regulated institution and established payments provider, PayPal will take a long view and see the stablecoin opportunity within a multi-year strategic lens. What they will likely be measuring is how PYUSD can enable new revenue streams, e.g. stablecoin reserve interest margin, stablecoin to crypto conversion fees, increased transaction velocity or new web3-specific use cases, e.g. gaming where they currently do not play a role. Eventually global expansion in large crypto markets in LATAM, Asia and Africa will also be a key area of interest.
Additionally, they will closely monitor how this affects their core business, e.g., better interoperability between PayPal and Venmo, increased use and stickiness of their consumer wallet and merchant checkout or SME cross border flows. Additionally, tradeoffs with respect to some of their current offerings around global remittance and P2P will be closely watched.
One particularly interesting area will be how this impacts their funding mix. If PYUSD carries a close-to-zero cost of funds and becomes widely used for remittances or payments the shift from higher cost payment methods like credit cards could have a huge impact on their bottom line. It could magnify the current funding mix boost they get when people use their PayPal balance to pay for something.
Given PayPal’s background of providing great user experiences along with being a globally regulated financial institution, they feel they can be a leader in regulated digital payments.
PayPal launching its own stablecoin is a massive step for the industry. PayPal is one of the largest payment companies in the world and providing stablecoin payment opportunities to its substantial user and merchant base of 433 million active accounts provides it with a very large network to address. Ultimately, payments are all about networks. It also fits in the picture that more and more institutions are currently seeking to enter the crypto space (e.g. BlackRock filing a Bitcoin ETF application).
In particular, cross-border payments are a very relevant use case. Stablecoin payments could potentially lower transaction costs for cross-border payments and provide (almost) real-time settlement. This is ultimately a great advantage in the context of remittances and international payments, where fees are still high today and transfer times are too long.
Still, before evaluating the initiative in greater detail, we need more clarity on which external wallets to pay out the stablecoin are „compatible“, how PYUSD will be embedded in the developer communities, which markets will be addressed, and which use cases PayPal will focus on, amongst other things.
Further, as discussed above, the US does not have a stablecoin regulation in place yet. The design of this regulation will also heavily impact PYUSD as well as the whole US crypto ecosystem.
etonec builds blockchain-based payment solutions at the intersection of payments, banking, and digital assets. What makes etonec unique is that it combines decades of global experience in payments and traditional finance, e.g., from working for PayPal, with insights in emerging technologies and concepts gleaned from working for leading crypto projects, such as the Libra/Diem Association.
The etonec team is comprised of leading experts in digital currencies, stablecoins, central bank digital currencies (CBDCs), cryptocurrencies, self-sovereign identity (SSI), and in further innovative topics, such as the Bitcoin Lightning Network, Zero-Knowledge Proof Technologies, and Crypto-Backed Lending - topics that will heavily impact the future of payments.