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PayPal is trying to drag its 435 million users into the $120 billion stablecoin market — here’s why

PayPal on Monday became the first major U.S. fintech company to offer its own crypto token with a dollar-pegged stablecoin known as PayPal USD, making big promises of how it can move money between millions of crypto investors. 

The company is entering an extremely crowded market already dominated by stablecoins like tether and USDC, at a time when the hype over cryptocurrency has largely fizzled and prices have been mostly stable with no big run-ups since 2022.

But the company’s chief crypto exec tells CNBC that the payment processor is confident in its timing – and its competitive advantage in the space.

“Stablecoins are the killer application for blockchains right now,” said Jose Fernandez da Ponte, PayPal’s senior vice president and general manager of blockchain, crypto, and digital currencies. 

“There are inherent advantages in cost, programmability, settlement time,” continued da Ponte, adding that the market is primed for new entrants that are fully backed – and unlike tether, fully regulated. 

“Stablecoins are something that we cannot just sit out,” da Ponte added.

Da Ponte denied a Bloomberg report that the payments processor paused development of its stablecoin in February. At the time, both the SEC and New York’s financial regulator, NYDFS, were putting pressure on Paxos Trust, a New York-based crypto financial services firm helping PayPal issue its stablecoin. Regulators wanted the firm to discontinue its relationship with Binance. Paxos ultimately stopped issuing Binance’s own dollar-pegged token, dubbed BUSD.

The launch comes after crypto liquidity plummeted in the last year and a half.

In March, two of the banks that were friendliest to the crypto sector, Silvergate and Signature, and the biggest bank for tech startups, Silicon Valley Bank, all failed in less than a week. The collapse of the crypto banking trifecta rippled into the stablecoin market, with Circle’s USD Coin, or USDC, briefly losing its peg to the U.S. dollar. 

Since the banking crisis earlier this year, the added gridlock at the on-and-off ramps connecting traditional finance with the digital asset market has also complicated getting cash into the crypto sector. 

The total market cap of stablecoins has plunged since its peak, dropping 25% to $120 billion, according to data from TradingView. Tack on the SEC’s regulatory crackdown on the sector and the protracted bear market pricing, and it’s not a particularly hospitable environment for crypto-centric enterprises. 

But da Ponte argues this troubled backdrop is exactly why PayPal is poised to succeed. 

“We are bringing to bear all the infrastructure that we have built over the years in terms of being regulated in multiple countries, in terms of risk management, in terms of compliance, and we think that that’s a key asset that is a difference in the approach that we are taking,” he said.

The broad appeal of stablecoins

Stablecoins are a subset of the crypto ecosystem that investors can typically rely on to maintain a set price. These tokens are supposed to be pegged to the value of a real-world asset, such as a fiat currency like the U.S. dollar or a commodity like gold. 

The utility of using a stablecoin pegged to the price of the U.S. dollar rather than dealing in the fiat currency itself has to do with the nuances differentiating the several different types of digital U.S. dollars out there today.

Sitting in commercial bank accounts across the country are electronic U.S. dollars, which are partially backed by reserves, under a system known as fractional-reserve banking. As the name implies, the bank holds in its reserves a fraction of the bank’s deposit liabilities. Transferring this form of money from one bank to another or from one country to another operates on legacy financial rails and often involves paying fees to move that cash.

There are also a spate of USD-pegged stablecoins, including tether, USDC, and now PayPal’s USD, or PYUSD. Although critics have questioned whether tether has enough dollar reserves to back its currency, it remains the largest stablecoin on the planet. USD Coin is backed by fully reserved assets, redeemable on a 1:1 basis for U.S. dollars, and governed by a consortium of regulated financial institutions. It is also relatively easy to use no matter where you are.

Similar to USDC, PayPal USD is backed by a combination of dollar deposits, short-term U.S. Treasuries and similar cash equivalents – and is redeemable for dollars.

Then there’s the hypothetical digital dollar that would be the Fed’s take on a central bank digital currency, or CBDC. This would essentially just be a digital twin of the U.S. dollar: Fully regulated, under a central authority, and with the full faith and backing of the country’s central bank.

There are relative benefits and drawbacks of all these forms. Some argue that a CBDC in the U.S. would technically be safer than privately issued stablecoins because it would present a direct claim against a central bank, similar to the U.S. dollar.

But many of the people who deal in stablecoins don’t necessarily want safe. They want an easier way of doing business, especially internationally.

“It’s just an alternative payments network, built on top of the commercial bank system,” Nic Carter, founding partner at Castle Island Ventures, previously told CNBC. “It’s like open banking on steroids. It is very interoperable, it is relatively transparent, and in theory, you can get faster settlement and faster cross-border settlement, because it’s not encumbered.”

Stablecoins originally emerged to cater to demand for dollar exposure offshore and overseas, according to Carter. Tether, the world’s third-largest cryptocurrency and the biggest of the stablecoins, is primarily transacted outside the U.S.

“There are things that you cannot do with fiat,” explained da Ponte. 

Indeed, these nongovernmental digital tokens are increasingly being used in domestic and international transactions, which is scary for central banks because they don’t have a say in how this space is regulated.

“There is a strong advantage in settlement times,” da Ponte said of PYUSD transfers. “You can settle in times that range from seconds to minutes, when in traditional payment methods, sometimes you’re sending a wire internationally and that can take three to five days to settle.”

The accelerated settlement timeline is a game changer for merchants.

PayPal’s promises

The U.S. dollar-pegged stablecoin sector is crowded with a number of competitive offerings — but PayPal’s chief crypto executive tells CNBC that the payment processor’s entry into the space is “all about enlarging the pie.”

“We see the appetite from users that want alternatives, that want a market that is less concentrated, and we think that we have a place in that market,” said da Ponte.

PayPal does have a few key advantages — such as its extensive network of over 435 million active accounts.

“We have a large base of consumers; we have a large base of merchants,” da Ponte said of PayPal’s “two-sided network.”

“In terms of the distribution and the access and making this accessible to a larger segment of the population, I think that we are in a good position there,” he added.

PayPal’s crypto exec also pointed to the company’s competitive advantage with respect to fiat connectivity.

“We have always said that our role in crypto and digital currencies is trying to build that conduit between fiat and web3,” continued da Ponte.

Indeed, the on-ramping process — or moving money from fiat to crypto — is one major obstacle to on-chain payments.

“Companies like PayPal can offer cheap, effective ways to bridge the two worlds,” said Andy Bromberg, co-founder of CoinList and CEO of Eco, a crypto firm backed by Andreessen Horowitz and Coinbase Ventures.

“Once your money is in crypto, it’s easy to move between different networks and different assets — but getting it there is challenging and expensive,” continued Bromberg, an industry veteran who has been in the space for over a decade.

Bromberg added that PayPal’s ethereum-based stablecoin is also “a huge vote of confidence for the ecosystem and a signal that traditional players will increasingly be moving into the space.”

Da Ponte pointed to interoperability as another key feature, noting that the infrastructure to send PYUSD outside the PayPal ecosystem is already there.

Da Ponte explained that PayPal is enabling on-chain transfers, meaning that users will be able to move PYUSD in their PayPal wallet to an external crypto wallet.

“PayPal will not charge fees for that; obviously the user will need to pay the blockchain protocol fee — the ethereum fee — but that’s the only fee that will be included there,” he said, adding that PayPal believes its customers will adopt PYUSD as part of their portfolio of stablecoins.

PayPal plans to focus on payments in web3 and digitally native environments, including, according to da Ponte, the $100 billion digital goods market within online gaming.

PayPal says PYUSD will also soon be integrated into Paypal-owned Venmo.

“Users want to be able to send not only to friends from Venmo, but also to friends on PayPal,” he said, explaining that PYUSD would also allow PayPal merchants to be able to receive value from Venmo users, ultimately opening a base of millions of additional customers.

Challenges ahead

To start, PYUSD is only rolling out to U.S. customers, where stablecoin adoption has lagged behind the rest of the world.

“I don’t think the revolution will happen overnight,” da Ponte said. “I don’t think that you’re going to be paying at your neighborhood store with a stablecoin anytime soon.”

Jeremy Allaire, the CEO of competing stablecoin issuer Circle, said only about 30% of USDC adoption is happening in the United States.

Still, Allaire praised PayPal’s launch of the payment processor’s stablecoin, calling it “incredibly exciting.”

“It is a strong signal that near-instant, borderless, and programmable payments in the form of stablecoins are here to stay.” Allaire said. “Existing payment systems are outdated and digital dollars like USDC, leveraging the power of market neutral public blockchains, serve as the foundation for thousands of companies, neobanks, capital markets, and financial institutions.”

He also called PYUSD’s launch a prime example of what can be achieved when regulators give crypto companies clear guidelines. 

But U.S. crypto regulation remains uncertain.

Facebook (now known as Meta) previously spent years butting heads with regulators around the world over its efforts to launch its own brand of stablecoin — an ambition that ultimately failed after facing virtually universal blowback.

House Financial Services Committee Chairman Patrick McHenry, R-N.C., called for comprehensive crypto legislation the same day PayPal announced its rollout of PYUSD. 

“Clear regulations and robust consumer protections are essential to enabling stablecoins to achieve their full potential.” McHenry said. “We are currently at a crossroads to keep America at the forefront of digital asset innovation. Congress is making significant, bipartisan progress on legislation to ensure the U.S. leads the financial system of the future.”

Da Ponte sees PayPal’s more than 20-year tenure in the payments space as one of the company’s chief advantages in the stablecoin market.

“What we do is manage a regulated business and manage a strong compliance framework and infrastructure,” he said.

“What we are doing now is we are taking that value proposition that has been around for a long, long while and making it available outside the PayPal ecosystem.”

But scams remain a major challenge to the industry as a whole, even for tech titans like PayPal.

Just a day after the stablecoin’s launch, dozens of fake PayPal tokens flooded onto DeFi exchanges, according to data from DexTools. Many of the fake PayPal cryptos boasted huge gains – which contradicts the very premise of a stablecoin having a set value. One of these fraudulent tokens amassed $47,000 in trading volume and appreciated 3,000% in 24 hours.

But, if PayPal can overcome the regulatory pressures and adoption challenges, the company can capitalize on a growing wave of institutional interest.

Wall Street has turned its attention back to crypto in recent weeks, including several filings for spot bitcoin ETFs. The SEC has rejected these applications in the past, but new partnerships with Coinbase for surveillance monitoring could assuage the SEC’s concerns of market manipulation.

“We see that there is institutional interest, we see that there is demand for additional tokens in this space, and we see the regulation moving forward,” said da Ponte.

“And that combination of things made this the right time to step in.”

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