PayPal Introduces Stablecoin for Cryptocurrency Payments

PayPal Holdings Inc. is introducing a stablecoin, marking the first instance of a major financial company doing so. This move has the potential to greatly enhance the slow acceptance of digital tokens for payment purposes.

PayPal USD (PYUSD) was issued by Paxos Trust Co. and is fully collateralized by U.S. dollar deposits, short-term Treasuries and cash equivalents, the San Jose, Calif.-based payments company said Monday. It is pegged to the dollar and is gradually being made available to PayPal customers in the US.

With PYUSD, CEO Dan Schulman aims to strengthen PayPal’s dominance in digital payments by relying on technology that enables instant and cheaper account transfers without a central intermediary. PayPal shares have fallen 33 percent over the past 12 months, the sixth-worst on the Nasdaq 100, as the pandemic-era boom in online payments has waned.

“The vision over time is that this will become part of the overall payment infrastructure,” Schulman, who is preparing to step down in the coming months, said in an interview.

Stablecoins — crypto tokens tied to an asset like the dollar — have been around for nearly a decade, but are mostly used by traders to move digital assets between exchanges and have achieved limited penetration in consumer payments. According to CoinGecko, there are approximately $126 billion worth of stablecoins in circulation, the largest of which is Tether Holdings Ltd’s USDT.

Some have been controversial: Meta Inc.’s high-profile company came under fire last year after an intense regulatory backlash. PayPal itself stopped working on PYUSD in February as regulators stepped up their oversight of cryptocurrencies.

The company now believes the regulatory environment is “moving toward clarity” and sees growing demand for an alternative stablecoin as the market is focused, Jose Fernandez da Ponte, head of PayPal’s blockchain and digital currencies team, said in an interview.

Last month, the House Financial Services Committee introduced a bill to regulate crypto-stable coins championed by Patrick McHenry, a Republican from North Carolina.

McHenry said in a statement Monday that PYUSD demonstrates that “stable coins — if issued within a clear regulatory framework — hold the promise” of payment systems. “Clear regulations and robust consumer protections are essential for stablecoins to reach their full potential,” McHenry said.

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PYUSD is designed to always be redeemed in dollars and can also be exchanged for other cryptocurrencies available online on PayPal. It can be used to finance purchases and will soon be available on PayPal’s popular payment app Venmo. Users will eventually be able to send their token holdings between PayPal and the Venmo wallet.

The coin can also be transferred to compatible third-party wallets outside the PayPal network.

PayPal, which has more than 431 million active accounts worldwide, first launched cryptocurrency services in 2020. It allows users to buy, sell, and make payments with a handful of tokens like Bitcoin through its platform.

The company said last week it needed to set aside more cash in the second quarter to cover sour loans it made to traders, prompting a 12 percent one-day drop in its shares. PayPal has expanded the services it offers to millions of consumers and merchants across its many platforms, including working capital loans and remittances.

PayPal shares rose as much as 1.6% early Monday.

Read more: PayPal sees margin pressure as loan terms rise

TerraUSD Implosion

Initially, PayPal expects PYUSD to be used mainly in the cryptocurrency and web3 sectors, such as for trading in and out of other digital tokens and in-game payments, before gradually being adopted in areas such as remittances and micropayments.

Proponents of stablecoins have long argued that they are a superior way to get cheap, instant money transfers and payments. But they have also faced resistance from central banks busy developing their own digital currencies and, in USDT’s case, speculation about the quality of the reserve.

In perhaps the most significant setback for stablecoins, TerraUSD collapsed in May 2022 when the complex algorithmic system underpinning it failed, triggering a broader cryptocurrency collapse. Its inventor, South Korean citizen Do Kwon, has been charged with fraud by US prosecutors, who say the episode cost investors about $40 billion.

“The events of the past year have raised serious doubts about the ability of stablecoins to function as money,” said Agustin Carstens, head of the Bank for International Settlements, in a speech in February. “Stablecoins must derive their credibility from sovereign fiat currencies.”

In February, the New York State Department of Financial Services said it had ordered Paxos to stop issuing a Binance-branded stablecoin from crypto exchange BUSD. The New York regulator said at the time that its decision stemmed from “several unresolved issues related to Paxos’ oversight of its relationship with Binance.”

Paxos is regulated by the NYDFS and PYUSD is a regulated product in New York State. The regulator granted PayPal a local crypto license in June last year.

PayPal held extensive discussions with U.S. regulators and policymakers as it prepared to implement PYUSD, Schulman said. “We’re at a place right now in these discussions where people feel comfortable with a respected, well-regulated US financial entity moving into a stable coin state and think that’s an important initial move,” he said.

Starting in September, Paxos will publish monthly reports detailing the funds underlying PYUSD, PayPal said. Paxos also publishes a third-party certificate from an accounting firm about PYUSD’s reserve assets.