Dialogue with PayPal: The impact of PYUSD on the crypto industry and long-term strategy.

Original Title: "Will PayPal's PYUSD Steal Market Share From Tether and Circle?"

Original Translation: Kaori, Luccy, BlockBeats

On August 7th, PayPal announced the launch of a USD stablecoin called PayPal USD (PYUSD) for transfers and payments. The stablecoin is issued by Paxos and backed by the US dollar, short-term government bonds, and cash equivalents. It will gradually be made available to PayPal customers in the United States. Despite PayPal's previous involvement in the cryptocurrency industry over the past few years, the launch of its official stablecoin can still be considered a significant event in the development of the crypto industry.

Recently, Laura Shin interviewed José Fernández da Ponte, the Senior Vice President of Cryptocurrency at PayPal, to delve into how the fintech giant is developing long-term strategies around blockchain-based payments. BlockBeats has compiled and translated the interview, which is presented in full below:

Laura Shin: This week, PayPal launched the stablecoin PYUSD on Ethereum. What is PayPal's vision for PYUSD and how will it be used?

José Fernández da Ponte: We have been active in the cryptocurrency field for the past four years. PayPal's overall vision has always been to become a bridge between fiat currency and Web3, bringing mainstream applications to the payment system. As a payment company, we are very concerned about payment applications. The launch of PYUSD is a natural development in this process. We started with the use of traditional cryptocurrency tokens in applications, then moved to on-chain transfers, entered the international market, and now added a fully supported and regulated stable value tool that can be used for payments, which is the culmination of the first phase. We do believe that stablecoins are the killer application of the blockchain industry at present, and they are very close to the payment market that we are very concerned about.

Laura Shin: How do you expect to apply it? For example, which industries do you think will use it, DeFi? Or do you see it as just a simple payment method?

José Fernández da Ponte: We do believe that the fundamental principles of digital currency are very suitable for payments, with some inherent advantages such as cost, programmability, and settlement time. Interestingly, much of the discussion has focused on the cost of each transaction, but I am more interested in settlement time.

We tend to say they are faster and cheaper, but when you pay, speed is cheap, and the advantage of settlement time is very clear. But this takes time, and the revolution will not happen overnight. It will take a few years for stablecoins to become mainstream in daily payments. However, some industries are already very suitable for using stablecoins. Today, $122 billion in stablecoins are mainly used for crypto trading and Web3 use cases, including DeFi that you mentioned, and we expect PYUSD to be used there as well. We have seen some early cases, such as remittances, which is an area we are very interested in.

Several years ago, PayPal acquired a company called Xoom, which has been very active in the remittance field. Therefore, we do have the right to play a role in this field. The integration between remittances and digital currencies has already begun. In the B2B payment field, we see more and more stablecoins being adopted, which is very meaningful. If you are a company that exports to foreign countries and hopes to receive payments, timely settlement time is indeed very powerful compared to receiving a telegraphic transfer that takes three to five days to clear.

Possibly aside from cryptocurrency, the first fourth-tier market we believe to adopt stablecoins is digital commodities. Economies such as Minecraft or Roblox see approximately $100 billion in digital commodity transactions annually. If you are a developer selling digital commodities in-game within the current payment system, it may take up to 15 days to receive your payment. Therefore, the advantages of implementing native in-game digital settlement are quite clear.

Similarly, I believe that we are still a few years away from mainstream use cases for domestic e-commerce or retail, but there is already a very large commercial market that can use stablecoins.

Laura Shin: So you mean DeFi will go further?

José Fernández da Ponte: I believe that DeFi will be part of the first wave, and currently you can only get PYUSD on the PayPal wallet. We are adding this product, but it is certain that major trading platforms will also offer PYUSD in the future, and people can use it for traditional use cases.

Laura Shin: I saw some news saying that PYUSD can be sent to "compatible external wallets". There may be some regulatory provisions that prohibit transactions to self-custody wallets, but I want to confirm if this includes self-custody wallets?

José Fernández da Ponte: Yes, that's correct. Regarding compatibility, I would like to say that PYUSD is an ERC-20 token deployed on the Ethereum blockchain and can be sent to external wallets that support ERC-20 tokens. This is the meaning of compatibility.

Laura Shin: There are some provisions in the user agreement that allow PayPal to reverse transactions, but I imagine this only applies to certain specific transactions, such as those within the PayPal/Venmo system.

José Fernández da Ponte: I don't know exactly which part you are referring to, but there are indeed some transactions related to fully supported and regulated stablecoins. Our issuance is approved by the New York DFS, with Paxos as the issuer. New York has very clear and strict requirements for KYC and anti-money laundering regulations, which require the ability to implement appropriate control measures.

Laura Shin: There are already some very popular stablecoin designs that are very similar to PYUSD, such as USDT and USDC. How do you plan to differentiate PYUSD from other similarly designed stablecoins?

José Fernández da Ponte: Yes, I think there are several different factors that make PYUSD a very strong value proposition. First, obviously, is the PayPal ecosystem. PYUSD is the only stablecoin accepted by the PayPal ecosystem, which includes PayPal now, soon to include Venmo, and our bilateral network. As a result, millions of consumers and merchants will be able to access it and use it as a funding tool for PayPal transactions. This means that if you shop at the millions of merchants on PayPal and you have a balance of PYUSD, you can use PYUSD as your funding tool for payment, which I think is something that no one else can do.

The second aspect is related to the connection with legal currency, and PayPal has utilized the banking connections we have established over the years. Converting from legal currency to stablecoin is a cumbersome process, sometimes requiring the wallet to be transferred to a trading platform to pay fees and then withdrawn, which can take several days. However, with PayPal, you can transfer PYUSD, sell it, and then withdraw it to your bank account. We believe this is an inherent advantage, both for the upstream and downstream channels.

My third point is about compliance and regulation. PYUSD is issued by New York Trust and draws on our 20 years of experience in dealing with and preventing online financial crimes.

Laura Shin: Speaking of regulation, stablecoin legislation has already passed the preliminary committee stage in the House of Representatives. Was your launch timing a coincidence or did it give you some confidence to proceed?

José Fernández da Ponte: We have been paying attention to the legislative process for a long time. Obviously, there are still differences among all parties on the legislative content, but this is a democratic process. Overall, the passage of these bills through deliberation may not necessarily be the trigger for our release. Nowadays, there is a clear trend on stablecoins, a few months ago it was MiCA in Europe. Many markets have clear regulations on stablecoins, and now the United States is also catching up. This is why we went to New York, because this is the strictest, most powerful, and rigorous framework available for stablecoins.

Laura Shin: Representative Maxine Waters issued a statement expressing concern over PayPal's decision to launch its own stablecoin without the federal regulatory, supervisory, and enforcement framework for these assets. What is your response to this?

José Fernández da Ponte: I have seen the statement from this senior member, and from the statement I understand that her main point is to advocate for federal regulation of stablecoins, as we just mentioned, this is a debate currently taking place in Congress. There are other members in Congress, both Republicans and Democrats, who have different views, and this is part of the legislative process. We strongly support regulation through legislation, and as I said, this is currently the strictest framework in place, and we will comply with and adhere to any legislation produced by Congress.

Laura Shin: Does PayPal believe federal regulation is necessary or does it believe state regulation of stablecoins is sufficient?

José Fernández da Ponte: We are a payment company. In this country, payment business is regulated at the state level. I believe that regulation varies in different places. For example, in places like MiCA, there is a very clear definition of payment stablecoins. In our view, if stablecoins are related to payment activities, it is reasonable to include them in the payment framework, which is currently regulated at the state level.

Laura Shin: A few years ago, Libra, initiated by Facebook (now Meta), attempted to create a stablecoin that was not directly pegged to the value of the US dollar. However, I am curious about how the company's failure, largely due to regulatory reasons, has affected PayPal's launch strategy.

José Fernández da Ponte: We had a discussion about Libra four years ago, but I don't think it will affect our approach because our development in this field is the same as our approach to other businesses. We are both a technology company and a regulated financial institution with a 20-year history. Our approach has always been to prioritize regulation, which sometimes means our progress may be slower than other companies, but we are very concerned about regulatory and compliance frameworks, as well as our relationship with regulatory agencies. As we have said in the past, we operate in 200 countries, which is a rare feat. We have always emphasized that in exploring this field, we will always coordinate with regulatory agencies. So I think this is not the influence of Libra, but rather our nature has always been this way.

Laura Shin: How do you plan to promote it in other parts of the world? Also, will you introduce stablecoins anchored to other legal currencies?

José Fernández da Ponte: We have already launched on the PayPal wallet, and the next focus is to enable this feature on the Venmo wallet, so it will still be based in the United States, but we will also consider international expansion. We have not yet considered other stablecoins priced in local currencies, and our current priority is to ensure the success of this release and make it beneficial to the cryptocurrency ecosystem.

Laura Shin: But I believe you must have a rough idea in your mind about whether to launch a Euro stablecoin or a Pound stablecoin.

José Fernández da Ponte: There are currently no plans.

Laura Shin: What does your upcoming monthly reserve report look like? Will it also display reserve proofs?

José Fernández da Ponte: As part of the New York framework, Paxos is the issuer of the token. Regular audits are required. Therefore, this will be similar to other stablecoins issued by Paxos, such as USDP. Users can see an audit report verified by a third party, which shows the amount and composition of the reserve.

Laura Shin: But this is not something that can recognize addresses, and people cannot use certain functions to prove that their coins are still reserved in the reserve.

José Fernández da Ponte: I believe that for the benefit of all parties, the best approach is to visit the Paxos website, which provides reports on other stablecoins, allowing you to gain a clear understanding of the information we provide here.

Laura Shin: PayPal hopes to establish itself in digital native environments such as online gaming. This seems different from PayPal's existing user base. How do you plan to attract these users?

José Fernández da Ponte: I am very interested in the payment aspect of the electronic gaming industry. If you consider electronic games, sometimes they may be thought of as only suitable for a younger audience by external observers. However, in reality, the audience for electronic games is very representative of the general population, and it is a very large industry with very strict and restricted computational requirements. From the perspective of solving difficult technical problems, this is a very challenging computational problem.

Many computing innovations have emerged in video games, and I believe many payment innovations will also be realized in video games. We have envisioned some payment use cases that are currently impossible, and stablecoins may make these use cases possible, such as streaming payments. Imagine paying by the second or minute while watching a video, instead of paying for the entire video? Or can you take away digital goods purchased in-game? I think we have seen some very exciting experiments, including NPCs (non-player characters) or AI agents in games that can connect to a wallet and carry value, and then this autonomous agent in the game can buy and sell things in the game.

We cannot imagine these things out of thin air. What we do is release a platform product and developers will develop on top of it.

Laura Shin: This is one of the reasons why PayPal decided to design PYUSD as an ERC-20 token, which sounds like planning to add more programmability to money, such as smart contracts.

José Fernández da Ponte: Yes, at the beginning of the process, we had to consider whether to go the open source and traditional permissionless route or to do something proprietary. Then we quickly chose the open way because we believe in following the developers. You shouldn't tell developers what to do, but let them tell you what to do. Choosing Ethereum was a very clear decision because the developer community was already there.

PYUSD is designed to be a multi-chain, so we have no reason not to expand to other protocols or other levels of the same protocol in the future. Although Ethereum has higher fees compared to other protocols, it also has many advantages. For some use cases, such as small payments or high-speed, high-throughput transactions, it may be expensive, so we will definitely expand from there, but Ethereum is clearly the preferred deployment platform.

Laura Shin: This undoubtedly opens up a new source of revenue for PayPal. Firstly, PayPal can earn money from deposits such as government bonds, with a fee of 1.5% for deposits or transactions?

José Fernández da Ponte: Traditionally, the monetization mechanism of stablecoins has been achieved through reserve earnings. However, in the current interest rate environment, this has become a significant source of profit for the industry, but we believe this should not be the only monetization mechanism. Interest rate environments may change, so our idea is that when these stablecoins are adopted, we will use tools that are closer to traditional payment businesses to achieve monetization. That is to say, when merchants want to accept stablecoin settlements, they need to pay a merchant discount rate.

In addition, people may convert one type of stablecoin to another, which may involve certain transaction fees. Regarding fees, there are no fees for purchasing PYUSD on the PayPal app or selling PYUSD. You can buy 1 USD for 1 USD without any fees, or sell 1 USD and receive 1 USD in your PayPal balance. Of course, you can also transfer funds, and we do not charge any PayPal fees for these transfers. The only fee you need to pay is the fee required by the Ethereum protocol. In the PayPal ecosystem, we do charge transaction fees, but not for stablecoins.

Laura Shin: Going back to my previous question about the source of PayPal's revenue, how big does PayPal think this potential business line will become?

José Fernández da Ponte: In the long run, this could be very important, but our expectations for next year are relatively moderate. Interestingly, this is usually a very polarized environment. The existence of stablecoins is evident, right? There are currently $120 billion worth of stablecoins on the market, and we hope to capture a portion of that market share while also helping to expand the entire market.

A few days ago, I saw an analyst report that said stablecoins will grow from the current $122 billion to $28 trillion in five years. This is a huge increase, meaning a 22-fold growth in five years, but I believe this is a project that requires years of development. We hope to establish the correct use cases and gradually promote growth, but we have a long-term development mindset, and this will be a journey spanning many years.

Laura Shin: How does this application showcase this payment method to users? Is it one of the options among all payment options, or are there any incentives to encourage people to try it?

José Fernández da Ponte: There are two different places where it is displayed. The first is when you enter the application, there is a cryptocurrency section within the application where you will see it as an additional token. You will see the tokens we support, Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, as well as PYUSD, which can be bought, sold, and transferred to external wallets.

In the checkout transaction, we provide consumers with choices without predefined or guided use of any specific payment method. So it will appear as another payment option, but will not be given any more priority at checkout. If you choose to use PayPal and pay with a credit card, your credit card will be displayed first, followed by others, including PYUSD.

Laura Shin: Okay, this discussion was very interesting. Is there anything else about PYUSD that I haven't asked but you would like to mention?

José Fernández da Ponte: As I mentioned earlier, we do believe that stablecoins are the killer application in this field. The advantages in settlement time, cost, and speed are crucial, but it will take some time for them to become mainstream in the payment industry. Therefore, we have adopted a cryptocurrency-first strategy and then started exploring some retail use cases. When it comes to competition, I believe we will have a certain market share here, but I also believe that there is a lot of demand in the market and hope to have more fully supported and regulated stablecoins, which is good for the development of the entire industry.

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