PayPal’s introduction of its native stablecoin, PayPal USD (PYUSD), has sparked heated debates within the crypto industry regarding its possible sway on payments and wider crypto adoption.
While this step seems to be a big jump toward accepting cryptocurrencies in regular finance, some industry observers advise caution. They underline the hurdles and limitations that could slow down broader adoption.
What is PYUSD?
This initiative aims to bridge the fiat and digital currency realms for consumers, merchants and developers. PayPal CEO Dan Schulman highlighted the need for a stable digital-fiat conduit. PYUSD facilitates various transactions, including payments, fund transfers between PayPal and compatible external wallets, and crypto conversions:
“The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar. Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.”
The coin is designed to mitigate payment frictions in virtual environments, expedite value transfer, and simplify digital asset engagement by being a safer alternative to the fluctuating nature of most cryptocurrencies.
PYUSD, being an ERC-20 token on the Ethereum blockchain, is geared for compatibility with prevalent exchanges, wallets and Web3 applications, with plans to extend its availability to Venmo.
While the coin is a step toward reducing the gap between conventional and digital financial ecosystems, the widespread adoption of PYUSD across PayPal’s vast user base in 200 markets remains to be seen.
Regulatory oversight for PYUSD is provided by the New York State Department of Financial Services, with Paxos set to publish a monthly reserve report and a third-party attestation of the reserve assets’ value from September 2023, promoting transparency.
Besides PYUSD, PayPal continues to focus on enhancing digital currency education and comprehension among consumers and merchants, supplementing its existing services that allow customers to transact in select cryptocurrencies.
Effect on the industry
“The launch of PYUSD really signifies the largest payments company to date embracing blockchain technology in a way that creates a new standard and a new level of utility in the product itself,” Walter Hessert notes on the American Banker podcast. Hessert is head of strategy at Paxos, a global blockchain infrastructure company.
“When PayPal enters the space and launches a stablecoin, they are saying to other payments companies, and to their tens of millions of merchants around the world, to their hundreds of millions of consumers that have their application, that stablecoin is a real product,” he added.
The PYUSD launch sends out a message: Stablecoins are in the mainstream, extending the benefits of blockchain to everyday transactions.
Hessert’s position depends on PayPal’s ability to act as a spark for wider crypto acceptance. Digital assets often live within their own limited systems, held back by regulatory frameworks. In this light, the coming of a stablecoin that acts as a bridge between old and digital money has a strong attraction.
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Others are enticed by the possibility of PayPal’s stablecoin across multiple systems, believing that it will lead to the introduction of more use cases.
Pan Lorattawut, CEO of VUCA Digital, told Cointelegraph, “If PayPal’s stablecoin can be integrated into cross ecosystems, exchanges and wallets, it will increase the use cases of many digital assets, tokens and cryptocurrencies and make it a financial leader that can bridge many users to the crypto world.”
She asserts that the presence of stablecoins that can be easily traded, transferred and converted into other cryptocurrencies or fiat will make them more versatile and welcoming for crypto natives and new users.
However, Lorattawut is not unaware of the associated risks. “Even though stablecoins and cryptocurrencies remain a small part of the financial system, there is increased interest in regulating stablecoins if they get bigger and pose a systemic risk to the economy,” she said.
But she also added that PayPal’s entry into the crypto arena can act as a catalyst for a crypto-driven payments system and is good for broader adoption of the crypto market despite a long-time regulatory and compliance challenge.
Some believe that PayPal’s entry into the stablecoin space can open the doors for other fintech firms to follow suit. PayPal’s move can set the precedent for a proactive corporate approach to Web3 innovation.
Others are more conflicted, like Twitter crypto influencer The Wolf Of Crypto Streets.
I think I’m the only one not excited about the PayPal stablecoin launch
I don’t want these restrictive and institutionalized payment systems taking over crypto and web3
One of the reasons I’m in the crypto space in the first place is escaping them.
— The Wolf Of Crypto Streets (@W0LF0FCRYPT0) August 7, 2023
Regulators issuing warnings to banks to stop doing business with PayPal soon after the stablecoin launch also scaled the buzz down. U.S. regulators have lately filed several lawsuits against tech businesses promoting currency tokenization.
Regulation and compliance challenges
PayPal’s entry into this world is like a two-sided blade. On one hand, it could act as a spark for a crypto payment system and help more people use digital assets. On the other hand, PayPal’s size and sway may pull stronger rule focus, leading to tighter checking and rule needs.
Regulators are already up in arms against it. Maxine Waters, the top Democrat on the House Financial Services Committee, has shown concern about PayPal launching its own stablecoin.
“I am deeply concerned that PayPal has chosen to launch its own stablecoin while there is still no federal framework for regulation, oversight, and endorsement of these assets,” Maxine wrote shortly after the release of the stablecoin.
A strong rule focus could choke new ideas and take away the sympathy of the crypto market for those who value its free and, for the most part, unregulated nature.
DeFi’s potential to serve the unbanked
According to the World Bank, around 1.7 billion people worldwide don’t have bank accounts, missing out on key money services. This lockout from the traditional banking system hurts their ability to take part in the global money game.
By giving access to loans, savings and investment opportunities, DeFi could give power to unbanked and underbanked populations, letting them access cryptocurrencies and, thereby, the global financial system.
While a lot has been written about how DeFi could change the fates of multiple unbanked countries, it still remains an unrealized dream. Multiple bottlenecks still exist, with regulatory issues being at the top of the list.
But if regulations become more aligned with the modern mindset and DeFi becomes more acceptable, can PayPal’s stablecoin use PayPal’s familiarity to facilitate the transition from conventional to DeFi?
As it stands, PYUSD has strong centralized roots and has not made the leap into DeFi. While the possibility still exists for it to be more open and venture into the decentralized arena, for now, it seems too foolhardy to entertain.
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The crypto crowd wrestles with the possible good and bad sides of PayPal’s stablecoin.
While it can potentially bridge the gap between old finance and digital assets, real worries remain about sticking to Web2 systems, being inaccessible to people without banks and regulatory scrutiny.
There is also an issue with adoption. CoinMarketCap shows that the token ranks 242 at the time of writing. While the token is on 4,452 watchlists, there are still apprehensions about it, with many hoisting bearish flags.
It goes to show that a lot still has to be done to make PYUSD a household name in the blockchain arena. Until then, only speculations can be made about how impactful it can be for the financial ecosystem.