On Monday (August 7, 2023), PayPal revealed its plan to introduce a stablecoin (PYUSD) in collaboration with Paxos, a maker of regulated blockchain products. The reaction has been polarizing, calling it a ‘marketing gimmick’ or ‘the future of digital payments’ depending on the source.
What are Stablecoins?
In the world of cryptocurrencies, where wild price swings dominate the headlines, there exists a concept that stands as a beacon of stability: the stablecoin. While the likes of Bitcoin and Ethereum continue to make waves with their volatility, stablecoins offer a reliable and predictable alternative. A stablecoin is a type of digital currency designed to maintain a steady value, typically pegged to a real-world asset like a fiat currency. The practical significance of stablecoins versus other cryptocurrencies is reduced volatility.
They are not without risks though. As stablecoins become more prominent, regulators are paying closer attention, leading to potential challenges and hurdles ahead. Some critics also argue that some stablecoins, especially those backed by fiat, could be subject to the same centralization issues that cryptocurrencies aim to overcome. It remains to be seen how a decentralized stablecoin overseen by one of the largest tech companies in the world can remain in practice.
Why is PayPal Launching a Stablecoin?
About a year ago to the day, PayPal launched limited cryptocurrency trading for all US account holders. While the timing may have been a jump-on-the-bandwagon moment, cryptocurrency does offer some benefits to PayPal’s business to keep them competitive in the market. Stablecoins specifically offer a bridge between the worlds of cryptocurrencies and traditional finance that could work in PayPal’s favor in ways cryptocurrency companies have not been able to make happen. Integrating an easier-to-use and understand cryptocurrency into an interface consumers are already familiar with could enable better adoption than Coinbase trying to get the mainstream market into their app.
Reducing Reliance on Traditional Banking Infrastructure
For PayPal, a proprietary stablecoin represents a leap toward greater financial autonomy. By creating their own digital currency, they can potentially reduce their dependency on traditional banking systems for processing payments and settlements. This control over their financial infrastructure could lead to increased efficiency, reduced operational costs, and the ability to provide users with quicker and more seamless transactions.
PayPal’s revenue doubled from 2017 to 2022, but its net profit remained largely flat. Since they are currently reliant upon traditional banking systems, they are at the whim of their fees as well. Transaction costs are not fixed, they are highly variable. So the more transactions PayPal processes, their costs go up too. In PayPal’s own words, cryptocurrency has “inherent advantages in cost, programmability, [and] settlement time.”
This could come in conflict with their current business model though. For 2022, 92% of PayPal’s revenue comes from transaction fees they impose on customers. It will be hard to get adoption of a new cryptocurrency if the transaction costs are the same or more than traditional fiat payments.
Seamless Integration with Their Ecosystem
PayPal has evolved into more than just a payment platform; it’s become an ecosystem of financial services, including online shopping, peer-to-peer transfers (hello Venmo), and even investments. Introducing a stablecoin into this ecosystem could create a seamless and unified experience for users. Transfers between different services within PayPal’s ecosystem could be as simple as transferring stablecoins, eliminating the need for currency conversions, and opening the door for new financial products and services.
Empowering Cross-Border Transactions
Traditional international money transfers are plagued by high fees, slow processing times, and fluctuating exchange rates. PayPal is already an improvement from the traditional wire transfers of late, but they still charge and pass through fees even for personal transactions. A PayPal stablecoin could provide users with a digital currency that retains a consistent value, sidestepping the challenges of currency fluctuations and the associated costs.
While it’s impossible to pinpoint exactly how much fraud occurs in digital payments, Stripe puts it over $100 billion dollars per year. This number represents a lot of different types of fraud, but looking at peer-to-peer and ecommerce transactions a blockchain ledger is another tool that could be used to fight fraud. The blockchain analysis industry has come a long way since the nearly anonymous early days of Bitcoin. Chain analysis won’t magically solve the digital fraud problem, but is another tool in the arsenal to connect fraudsters across transactions.
Is a PayPal Stablecoin a Good Thing?
It’s too soon to say whether a PayPal stablecoin is a good or bad thing, but I think the answer will be different whether you’re a customer or a merchant.
For customers, reduced transaction fees and faster settlements of transfers could be a good thing. There are still risks though since cryptocurrency deposits are not insured under the FDIC, so users are likely not entitled to anything in the case of fraud or theft. We’ve seen many stories of fraudulent stablecoins not having sufficient backing or not being well managed. While PayPal is the brand behind the stablecoin, they are not managing it. A company called Paxos is the one issuing the coins.
For merchants, I don’t see much of a downside. PYUSD still needs to be converted to a fiat currency, and the stability and support of PayPal help overcome some of the biggest obstacles of traditional cryptocurrency acceptance. Two of the biggest obstacles in merchants accepting cryptocurrency payments are the costs to implement another payment network and the risks in the variability of the currency itself.
If a merchant wants to sell an item for $2,000 USD in Bitcoin, they would first need to convert that into the present value for BTC. Let’s call that 0.067644 BTC as of today. Once the transaction settles, they need to convert that back into USD to move to their bank. Bitcoin was down 1.46% relative to the USD yesterday so that $2,000 is now $1,970. This is before accounting for all of the fees for conversions and transfers.