Industry good news? Payment giant PayPal announces US dollar stablecoin

Written by: Mary Liu, BitpushNews

On August 7, payment giant PayPal announced the launch of the dollar-pegged stablecoin PayPal USD (PYUSD), becoming the first mainstream financial service company to adopt cryptocurrency for payments and transfers.

According to reports, PayPal USD (PYUSD) is backed by dollar deposits and short-term U.S. Treasury bills, issued by Paxos Trust Co, and will gradually be made available to PayPal customers in the U.S. Like Tether and Circle, the reserves will be held in the form of U.S. Treasury bills. The interest earned on these Treasury bills will be shared between PayPal and Paxos.

This move may be a new attempt by the payment company to diversify its revenue. In the post-pandemic era, as the momentum of online payments in North America has weakened, PayPal's stock price has dropped 33% over the past 12 months. The company's adjusted operating profit margin for the second quarter was 21.4%, below the expected 22%, and its financial report showed lackluster performance. Due to investor disappointment with the quarterly operating profit margin, PayPal's stock price fell 7% in after-hours trading last Wednesday.

PayPal President and CEO Dan Schulman stated in the announcement that the company hopes to further solidify its dominance in the digital payments space through PYUSD, relying on technology that enables instant and low-cost transfers without a central intermediary. He said, "Over time, our vision is to be part of the entire payment infrastructure."

PayPal's announcement drove its stock price up by 3% during intraday trading on Monday.

PayPal's Crypto Journey

PayPal has over 431 million active accounts globally and launched its cryptocurrency services in 2020. It allows users to buy and sell a limited number of tokens like Bitcoin and make payments through its platform. Then, in 2021, PayPal announced the launch of Checkout with Crypto, a feature that allows consumers to check out using cryptocurrency at millions of online businesses. Last year, the company enabled users to transfer cryptocurrency from their accounts to other wallets and exchanges.

Argus Research Corp analyst Stephen Biggar stated that the company has been associated with cryptocurrency for some time, so the launch of a stablecoin is not surprising, and PayPal's brand name gives significant meaning to the cryptocurrency industry.

PYUSD is designed to be redeemable for dollars at any time and can also be exchanged for other cryptocurrencies offered on the PayPal network. It can be used to fund purchases and will soon be available on PayPal's popular payment app Venmo. Users will eventually be able to send their held tokens between PayPal and Venmo wallets. The token can also be transferred to compatible third-party wallets outside the PayPal network.

PayPal's stablecoin is issued by Paxos, a veteran player in the stablecoin space and also PayPal's brokerage partner for cryptocurrency trading services. Paxos is regulated by the NYDFS, and PYUSD will become a regulated product in New York State. Last June, PayPal obtained a local cryptocurrency license from regulators. Paxos previously issued the Binance-branded stablecoin BUSD, which was pegged to the dollar, but was ordered to cease operations by the New York State Department of Financial Services in February of this year.

PayPal expects PYUSD to initially be used primarily in the cryptocurrency and web3 sectors, such as for transactions involving the inflow and outflow of other digital tokens and in-game payments, before gradually being adopted in areas like remittances and micropayments.

Schulman stated that PayPal engaged in extensive discussions with U.S. regulators and policymakers while preparing to launch PYUSD. He said, "We are now in a position in these conversations where people feel comfortable with a respected, well-regulated U.S. financial entity entering the stablecoin space, and they see this as an important initial step."

PayPal announced that starting in September, Paxos will publish monthly reports detailing the assets backing PYUSD, and Paxos will also release third-party attestations from accounting firms regarding the reserve assets of PYUSD.

Challenges Facing Stablecoins

Although stablecoins have existed for years, they have not yet successfully entered the mainstream consumer payment ecosystem. The cryptocurrency industry has been struggling with regulatory resistance over the past 12 months, and a series of collapses has intensified this resistance, leading to a decline in the overall market value of stablecoins.

According to data from CryptoQuant, the market capitalization of the largest dollar-pegged stablecoin, USD Coin (USDC), issued by U.S. companies, has fallen by about 41% since January 1. USDC is managed by the Centre consortium, which was founded by Circle and includes the cryptocurrency exchange Coinbase.

Attempts by some tech giants to launch stablecoins have faced strong opposition from financial regulators and policymakers. Meta (formerly Facebook) planned to launch the stablecoin Libra in 2019 but was thwarted due to regulators' concerns that it could undermine global financial stability.

From the UK to the EU, a series of major economies have developed rules to govern stablecoins, with EU policies set to take effect in June 2024.

Last month, the U.S. House Financial Services Committee also proposed a bill to establish a federal regulatory framework for stablecoins, focusing on the registration and approval process rules for stablecoin issuers.

Jose Fernandez da Ponte, head of PayPal's blockchain and digital currency team, stated in an interview with Bloomberg that the company now believes the regulatory environment is "moving in a clearer direction," and due to market concentration, there is a growing demand for alternative stablecoins.

Walter Hessert, strategic director at Paxos, told Coindesk that PYUSD has clear differences from other competitors, thanks to Paxos's status as a trust company regulated by the New York Department of Financial Services (NYDFS). This means that if Paxos were to go bankrupt, its regulator, NYDFS, would intervene, and PYUSD would be protected from bankruptcy. This way, customers would not unknowingly become creditors in the event of bankruptcy, and funds would be returned to each token holder.

Tether's Chief Technology Officer Paolo Ardoino commented, "As another stablecoin in the U.S., YUSD could impact the payment revenues that primarily drive Mastercard and Visa, and it will also help the industry further develop and promote reasonable regulation."