Original Title: "Paypal's Stablecoin Expected to Lead the Cryptocurrency Industry to the Mainstream"

Original Source: Web3 Xiao Lu

On August 7, 2023, the US payment giant Paypal announced the launch of its stablecoin, PayPal USD (PYUSD), becoming the first tech giant to issue a stablecoin. While we were still mired in the political quagmire of the SEC's game with Binance, Coinbase, and Ripple, traditional financial player Paypal broke the deadlock of cryptocurrency regulation by launching the PYUSD stablecoin in partnership with Paxos, and the market once again became lively.

This article will take a close look at the PYUSD stablecoin to examine the logic behind Paypal's launch of a stablecoin at this time, analyze the advantages of the PYUSD stablecoin, and explore the challenges it may face from decentralization or regulatory uncertainty.

One, Paypal's PYUSD stablecoin

On August 7th, 2023, American payment giant Paypal announced the launch of its stablecoin, PayPal USD (PYUSD). PYUSD stablecoin is fully collateralized by US dollar deposits, short-term US Treasury bonds, and similar cash equivalents, 100% of which are anchored. Qualified US users can exchange 1:1 USD through Paypal. As a result, Paypal became the first technology giant to issue a stablecoin.

As the only stablecoin supported in the PayPal ecosystem, PYUSD leverages PayPal's over 20 years of experience in the global payment industry, combined with the efficiency, low cost, and programmability of blockchain technology. It will be used to connect PayPal's existing 431 million users, providing a seamless bridge between fiat currency and digital currency for consumers, merchants, and developers in Web2.

(https://www.paypal.com/us/digital-wallet/manage-money/crypto/pyusd)

In addition, PYUSD, as an ERC-20 token issued on the Ethereum blockchain, can assist PayPal's ecological application to expand to external Web3 projects. Currently, most stablecoins are used in specific Web3 scenarios, but PYUSD is compatible with both Web2 and Web3 from day one.

PayPal CEO Dan Schulman said, "The transition to digital currency requires a stable tool that is both digitized and easy to peg to legal currencies such as the US dollar. PYUSD provides the necessary foundation for the growth of digital payments."

符合条件的美国客户能够通过 PayPal:

Transfer: Transfer PYUSD between PayPal and compatible external wallets.

Send: Use PYUSD for peer-to-peer payments;

Fund Purchases: Choose PYUSD as the payment method when checking out;

Convert: Convert to any cryptocurrency supported by PayPal.

(https://paxos.com/2023/08/07/paypal-launches-us-dollar-backed-stablecoin/)

PYUSD, a stablecoin with a Web2 perspective, may change the overall payment method of Web3. And in terms of compliance, Paypal, with over 20 years of experience in communicating with regulators, will be more advanced than other Web3 enterprises.

The Paxos Trust Company, which issues PYUSD, was established in 2013. It mainly provides services such as cash custody, cryptocurrency services, digital asset issuance, securities and commodity settlement. The company holds the Bitlicense cryptocurrency operating license issued by the New York State and is regulated by the New York State Department of Financial Services (NYDFS). Although Paxos received regulatory requirements from NYDFS in February this year and delisted the Binance-Peg BUSD stablecoin, as well as received a Wells Notice from the SEC considering BUSD as a security, it is believed that the cooperation with Paypal this time, both in terms of market size and qualification review, is cautious for both parties in terms of regulation.

From September 2023, Paxos will release a monthly public PYUSD reserve report, as well as third-party verification of the reserve asset value. The aforementioned certification will be issued by an independent third-party accounting firm and executed in accordance with the appraisal standards established by the American Institute of Certified Public Accountants (AICPA) to ensure the security and integrity of the assets.

In June 2022, Paypal also successfully obtained the NYDFS Bitlicense license. Paypal also disclosed that it had extensive discussions with US regulators and policymakers before the launch of PYUSD.

二、Paypal wants to make a fortune in the cryptocurrency industry

As we all know, stablecoins are the most profitable business in the cryptocurrency industry. In addition to basic income such as transaction fees and service fees, the interest rate income similar to traditional bank deposit and loan business is particularly considerable in the current interest rate environment. It can be said that the current interest rate is dominating everything.

From a business perspective, it is understandable for Paypal to target the cryptocurrency industry. From an industry perspective, it is also acceptable for technology companies that are leading in the traditional payment industry to fully embrace blockchain technology. It should be noted that Bitcoin and blockchain technology were created to solve the problem of decentralized peer-to-peer electronic cash payment systems.

2.1 Interest Income of Reserve Assets

According to the Q2 2023 report disclosed by Tether, the issuer of USDT, the total asset size of USDT has increased from 66 billion at the beginning of the year to 86 billion US dollars currently. More than 55 billion US dollars of assets are invested in risk-free assets such as US bonds, which is the main source of profit.

According to reports, Tether made over $1 billion in profit in Q2 and $1.48 billion in profit in Q1. Tether is expected to earn $4 billion in profit this year, which is more than the profit of global asset management giant Blackrock, despite having a workforce of only 50+ people.

（https://tether.to/en/transparency/#reports）

How to create huge revenue?

Under the scale effect, the marginal issuance cost of stablecoin issuers is zero. They only need to issue debt denominated in US dollars to harvest fiat assets at zero cost, and then invest the fiat assets in risk-free interest-bearing assets such as US bonds while retaining all of their earnings.

So how can we achieve zero-cost acquisition of fiat assets?

SEC gave Paxos stablecoin issuer a grand reason, that is, to avoid the risk of unregistered securities issuance that Paxos was accused of by SEC before. As a centralized issuer, if it provides interest-bearing stablecoin assets to users, such stablecoins are likely to be recognized as securities by SEC.

Therefore, we can see from the user agreement of Paypal Cryptocurrency that Paxos, as the issuer, has the right to enjoy the fees generated by fiat asset custody, which will be shared with Paypal. These profits have nothing to do with PYUSD stablecoin holders.

（https://www.paypal.com/us/legalhub/cryptocurrencies-tnc?locale.x=en_US#fees-pricing）

2.2 Traditional Payment Business Monetization

Paypal SVP Jose stated in an interview: "In the past, the traditional profit mechanism of stablecoins has always been achieved through the interest income of reserve assets. In the current interest rate environment, this has always been a considerable source of profit in the industry. However, we do not believe that this is the only profit mechanism. Paypal will achieve profitability through a more traditional payment business approach. This also means that when merchants want to accept stablecoin settlements, there will be a certain merchant discount rate, and individual users will also incur certain related fees when exchanging different types of stablecoins."

Trading and exchange have high-frequency application scenarios and stable fee deductions, which can contribute sustainable income. Paypal will continue to connect bindable cryptocurrencies and enrich the application scenarios of cryptocurrencies, making the trading and exchange (Convert/Swap) function of cryptocurrencies just around the corner. According to the listing documents disclosed by Coinbase to the SEC, Coinbase earned a huge income of 1.5 billion US dollars from transactions in Q1 2021, accounting for 86% of the total revenue of 1.8 billion US dollars at that time. Taking MetaMask as an example, its handling fee rate is 0.875%, and its revenue in 2021 is as high as 250 million yuan.

Through the above analysis of the encryption industry's entry into Paypal, it can be seen that the launch of PYUSD may not only change the current stablecoin market landscape, but also alter the profit logic of traditional payment businesses, opening up a new round of business model evolution in the traditional payment field.

Obviously, it goes without saying that Paypal has various advantages compared to other stablecoin issuers. It is believed that Paypal can maximize the value of PYUSD stablecoin by leveraging its massive traffic entrance (Web2) and rich payment scenarios (Web2+Web3), combined with the monetization advantages of its traditional payment business.

3. What are the advantages of Paypal's stablecoin?

（https://www.coingecko.com/en/categories/stablecoins?category=usd_stablecoin）

The centralized PYUSD stablecoin issued by Paypal and USDT by Tether, as well as USDC by Circle, have no fundamental differences. To cope with the competition of transparent stablecoins, the only way is to attract new users and increase market share through Web2, driving mass adoption of the cryptocurrency market.

In the current stablecoin market with a market value of approximately $120 billion, USDT and USDC have respectively accounted for about 68% and 21% of the market share. PYUSD, which is currently only available to eligible PayPal customers in the United States, wants to grab a corner of the existing market and will directly compete with USDC and BUSD, as these American customers tend to use regulated onshore stablecoins.

As for offshore stablecoins, Tether CTO Paolo Ardoino stated that the launch of PayPal stablecoin will not affect Tether because the company does not provide services to US users.

So, what is the advantage of Paypal's stablecoin?

3.1 Paypal's traffic and scene entrance

Former Paxos executive Austin Campbell said: "One of the most undeveloped scenes in the cryptocurrency ecosystem is the deposit and withdrawal channel. From this perspective, it is difficult to find a better choice than PayPal. I think the biggest innovation here is the addition of a native stablecoin, PYUSD, directly on the PayPal platform."

The key to breaking the circle of stablecoins lies in obtaining traffic entry points, which is exactly what Paypal possesses. No matter how advanced and secure Web3's stablecoin products boast, without the support of traffic entry points and participation in scenarios, everything is just empty talk. With scenarios, there is traffic, and with traffic, there is deposit.

If PYUSD can become popular, it will once again prove that the growth path of Web2 payment business can also be applied to Web3, which requires strong support from a powerful commercial ecosystem. This is a comprehensive competition of the company's ecological strength and the creation of a sustainable business model, rather than the current Web3 projects' low-level stack and single business surge through cutting-edge technology.

3.2 Paypal's Advantages Based on Blockchain

In terms of cross-border payments, PYUSD based on blockchain technology can achieve simultaneous and concurrent information and fund flows while transferring stablecoin funds, and "payment is settlement", making transactions simple and secure.

While SWIFT only involves the transmission of international payment instructions between banks, with a more complex process (requiring approval from multiple banks at different stages) and longer transaction times (often taking several days, compared to PYUSD's typical few seconds), PYUSD is based on blockchain technology's public ledger accounting, which maintains higher transparency compared to SWIFT's private ledger for payment settlement.

In theory, based on the blockchain technology architecture and the business ecosystem expanded by PayPal itself, PYUSD has the potential to directly compete with Tether and Circle, and is expected to become a dark horse in the Web3 payment field.

(https://flywheeldefi.com/article/paypal-steps-on-chain-with-pyusd)

Paypal SVP Jose also cited the advantages of PYUSD in the interview: "First, PYUSD is the only stablecoin accepted by the Paypal ecosystem, including Venmo and Paypal's bilateral network, which will connect millions of consumers and merchants; secondly, PYUSD can fully utilize Paypal's complete global payment channels and convenient payment experience for deposits and withdrawals; thirdly, compliance and regulation, PYUSD is issued by Paxos Trust Company, which is regulated by the state of New York, and has absorbed more than 20 years of experience from Paypal in handling and preventing online financial crimes."

Despite the aforementioned mutual praise in the business world, overall, both traditional finance and the cryptocurrency industry view Paypal's launch of a stablecoin as a positive development. However, there are also concerns about PYUSD, stemming from a departure from decentralization principles and regulatory uncertainty.

4. Increasingly Centralized PYUSD

PayPal's stablecoin PYUSD, although based on the Ethereum network, is not a completely decentralized token. @Bitcoin can discover through the smart contract deployed by PYUSD that PayPal has the authority to freeze wallet addresses it deems malicious and even forcibly remove PYUSD assets from the Ethereum network, even if the address is not on the PayPal platform.

Using the same example, we can see that previously, Circle froze 63 million USDC due to security concerns with Multichain.

（Twitter from Neeraj K Agrawal）

Centralized institutions can achieve many operations that were previously impossible on the blockchain, which is inevitably the result of compromise with regulation. The compromised PYUSD is more like a central bank digital currency (CBDC) issued by a technology company. Although centralized institutions such as Paypal and Circle can avoid many scams and hacking incidents in the cryptocurrency industry, this is still considered a violation of the decentralized spirit of the blockchain and cryptocurrency industry in the traditional sense.

Although the centralized core of PYUSD cannot satisfy the cryptocurrency industry, PYUSD may still be an important bridge for the future of blockchain and cryptocurrency industry towards Mass Adoption.

（https://onodumichael48.medium.com/a-four-minutes-primer-makerdaos-spark-protocol-68075d7c3e29）

Before PayPal launched PYUSD, MakerDAO had already returned to the center stage of the crypto world with the narrative of RWA. According to MakerDAO's Spark Protocol page, the deposit rate (DSR) of DAI has now increased to 8%, and the driving force behind the increase in DSR rate is the value capture of its RWA interest-bearing assets.

This change seems to be able to revive DAI. According to the latest data, the total locked value (TVL) of the DAI pool has exceeded 400 million US dollars, and the market value of DAI has also surpassed BUSD. Although the old DeFi projects have great potential to lead a new round of DeFi Summer again with the narrative of RWA, what we currently see is still a one-way rush of the crypto world towards traditional finance, with much talk but little action.

The decentralized nature of DeFi projects, as well as their composability magic (such as decentralized stablecoins that can reflect the value of captured RWA interest-bearing assets), has been sought after by crypto punks. However, for Web2 users, DeFi is still a dark forest full of uncertainty and anxiety. Incremental Web2 users don't care whether you are centralized or decentralized; convenience, ease of use, and user-friendliness are the key.

Five, PYUSD will accelerate the landing of stablecoin regulation

On July 27th, 2023, the Financial Services Committee of the United States House of Representatives introduced the Clarity for Payment Stablecoins Act of 2023. The purpose of this bill is to provide a clear regulatory framework for stablecoins and to protect American investors and consumers by establishing uniform standards.

After Paypal announced its stablecoin plan, Patrick McHenry, Chairman of the House Financial Services Committee, immediately expressed his support: "Paypal's statement is a clear signal that stablecoins issued under a clear regulatory framework are expected to become the cornerstone of our 21st century payment system. Paypal's stablecoin makes it more important than ever to continue pushing for legislation."

（https://twitter.com/FinancialCmte/status/1688541930752262144）

The launch of PYUSD has also drawn strong criticism from Maxine Waters, the top Democrat on the House Financial Services Committee. Indeed, considering PayPal's massive federal and global audience (PayPal has over 435 million customers worldwide, more than the total number of online accounts of all the largest banks combined), the corresponding stablecoin regulatory legislation at the New York state level is not yet clear on the supervision and enforcement of stablecoins at the federal level in the United States, but this is crucial for protecting consumer rights and maintaining financial stability.

In addition, given the nature of stablecoins as "currency", they to some extent replace part of the responsibilities of central bank legal tender, making it more likely to cause turbulence in the financial system. Therefore, the regulatory authorities for stablecoins will no longer be limited to the SEC and CFTC, but may also involve the intervention of central banks and finance ministries in other jurisdictions.

Believe that Payal's move will bring a sense of urgency to regulation, and the subsequent stablecoin craze may soon push Congress to enact stablecoin legislation to balance innovation and risk.

Chapter 6: Conclusion

PayPal's entry is just the beginning, and more financial companies will follow suit, including Visa, Mastercard, and Square, all of which have been exploring the application of stablecoins. However, given the importance of compliance in traditional finance, it may start in the US market and gradually expand overseas, and the pace may not be fast.

Although we have seen several previous bull markets driven by internal factors in the cryptocurrency industry, such as the ICO frenzy, DeFi Summer, and the rise and fall of NFTs, this time may be different. The stablecoin introduced by Paypal may lead to a new bull market, but this process will not happen overnight and may last for several years, or even decades.

At this very moment, Snowball was just pushed down from the top of the mountain by Paypal.

Original article link

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