Global payment giant PayPal announced on August 7 that it will collaborate with Paxos Trust, a New York-based cryptocurrency financial services company, to launch PayPal USD (PYUSD) stablecoin, becoming the first mainstream fintech company to introduce a stablecoin, and accepting payments and transfers using this stablecoin.

In addition, on August 20, the company further announced that it had already introduced the US dollar stablecoin (PYUSD) to some users on its payment platform Venmo. PayPal stated that Venmo users can purchase PYUSD and send it to friends and family who use PayPal, Venmo, and compatible external wallets. Individuals with compatible external wallets and merchants accepting PYUSD payments can also receive transfers from Venmo users, with applicable blockchain network fees.

“We remain fully committed to the mission behind PYUSD: deploying a safe, regulated stablecoin at scale both for the web3 ecosystem and for everyday payments“ PayPal stated in a press release. Patrick McHenry, Chairman of the U.S. House Financial Services Committee, also believes that stablecoins like PayPal’s PYUSD “hold promise as a pillar of our 21st-century payments system“.

What is PYUSD?

PYUSD is a stablecoin, a type of digital currency typically issued based on certain conditions or mechanisms that peg the value of the stablecoin to specific assets or asset classes outside the stablecoin, such as fiat currencies (like the US dollar), gold, or other cryptocurrencies. Its price performance is generally more stable than highly volatile cryptocurrencies because it is based on the price of the underlying asset. Stablecoins are also more suitable for everyday transactions due to their consistency.

PYUSD is pegged to the US dollar and backed by US dollar deposits and short-term U.S. Treasury bonds. It is an Ethereum ERC-20 token issued by Paxos Trust, designed for digital payments and Web3.

In addition to being exchangeable for US dollars, PYUSD can also be exchanged for other cryptocurrencies on the PayPal network, such as Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC).

This connection provides PYUSD with relatively stable value, benefiting merchants and consumers: they can enjoy the benefits of digital currency transactions, such as fast transfers and reduced transaction fees, without the significant fluctuations that often occur with other cryptocurrencies. Similar to common stablecoins like USDT and USDC, PYUSD is a cryptocurrency anchored to the price of the U.S. dollar. 1 PYUSD holds the value equivalent to 1 US dollar and fluctuates with the price of the US dollar.

How PYUSD Works and Asset Reserve Status

According to Paxos’ recently released transparency report, the total supply of PYUSD is currently 44 million tokens, with 90% still held in Paxos wallet addresses, while exchanges hold about 7%.

It is worth noting that the primary reserve asset of PYUSD is not solely fiat US dollars, but rather, 43 million is involved in reverse repurchase agreements (RRP) with financial institutions. Holders can request the seller to repurchase at a specified price at a specific time, ensuring funds can be accessed anytime and maintaining the liquidity of PYUSD, while avoiding a liquidity crisis caused by large-scale withdrawals. Paxos also states that this agreement effectively protects the stability mechanism of PYUSD.

Furthermore, its reserve assets are overcollateralized with 20-year US Treasury bonds, which can be liquidated to ensure the safety of funds in case of counterparty default.

In the event of a major crisis involving PYUSD, such as the decoupling incidents that occurred with USDT or USDC, Paxos will sell the US Treasury bonds pledged as part of the reverse repurchase agreement to protect the value of PYUSD and provide users with the ability to redeem 100%. Currently, 97% of PYUSD’s reserve assets consist of U.S. Treasuries to generate interest income, and Paxos only holds $15 million as emergency liquidity. At present, the scale of PYUSD is still in its early stages, so there is no significant risk in the near term.

PayPal’s PYUSD: Advantages and Challenges

Advantages

Large Existing User Base

PayPal has 430 million active users worldwide, with nearly 650,000 merchants using its services. It also supports multiple payment channels such as Braintree, Venmo, Xoom, Hyperwallet, Paidy, PayPal Credit, PayPal Zettle, and PayPal Honey. With an annual transaction volume of nearly 20 billion and a transaction value exceeding $1.3 trillion, PayPal has a significant user base and transaction volume.

By launching PYUSD on the Ethereum network, PayPal can tap into Ethereum’s large user base. With Ethereum’s current daily active users reaching around 340,000, even if only 1% of users and funds flow into PYUSD, it can generate significant incremental effects.

Mayur Yeole, an analyst at JPMorgan, also believes that PayPal’s entry into the stablecoin business will strengthen both traditional and decentralized financial payment networks, creating a synergistic effect.

Filling the Gap Caused by Regulated BUSD

BUSD, a stablecoin launched by Binance with a market capitalization that once reached $20 billion, was forced to suspend issuance by U.S. regulatory agencies in February of this year. This created a significant impact on the market and resulted in a $20 billion funding gap.

The launch of PYUSD can fill this market gap and potentially attract DeFi projects originally on the Binance Smart Chain.

Challenges

Ethereum Network Fees and Scalability Issues

Mark Heynen, VP of Business Development at the Stellar Development Foundation, stated that while Ethereum is a popular blockchain network, it was not fundamentally built for payments. Although internal transfers incur no fees, withdrawing tokens to other wallets or exchanges might require higher Gas Fees. Therefore, cost and scalability could ultimately hinder PayPal’s mainstream payment adoption.

Lack of Decentralization

PayPal is a globally recognized brand, and the launch of a stablecoin has the potential to gain more trust from users. However, some critics believe that PYUSD possesses centralized management characteristics. @0xCygaar, a software engineer who often discusses cryptocurrencies, stated that the PayPal stablecoin contract is written in a very old version of Solidity. Furthermore, it allows the contract owner to pause all transfers, freeze addresses, and arbitrarily increase the total supply. Additionally, regulatory preferences for regulated stablecoins may reduce the market share of decentralized stablecoins, posing a threat to the decentralized principles that support the cryptocurrency space.

Closed Payment Ecosystem

Currently, PayPal has launched PYUSD on its mobile payment platform, Venmo, in the U.S. However, Venmo is only available in the U.S. and requires users to link a local bank account. This model primarily serves individuals with U.S. bank accounts, offering them a new method of conducting transactions using a currency similar to the dollar.

If PayPal wants PYUSD to gain market share faster, it needs to encourage users to use PYUSD outside of its own ecosystem.

Can PYUSD Disrupt the Market Dominance of USDT and USDC?

Currently, the total supply of stablecoins worldwide amounts to $126 billion, with Tether’s USDT ($86.5 billion) leading the market followed by Circle’s USD Coin (USDC, $26 billion), along with others.

Source: The Block

According to Paolo Ardoino, CTO of Tether, in an interview with The Block, PYUSD will not impact Tether since it is currently only available in the U.S., and Tether does not serve U.S. customers. He also implied that with various players in the U.S. market, Tether will focus on operating in emerging markets and developing countries.

Jeremy Allaire, CEO of Circle, also mentioned in a tweet that in addition to targeting the U.S. market, USDC has high adoption rates in other global markets. He tweeted “We estimate that 70% of USDC adoption is non-US, and some of the fastest growing areas are emerging and developing markets. Strong progress happening across Asia, LATAM, and Africa. Demand for safe, transparent digital dollars is strong.”

Both giants, rather than worrying about competition, have an optimistic attitude towards traditional finance entering the stablecoin market. Ardoino believes that if PYUSD enters international markets in the future, it will have a positive impact on the entire cryptocurrency industry. Allaire also expressed his happiness about heavyweight internet and payment companies entering the stablecoin field, saying “This is what happens when we start to get regulatory clarity.”

Conclusion

“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,“ said Dan Schulman, president and CEO of PayPal. “Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.”

According to Mark Connors, a research executive at digital asset custodian 3iQ, as reported by Decrypt, the launch of a stablecoin by PayPal may prompt regulatory agencies to take action, which is undoubtedly helpful for the development of cryptocurrencies. Antonio Juliano, CEO of decentralized derivatives exchange dYdX, also shares a similar view, stating that “competition breeds better products”. He believes that this will provide people with more stablecoin choices from trusted companies, which is overall a good thing.

Although there is still a long way to go for PYUSD to achieve widespread adoption, the fact that a traditional financial giant is officially entering the world of digital currency may be a starting point for the future of finance.