Author: Samuel McCulloch, Flywheel DeFi; translation: Jinse Finance xiaozou

On the morning of August 7, 2023, payment giant Paypal announced the launch of its stablecoin Paypal USD (PYUSD). The stablecoin will be used to connect PayPal's existing user base of 431 million and finally unabashedly demonstrate their commitment to the on-chain world.

**1. What is PYUSD? **

Paypal’s PYUSD is the first stablecoin issued by a major “non-crypto” company. This represents a marked shift in general corporate attitudes towards stablecoins and a future that is about to be embraced by policy.

PayPal’s stablecoin, PYUSD, is fully backed by U.S. dollar deposits (such as short-term U.S. Treasury bills) and equivalent assets. PYUSD is managed by the Paxos Trust Company and can be exchanged 1:1 for USD via PayPal or the Venmo app.

According to the description in the Paypal press release:

PayPal customers purchasing PayPal USD will be able to:

Transfer PayPal USD between PayPal and compatible external wallets.

Use PYUSD for in-person payments.

Use PayPal USD to purchase funds by selecting at checkout.

Convert between any PayPal supported cryptocurrency and PayPal USD.

2. Why the issuance of PYUSD will promote the adoption of cryptocurrency

Until now, the only way to get paid stablecoins was through crypto companies like Tether, Coinbase or Gemini. Now, with the entry of PayPal, millions of people are gaining access to one of the most widely used payment platforms in the world as a gateway into the crypto world.

Austin Campbell, former Paxos portfolio director and Zero Knowledge Consulting partner, said on Leviathan News: "One of the least developed parts of the crypto ecosystem is the actual deposit and withdrawal channels. From this perspective, it is very difficult to want to surpass PayPal." Difficult. In fact, I think the biggest innovation is adding a native stablecoin to the PayPal platform.”

Campbell further stated that he had been working on the product for two and a half years before it was released. Rumors about the development of PayPal's stable currency were reported as early as 2021, when Jose Fernandez da Ponte, PayPal's vice president and general manager of blockchain, encryption and digital currency, told the media: "It's still too early." As more and more rumors appeared in the media of one kind or another, Paypal's plan was further confirmed, but in February this year, the payment company announced that the stablecoin product plan had been put on hold while Paxos was under investigation by the New York Department of Financial Services. . Six months later, the company clearly felt the regulatory environment had stabilized enough that it was time to launch their stablecoin.

PayPal chose Paxos to manage and issue their stablecoin, which means the stablecoin will be fully reserved, have separate funds, and have transparent monthly reporting. Additionally, their stablecoins will be monitored by on-chain analytics firms such as Chainalysis and TRM to monitor for illicit use. PayPal will be able to freeze funds from criminal activity.

Paxos has drawn the ire of regulators over its relationship with Binance, after a long string of alleged breaches culminated in an order from the New York Department of Financial Services to halt BUSD mining and a Wells Notice from the SEC. notify). The NYDFS said the order was "the result of several outstanding issues related to Paxos' oversight of its relationship with Binance."

"Effective February 21, Paxos will cease issuing new BUSD tokens at the direction of, and in close coordination with, the New York Department of Financial Services," Paxos said in a statement. Ann’s partnership on the BUSD stablecoin.”

"The market has changed, and the relationship with Binance is no longer in line with our current strategic focus." Paxos CEO Charles Cascarilla said.

Binance’s relationship with Paxos allows them to mint BUSD directly from their exchange and port it to any blockchain of their choice.

“We do not authorize Binance-Peg BUSD on any blockchain, nor is Binance-Peg BUSD issued by Paxos,” NYDFS said.

Now that PayPal is working with Paxos, it must show that the investigation is over and that the embattled issuer is now free to operate after intense regulatory scrutiny.

3、PayPal vs Meta

While this is fresh news, the reaction to it was markedly different from the failed Diem stablecoin developed by Meta. When the social networking company first announced its intention to enter the crypto market in 2021, it was slammed by politicians, economists and activists of both parties.

At the time, Facebook was still reeling from the Cambridge Analytica scandal that had been a flashpoint in the 2020 election. The company has yet to restore its image, so the reaction to the Diem news has been vehement.

Senator Elizabeth Warren expressed her strongest opposition to Facebook's plans to launch a cryptocurrency and digital wallet. In addition, she, Senators Brian Schatz (D), Sherrod Brown (D), and others wrote in a letter: "Facebook is again intensively pursuing digital currency plans and has launched a payment infrastructure network pilot, but these The plan is incompatible with the actual financial regulatory environment — not just for Diem, but for stablecoins in general.”

According to Campbell, Facebook faces a two-fold problem.

First, unlike PayPal, Diem is an entirely new line of business for the company. Facebook is a social network used by more than 2 billion people around the world. It also owns the Whatsapp and Instagram brands. If you add payment services, Facebook will completely transform into a giant quasi-bank that can quickly provide services to all users overnight. Lawmakers and regulators worry that Facebook will use the collected user data to further abuse its already considerable power.

The social giant doesn't just have access to data like your friend list, likes, posts, direct messages, and geolocation. The addition of Diem could also give every Facebook user unprecedented access to personal finances. For a company whose image has been shattered by scandal, Diem simply took too long.

Diem’s second problem is that the protocol is not just a dollar stablecoin, it also envisions an SDR-like currency backed by a variety of foreign currency pairs including the euro, yen, Australian dollar and Swiss franc. Economists were literally stunned by the proposal. In their view, the global use of a basket of currencies would weaken the ability of central banks to conduct domestic monetary transmission. If their citizens have easy access to volatility-suppressed stablecoins anywhere in the world, what poor fool would buy the worthless bonds they issue?

Diem has never been able to get out of regulatory hell. PayPal is shining brightly.

4. Interest rate dominates everything around us

In 2023, every large fintech company will be a quasi-bank, and a significant portion of its revenue will come from net interest income. Coinbase, Robinhood, and many others have reaped huge profits from rising interest rates.

The prospect of adding a stablecoin to their offering is tantalizing, as such a design would resemble a zero-interest coupon-free bond. Stablecoin issuers issue tokens but get to keep all the proceeds they get from short-term treasury bills. In a perfectly rational world, in an unfettered competitive market, no one would hold stablecoins or cash for it. What is the benefit of owning an asset that does not generate interest income? The short answer is, nothing.

But we live in a world of enormous regulatory hurdles, sanctions, swap restrictions, domestic capital controls, and securities laws. For some, simply being able to access dollars is enough. Until recently, in the cryptocurrency space, the need for leverage far outstripped the need for yield on imported government bonds. As short-term yields reach above 5% and show no signs of cooling, a new pattern emerges.

Look at Tether again...

Tether is on track to generate $4 billion in net interest income this year. That's more than Blackrock's expected earnings this year. It's all about issuing dollar-denominated bonds. It's clear that every fintech + bank should issue their own stablecoin, it's "free" money for them.

In theory, PayPal should be able to win against Tether or even Circle with its larger user base and wider global on-market footprint. In our interview with Campbell, he believes that the market cap of PYUSD could rise to $500 billion in 5-10 years. At that size, PayPal would be one of the world's largest holders of U.S. Treasury bonds, generating more than $25 billion in gross annual interest income.

**5. Will PayPal join the Curve war? **

The short answer is, no. A more detailed answer is that it will depend on the jurisdiction.

In the U.S. and Europe, returning interest income to the populace is severely limited, or banned entirely. If Paypal starts trading CRV off-market from Michael to bribe their pool, then Gary G will knock on PayPal's door himself. In poor European countries, new issuers of stablecoins under the MiCA (Electronic Money Token or EMT) will be prohibited from paying interest in order to “reduce the risk of electronic money tokens being used as stores of value.” When seigniorage collected by the government ceases to be a functional conduit, the associated economics break down. We discussed this with Omid Malekan on our recent podcast, that governments are not ready for the national debt to be the real means of payment in the world.

Beyond those two continents, competitive markets will drive policies in the Middle East and Asia to attract new companies that do just one job — pass interest on to investors. We’ve already seen this with Zunami Dollar (USZ), a Japan-based stablecoin that deposits its net interest earnings directly into Votium pools to boost Curve’s liquidity. Campbell argued that PayPal could set up a branch in one of these regions, and that they are "pretty global," "but there is no requirement that they have a branch outside the United States."

If Michael's vision comes to fruition, Curve will become a major marketplace for foreign exchange trading. PYUSD is just one of thousands of international stable currencies on the market. Traders will need liquidity, and liquidity on Curve requires bribes. If PYUSD does achieve scale, it wouldn’t be a surprise that PayPal’s subsidiaries outside the US would join the Curve fray.

6. Banks are under threat

Payment stablecoins in their current form pose a threat to the leveraged lending model inherent in the banking industry. After Silicon Valley Bank collapsed, depositors were forced to reassess the business models that underpinned their deposits. If a company like PayPal offers a stablecoin that can be used in DeFi, then besides FDIC insurance and a series of regulations, there is no reason to keep funds in the bank.

When I exchange my USD for PYUSD, I can check on a monthly basis the exact amount of all investments and positions backing my stablecoin. Paxos only holds cash and short-term Treasury bills. They don't have the long-term bond exposure that caused Silicon Valley banks to fail.

"If I wanted to use a debit card, I'd also like to do a real estate business loan. People don't usually think about it that way, but when you put money in the bank, they do. They lend it out."

With the U.S. Securities and Exchange Commission (SEC) and Elizabeth Warren doing all they can to stymie bank growth, JPMorgan will be the last institution to receive regulatory approval to issue a stablecoin. Bank deposits are under threat as more and more small savers move their deposits out of banks and into DeFi.

If fintech companies are allowed to operate the way they currently do, structural reforms will be urgent. "Overall, if this pattern continues, I want to be clear, I think the banks are going to have an existential question of what is our funding model like? What is the real price of borrowing? How should we Construct? Because as we found out in 2008, we may be too biased towards lending at any cost, probably by forcing all deposits into the system to be lent in risky ways, whether people want to or not.”

7. Stable currency season is coming

PayPal's entry into the market is just the beginning. More major payments and credit companies such as Visa, Mastercard and Square are reportedly exploring adding stablecoins to their product lines. The PYUSD release announcement will give the green light to competing launches and will speed up development timelines. PayPal has pioneered the service, but its rivals will be watching the market and Washington's reaction closely.

If there is no major opposition, PayPal's stablecoins will also grow, and they will enter the market quickly, marking a new monetary regime. Congress has yet to pass a unified stablecoin bill, a moment that could be the catalyst that forces Washington to end the long-awaited stalemate over a stablecoin bill. Once a clear regulatory system is established, the "Spring of Thousands of Stablecoins" will start, which will unlock the efficiency of off-chain capital around the world, and at the same time, a large amount of liquidity will flood on-chain.