Hi all,

Have you ever paid anything with PayPal? 'Yes' is not a surprising answer, considering that it's a true giant when it comes to online payments.

But the business may be changing in the future. It's very hard to predict but the company tries to ensure that it will remain relevant, even when more payments are made directly with cryptocurrencies.

So what’s up?

We'll take a look at PayPal's recent love of crypto.

• What is the company doing?

• Why is PayPal doing it?

Let’s get started! 🤓

In August 2023, PayPal made headlines when it launched a so-called stablecoin. PayPal USD (in short: PYUSD) is fully backed by US dollar deposits, short-term US treasuries and similar financial instruments.

In a nutshell, clients can buy one PYUSD and redeem it later 1:1 for real US dollars. At the same time, PYUSD is a cryptocurrency which you can use for digital payments.

Given that crypto adoption is still relatively limited in most countries, that doesn't sound like a really big thing. Statistics tell a different story though. In 2022, stablecoins already moved more value across their networks than Mastercard – or PayPal.

Given that PayPal's business model is centred on charging fees from merchants for facilitating payments of their customers, that's not a great outlook.

In the not too distant future, even more customers and merchants could transact directly with each other through blockchain-based payments. That would cut out the middleman and threaten PayPal's core revenue stream.

Why do you need stablecoins?

Any online payments could be made with 'real' cryptocurrencies like bitcoin or ether. For now, however, these are pretty volatile. When you have an online shop and you have to pay your deliveries in euros or dollars, you'd rather set your prices in those currencies as well.

That's where stablecoins come in. You can't make a blockchain-based payment with your credit card. Instead, you would buy a stablecoin (such as PYUSD) which could be done with your credit card or your PayPal balance. PYUSD can then be used for payments – and the recipient can use it to make other payments or redeem it for real US dollars if required.

That sounds a little complicated so ignore the technical side for a moment. Using any stablecoin is then very similar to a gift card. You can purchase both to buy things online. If you don't need your stablecoins anymore, you can even redeem them – which is something you can't do with a simple gift card.

The most important characteristic of a stablecoin is obvious: it must remain stable. It's pegged 1:1 against another currency (usually the US dollar, although Circle has also issued a Euro-pegged stablecoin). That means it should come from a trustworthy – and ideally from a regulated – issuer.

This is where reality gets a bit complicated. While PYUSD is backed by real assets, other issuers have attempted to use algorithms instead. In May 2022, that led to the collapse of terraUSD. You may have seen some headlines about that episode which was noteworthy because billions of dollar in wealth disappeared virtually over night.

To clarify: PYUSD is nothing like that. However, the reputation of cryptocurrencies – including stablecoins – has suffered quite a lot in recent years.

What's in it for PayPal?

PayPal is a serious fintech player. Merely announcing the launch of PYUSD was therefore a positive step for the crypto industry as a whole.

That's a nice side effect but not PayPal's main motivation. There are two more important benefits for the company.

One the one hand, PayPal is future-proofing its own business. As mentioned above, direct blockchain-based payments could cut out the middleman in the future, reducing fees for payment providers significantly.

On the other hand, the company may be able to collect interest. But how does that work?

PYUSD is backed by highly liquid dollar equivalents, i.e. financial instruments that can easily be sold without a loss. That's necessary to ensure that PYUSD always redeemable 1:1 with the US dollar.

Such dollar equivalents are, for example, US Treasuries. The yield on these is currently above 4%. If PayPal holds US Treasuries worth $100 to back 100 PYUSD, the company therefore collects more than four dollars per year in interest payments.

At the moment, PYUSD's market cap is not much more than $200 million. In the context of PayPal's annual revenues of around $30 billion, they could probably do without the little extra income.

When you look at more established players, however, you can see the potential. Circle's USDC stablecoin currently has a market cap of slightly less than $30 billion. No wonder that the company is interested in becoming publicly listed – they filed for an IPO in January.

Circle's big rival Tether is even bigger. Its stablecoin just crossed $100 billion in circulation, despite long-standing concerns about the company's reserve transparency.

Summary

Purchases of PYUSD are limited to specific PayPal clients – for now. Some of that may be due to internal constraints but the main issue is regulatory uncertainty. The US in particular has not been crypto-friendly in recent years.

The European Union and several countries around the world have made a lot more progress in terms of legislation. The EU's new MiCA regulation is particularly noteworthy in this regard.

Implementation of new laws, however, is a different matter. It usually takes government agencies more time to implement regulation than it takes tech companies to come up with new ideas and products.

Overall, it will be interesting to follow the moves of PayPal and other established fintech players in the world of crypto. It's yet another sign that digital assets are much more than a pipe dream. Blockchain-based payments are very likely to become much more important in the coming years.

That’s the end for today! 😢