PayPal’s Stablecoin: What Makes it Different from Facebook’s Libra?

Due to PayPal’s influential position in Washington and policymakers’ improved comprehension of the matters over the past three years, it is anticipated that PayPal’s stablecoin will triumph where Facebook’s stablecoin failed.

PayPal this month announced the launch of PayPal USD, a cryptocurrency pegged to the US dollar, making it the second major global company to launch a stablecoin since Facebook, now Meta Platforms, announced Libra in June 2019.

The move, which comes amid PayPal’s transition to a new CEO that was announced last week, appears risky after political opposition crushed Facebook’s stablecoin and as regulators weigh in on the crypto sector after a series of meltdowns.

But PayPal is in a stronger position than Facebook, said former officials, executives and analysts. Policymakers are more familiar with more stable coins, typically cryptocurrencies pegged to fiat currency, than they were in 2019. The creation of federal stablecoin regulations has also helped strengthen their legitimacy in the eyes of lawmakers.

“The world has changed dramatically since Facebook’s Libra project. Stablecoins were unfamiliar,” said Christopher Giancarlo, former chairman of the US Commodity Futures Trading Commission.

“Since then, the administration, Congress, and the Federal Reserve have had time to focus on stablecoins and stablecoin regulation, and there has been very extensive PR activity in the industry, including a lot of lobbying.”

Unlike Facebook, the social media giant that has been under constant scrutiny over privacy issues and Russian election meddling, PayPal is an established financial player in Washington. It spent $1.13 million on federal lobbying last year, according to OpenSecrets, and has been lobbying for cryptocurrencies for several years, documents show.

“From a policy perspective, there is a seismic difference between Facebook’s Libra and PayPal’s stablecoin,” said Isaac Boltansky, director of policy research at brokerage BTIG.

“There is still a wall between banking and commerce, so knowing that PayPal is clearly on the other side of the wall should reassure lawmakers.”

PayPal and Meta declined to comment.

PayPal USD is issued by the digital trust company Paxos Trust, guaranteed by dollar deposits and the US Treasury, and regulated by the New York State Department of Financial Services.

PayPal launched the stablecoin because it sees itself as leading payments innovation, said one person familiar with the plan, and CEO Dan Schulman has said he plans to eventually use it for payments. But PayPal expects the stablecoin to be used mostly by US customers to buy and sell other cryptocurrencies on its platform, the source said.

Dan Dolev, senior analyst at Mizuho, said PayPal USD is not a game changer for PayPal investors. “It’s positive noise,” he added.

BIG GOALS

It is certain that some policy makers have concerns. Maxine Waters, the top Democrat on the House Financial Services Committee, expressed concern that PayPal would launch a stablecoin without federal oversight to protect consumers and financial stability. But for the most part, Washington’s reaction has been muted.

When Facebook unveiled Libra, a Swiss-based stablecoin tied to a basket of currencies, executives made no secret of their ambitions. They said they wanted to revolutionize the global financial system.

The project faced fierce opposition from policymakers who worried that Vaaka could give Facebook too much control over the monetary system and infringe on users’ privacy. Taken by surprise, regulators were confused about who should oversee stablecoins.

Facebook changed the Libra name, made it smaller and moved the project to the US to get approval from the US authorities.

According to a former official with direct knowledge of the matter, the decision to approve Libra coincided with President Joe Biden taking office in January 2021. Although the Fed had been working on the issue for some time, the decision ultimately rested with new Treasury Secretary Janet Yellen. He wanted time to fully analyze things, this person said.

Tired of waiting, Facebook sold the company in January 2022.

The White House and the Fed declined to comment. A Treasury spokesman noted that Yellen has “repeatedly urged Congress to create a comprehensive regulatory framework for stablecoins.”

The Ministry of Finance has been investigating stablecoins for the past two years. When TerraUSD collapsed last year, Yellen said that stablecoins do not pose systemic risks. Since then, fears that stablecoins could supplant traditional money have subsided, and the Treasury Department and Congress have broadly agreed that they should be overseen by prudential regulators.

“There’s been an awful lot of work done … to understand what the relative risk of these things is,” said Jack Fletcher, director of policy and government relations at blockchain company R3.

The Fed this month outlined a process for state banks to trade in stablecoins, while the House Financial Services Committee last month introduced a bill that would give the Fed more power to oversee stablecoins while preserving the authority of state regulators.

The committee’s Republican chairman, Patrick McHenry, said in a statement on PayPal USD that Congress should move quickly to pass the bill “so that stablecoins can reach their full potential.”