With great claims about how it can transfer money across millions of cryptocurrency investors, PayPal became the first significant U.S. fintech business to launch its own crypto token with a dollar-pegged stablecoin known as PayPal USD on Monday.

The company is entering a very competitive space that is currently dominated by stablecoins like tether and USDC at a time when the initial excitement surrounding cryptocurrencies has largely subsided and values have been fairly stable since 2022.

The payment processor is confident in its timeliness and competitive edge in the market, the company’s senior crypto executive says CNBC.

“Stablecoins are the killer application for blockchains right now,” said Jose Fernandez da Ponte, PayPal’s senior vice president and general manager of blockchain, crypto, and digital currencies.

“There are inherent advantages in cost, programmability, settlement time,” continued da Ponte, adding that the market is primed for new entrants that are fully backed – and unlike tether, fully regulated.

“Stablecoins are something that we cannot just sit out,” da Ponte added.

According to a Bloomberg article, the payments processor halted stablecoin development in February, although Da Ponte refuted this. Paxos Trust, a New York-based crypto financial services company assisting PayPal in the issuance of its stablecoin, was under pressure from the SEC and NYDFS at the time. Regulators demanded that the company end its partnership with Binance. In the end, Paxos ceased producing BUSD, Binance’s own dollar-pegged coin.

The debut follows a collapse in cryptocurrency liquidity over the previous 18 months.

In March, Silicon Valley Bank, the largest bank for tech startups, two of the banks that were friendliest to the crypto sector, Silvergate and Signature, both failed in less than a week.

Circle’s USD Coin, or USDC, suddenly lost its peg to the US dollar as a result of the collapse of the crypto banking trinity, which had an impact on the stablecoin market.

Getting money into the cryptocurrency sector has become more difficult since the banking crisis earlier this year due to the increased congestion at the on-and-off ramps connecting traditional finance with the digital asset market.

According to data from TradingView, the overall market cap of stablecoins has fallen drastically since its peak, falling 25% to $120 billion. The prolonged bear market pricing and the SEC’s regulatory onslaught on the sector make for an unfriendly environment for businesses focused on cryptocurrencies.

Da Ponte counters that PayPal is positioned for success precisely because of this difficult environment.

“We are bringing to bear all the infrastructure that we have built over the years in terms of being regulated in multiple countries, in terms of risk management, in terms of compliance, and we think that that’s a key asset that is a difference in the approach that we are taking,” he said.

Investors may often rely on stablecoins, a subset of the cryptocurrency ecosystem, to maintain a predetermined price. These tokens must be linked to the value of a physical item, such as a commodity like gold or a fiat currency like the U.S. dollar.

The advantages of utilising a stablecoin tied to the price of the U.S. dollar over using that fiat currency directly have to do with the subtle differences between the many forms of digital U.S. dollars that are now available.

Electronic US dollars partially backed by reserves are held in commercial bank accounts across the nation by a practise known as fractional-reserve banking.

As the name suggests, the bank maintains a portion of its deposit liabilities in reserves. This type of money is moved using traditional financial channels, and moving it from one bank to another or from one nation to another frequently entails paying fees.

There are also a number of stablecoins that are tied to the US dollar, such as tether, USDC, and recently PayPal’s USD, or PYUSD. The biggest stablecoin on the planet, tether is nevertheless under fire from detractors who doubt if it has enough dollar reserves to support its currency. USD Coin is controlled by a group of authorised financial institutions, is backed by fully reserved assets, and is redeemable 1:1 for US dollars. Additionally, it is often simple to use wherever you are.

Comparable to USDC, PayPal USD is redeemable for dollars and is backed by a combination of dollar deposits, short-term U.S. Treasuries, and comparable cash equivalents.

The Fed’s version of a central bank digital currency, or CBDC, is the hypothetical digital dollar. This would effectively be a digital version of the American dollar, fully regulated, governed by a single body, and supported wholeheartedly by the nation’s central bank.

All of these kinds have proportional advantages and disadvantages. Some contend that because a CBDC in the United States would present a direct claim against a central bank, much like the U.S. dollar, it would be inherently safer than privately created stablecoins.

However, many stablecoin traders don’t necessarily want safe. They seek an easier way to conduct business, particularly abroad.

“It’s just an alternative payments network, built on top of the commercial bank system,” Nic Carter, founding partner at Castle Island Ventures, previously told CNBC. “It’s like open banking on steroids. It is very interoperable, it is relatively transparent, and in theory, you can get faster settlement and faster cross-border settlement, because it’s not encumbered.”

According to Carter, stablecoins were first developed to meet the desire for dollar exposure outside. The largest stablecoin and third-largest cryptocurrency in the world overall, Tether, is mostly used outside of the United States.

“There are things that you cannot do with fiat,” explained da Ponte.

Indeed, the usage of these non-governmental digital tokens in domestic and foreign transactions is rising, which is unsettling for central banks because they have no control over how this market is governed.

“There is a strong advantage in settlement times,” da Ponte said of PYUSD transfers. “You can settle in times that range from seconds to minutes, when in traditional payment methods, sometimes you’re sending a wire internationally and that can take three to five days to settle.”

For traders, the expedited settlement timeline is a game-changer.

Although there are many competing offerings in the U.S. dollar-pegged stablecoin market, PayPal’s senior crypto officer tells CNBC that the payment processor’s foray into the industry is “all about enlarging the pie.”

“We see the appetite from users that want alternatives, that want a market that is less concentrated, and we think that we have a place in that market,” said da Ponte.

A few significant benefits exist for PayPal, such as its vast network of over 435 million active accounts.

“We have a large base of consumers; we have a large base of merchants,” da Ponte said of PayPal’s “two-sided network.”

“In terms of the distribution and the access and making this accessible to a larger segment of the population, I think that we are in a good position there,” he added.

The cryptocurrency executive at PayPal also emphasised the company’s competitive edge in terms of fiat connectivity.

“We have always said that our role in crypto and digital currencies is trying to build that conduit between fiat and web3,” continued da Ponte.

In fact, one significant barrier to on-chain payments is the process of “on-ramping,” or the conversion of funds from fiat to cryptocurrency.

“Companies like PayPal can offer cheap, effective ways to bridge the two worlds,” said Andy Bromberg, co-founder of CoinList and CEO of Eco, a crypto firm backed by Andreessen Horowitz and Coinbase Ventures.

“Once your money is in crypto, it’s easy to move between different networks and different assets — but getting it there is challenging and expensive,” continued Bromberg, an industry veteran who has been in the space for over a decade.

According to Bromberg, PayPal’s ethereum-based stablecoin is “a huge vote of confidence for the ecosystem and a signal that traditional players will be moving into the space,” as well as “a huge vote of confidence for the ecosystem.”

Interoperability was another crucial element mentioned by Da Ponte, who noted that the necessary infrastructure already existed to send PYUSD outside of the PayPal network.

According to Da Ponte, PayPal is implementing on-chain transfers, allowing customers to transfer PYUSD from their PayPal wallet to an external cryptocurrency wallet.

“PayPal will not charge fees for that; obviously the user will need to pay the blockchain protocol fee — the ethereum fee — but that’s the only fee that will be included there,” he said, adding that PayPal believes its customers will adopt PYUSD as part of their portfolio of stablecoins.

According to da Ponte, PayPal intends to concentrate on payments in web3 and digitally native settings, including the $100 billion digital products sector in online gaming.

PYUSD will reportedly soon be included into Venmo, which is owned by PayPal.

“Users want to be able to send not only to friends from Venmo, but also to friends on PayPal,” he said, explaining that PYUSD would also allow PayPal merchants to be able to receive value from Venmo users, ultimately opening a base of millions of additional customers.

PYUSD is initially only being made available to U.S. users because stablecoin acceptance there has lagged behind that of the rest of the globe.

“I don’t think the revolution will happen overnight,” da Ponte said. “I don’t think that you’re going to be paying at your neighborhood store with a stablecoin anytime soon.”

Only about 30% of USDC adoption, according to Jeremy Allaire, CEO of rival stablecoin issuer Circle, is taking place in the United States.

Allaire nonetheless commended PayPal for launching its stablecoin, calling it “incredibly exciting.”

“It is a strong signal that near-instant, borderless, and programmable payments in the form of stablecoins are here to stay.” Allaire said. “Existing payment systems are outdated and digital dollars like USDC, leveraging the power of market neutral public blockchains, serve as the foundation for thousands of companies, neobanks, capital markets, and financial institutions.”

He also cited the debut of PYUSD as a shining example of what can be accomplished when regulators provide clear guidelines for cryptocurrency businesses.

However, the regulation of cryptocurrencies in the US is still unclear.

In the past, Facebook (now known as Meta) fought with regulators all over the world for years over its attempts to introduce its own stablecoin, an endeavour that ultimately failed due to almost universal backlash.

On the same day PayPal announced the launch of PYUSD, Patrick McHenry, chairman of the House Financial Services Committee and a Republican from North Carolina, urged for comprehensive crypto legislation.

“Clear regulations and robust consumer protections are essential to enabling stablecoins to achieve their full potential.” McHenry said. “We are currently at a crossroads to keep America at the forefront of digital asset innovation. Congress is making significant, bipartisan progress on legislation to ensure the U.S. leads the financial system of the future.”

One of PayPal’s key advantages in the stablecoin market, according to Da Ponte, is the company’s more than 20-year history in the payments industry.

“What we do is manage a regulated business and manage a strong compliance framework and infrastructure,” he said.

“What we are doing now is we are taking that value proposition that has been around for a long, long while and making it available outside the PayPal ecosystem.”

Scams, however, continue to pose a significant threat to the sector as a whole, even for digital giants like PayPal.

Data from DexTools shows that thousands of bogus PayPal tokens flooded DeFi markets just one day after the stablecoin’s release. Numerous phoney PayPal cryptos boasted significant increases, which runs counter to the idea that a stablecoin has a fixed value. One of these fake tokens saw a trade volume of $47,000 and a gain of 3,000% in just one day.

However, PayPal can benefit from an increasing tide of institutional interest if it can get past the regulatory constraints and adoption difficulties.

In recent weeks, Wall Street has once again focused on cryptocurrencies, as evidenced by several filings for spot bitcoin ETFs.

Although the SEC has previously denied these applications, new collaborations with Coinbase for surveillance monitoring may allay the agency’s worries about market manipulation.

“We see that there is institutional interest, we see that there is demand for additional tokens in this space, and we see the regulation moving forward,” said da Ponte.

“And that combination of things made this the right time to step in.”

(Adapted from CNBC.com)

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