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In August 2023, payment processing giant PayPal announced the launch of its own stablecoin, PayPal USD (PYUSD). Given PayPal’s standing in the world of digital payments, the move quickly made waves in the digital asset space.
The dollar-denominated PYUSD is the first stablecoin launched by a major U.S. financial company. It is fully backed by U.S. dollar deposits, U.S. Treasurys and other cash equivalents and should be able to be redeemed one-for-one in U.S. dollars.
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency that is pegged to a fiat currency. As is the case in traditional finance, the U.S. dollar dominates the stablecoin space. Hence, nearly all stablecoins are dollar-denominated.
With a peg to fiat currencies, stablecoins are designed to avoid the volatility that cryptocurrencies are so well known for. In essence, a stablecoin can be thought of as a tokenized version of a fiat currency—in the case of PYUSD, that is the dollar.
Through avoiding volatility, stablecoins provide users with a useful medium of exchange for buying and selling cryptocurrencies. There are many different types of stablecoins, but the most common involves the issuing company (such as PayPal) maintaining a reserve of assets backing the stablecoin tokens.
Is PayPal USD’s Price Really Stable?
Despite their name, some “stablecoins” have been anything but stable.
The most high-profile collapse came in May 2022, when TerraUSD (UST) lost its dollar peg, with the entire Terra ecosystem collapsing in a matter of days.
PayPal USD is structured in a completely different way from UST, however. TerraUSD was an algorithmic and decentralized stablecoin. Crucially, it was also not collateralized, ultimately a flawed model that ended in ruins when the peg broke down amid mass selling.
PayPal USD, on the other hand, is a lot more straightforward. It is fully backed by U.S. dollar deposits, U.S. Treasurys and similar cash equivalents.
Therefore, one token can be redeemed for one dollar at any time. In this case, PayPal USD can be bought or sold through PayPal at a rate of $1.00 per PayPal USD.
How Does PayPal USD Work?
The goal of PayPal USD is to create a more frictionless environment for users to transact with digital currencies, according to PayPal’s initial announcement. It offers several functions. These include:
- PayPal USD can be transferred to compatible crypto wallets—both PayPal Wallets and externally.
- Customers can purchase goods with PayPal USD, with automatic conversion to fiat occurring at the point of sale.
- PayPal USD will soon be available on Venmo, meaning people can pay fellow Venmo users in the stablecoin.
- Customers can use PayPal USD to purchase and sell any of PayPal’s supported currencies.
“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,” Dan Schulman, president and CEO of PayPal, said in an August press release.
In such a way, PayPal hopes its new stablecoin can serve as a bridge between the fiat landscape and the burgeoning Web3 and DeFi worlds, leveraging the formidable payments infrastructure already in place at the fintech company.
The company’s hopes of offering a bridge asset between these worlds will also be aided by the fact that PayPal USD is an ERC-20 token. This means it is launched on top of the Ethereum blockchain and is compatible with a wide range of Web3 applications. Ethereum has a substantial market lead in the space, with more than 50% of total value locked across DeFi, equivalent to more than $20 billion.
With its ERC-20 compatibility, “PayPal USD will be available to an already large and growing community of external developers, wallets and Web3 applications, can be easily adopted by exchanges, and will be deployed to power experiences within the PayPal ecosystem,” the PayPal press release said.
Is PayPal USD Safe?
PayPal USD is issued by Paxos Trust Company, a New York-domiciled company. Beginning in September 2023, Paxos will publish a monthly reserve report to the public, which reveals the breakdown of the instruments backing all PYUSD tokens in circulation.
With a U.S.-regulated company issuing the tokens, and PayPal trading publicly on the Nasdaq stock exchange since 2002, proponents will argue that the stablecoin is both reputable and trustworthy.
While this is almost definitely true, it should be mentioned that, like all things in the investing world, this is not 100% guaranteed. USD Coin, the world’s second-largest stablecoin, demonstrated this in March. As Silicon Valley Bank collapsed, it was revealed that approximately 8% of the reserves backing USDC tokens were held at the bank.
This caused panic among holders of the stablecoin, with the dollar peg slipping amid the immense selling pressure, and USDC falling as low as 88 cents. The episode was resolved positively for holders, however, with the dollar peg quickly restored once the U.S. administration confirmed it was stepping in to guarantee deposits at SVB.
While this represents an extreme example, it also reinforces the fact that stablecoins remain a nascent market, as does the cryptocurrency space overall. Nonetheless, with backing by cash and U.S. government-guaranteed Treasurys, the backing for PYUSD is as sound as one could hope for.
Is PayPal USD a Good Investment?
Stablecoins like PayPal USD don’t make much sense as an investment because they aren’t meant to increase in value. They only operate as a store of value, since one PYUSD should always equal one dollar.
The benefit of PYUSD will be through its convenient integration with the PayPal platform, allowing users already with a PayPal account to have a more seamless experience when interacting with digital currencies.
What Does PYUSD Mean for PayPal?
From PayPal’s point of view, the move represents the company’s latest expansion into the cryptocurrency ecosystem.
Earlier this year, the company disclosed it held close to $1 billion in cryptocurrency assets in a report filed with the SEC. The report outlines that PayPal considers these assets a “safeguarding liability” due to the “unique risks associated with cryptocurrencies.”
Looking across the market, there is currently a total circulating supply of $125 billion of stablecoins as of the time of this writing. Tether is the market leader, with its $83 billion supply representing a 67% share of the market. USD Coin is in second with $26 billion, equivalent to a 21% share. Hence, PayPal is competing against established rivals that already command a large chunk of the market.
What Does PayPal USD Mean for Crypto?
Adding to the challenges that PYUSD faces are the struggles that the entire cryptocurrency industry has faced.
While prices have bounced back in 2023, they remain far from the highs of 2021. The dwindling supply of stablecoins across the market demonstrates the capital flight from crypto as well—the total supply has been trending downwards since the collapse of TerraUSD in May 2022, before which the total supply peaked at more than $160 billion.
However, PayPal USD is unique in that it is the first stablecoin issued by a major U.S. financial services company. Shareholders will hope that the payment rails already in place on the app as well as PayPal’s considerable brand value will be key advantages for the stablecoin.
For the cryptocurrency industry, the entrance of another TradFi company into the space—which also happens to be a long-time leader in digital payments—demonstrates the continued growth of the nascent asset class.
