On Monday August 7, PayPal announced that it will launch a US dollar stablecoin, called PYUSD. This step is not surprising, because it is known for quite a while that PayPal is working on its own stablecoin. Still, it is a tremendous step for the whole crypto sector. In this blog post, I will take a close look at the PayPal stablecoin.
First, let’s break down the key components of the stablecoin initiative.
💵 Reserve: PYUSD is redeemable on demand at par and fully backed by US dollars, i.e., US dollar bank deposits, short-term US treasuries and similar cash equivalents. From September onwards, monthly Reserve Reports will be published as well as third-party attestations by independent accounting firms on the reserve assets. This transparent approach is similar to the one of the currently largest stablecoin USDC.
⚖️ Compliance focus: PYUSD seeks to be fully regulated. Currently, the US is developing a regulation on stablecoins, which, however, will take some time to be in place. Here, the EU is – with its Markets-in-crypto-assets (MiCA) regulation – ahead. It will be interesting to see how the SEC reacts to PYUSD. The SEC recently sued various stablecoin providers, as it argues that these stablecoins are unregistered securities and violating existing laws.
🏢 Issuer: PYUSD is issued by New York-based Paxos Trust subject to regulatory oversight by the New York State Department of Financial Services.
🔧Technology: PYUSD is issued as an ERC-20 Token on Ethereum. The great thing about such tokens is that their activities can be publically observed. Here, you see the smart contract that, amonst others, mints the PYUSD. On August 8 at 8 AM CET, PYUSD in the value of approx. 27 Mio. USD have been minted. For details of the functions of the smart contract, see this tweet by Jamiel Sheikh. Amongst others, the smart contract, besides minting, transfering and burning, also allows to freeze an account.
🔥Roll-out: The role-out will take place in the next weeks to eligible US customers.
🔍Functions: What can users do with the stablecoin? First, they can send money to other peers. This is one of the key functions of PayPal today. Second, users can transfer the stablecoin to „compatible“ external wallets. This could, e.g., be interpreted as sending the stablecoin to a hardware wallet, where one stores crypto. Which wallets are considered „compatible“ is currently not clear. Third, PYUSD can be used to fund purchases. Lastly, it can be converted to PayPal US (so to fiat).
👁️🗨️Target groups: The stablecoin will be available for consumers (e.g. to pay), for merchants (e.g. to receive money), and, interestingly, for developers. One could e.g. think about that developers could include PYUSD in their smart contracts and use PYUSD as the form of money for such applications. But also here, details are not clear yet.
💡Why PayPal is doing it: Goals are to reduce frictions for -in-experience payments, facilitate fast transfers, send remittance or conduct international payments, direct flows to developers and creaters, foster expansion into digital assets.
PayPal launching its own stablecoin is a massive step for the industry. PayPal is one of the largest payment company in the world and providing stablecoin payment opportunities to its substantial user and merchant base provides it with a very large network to address. Ultimately, payments are all about networks. It fits in the picture that more and more institutional currently seek to enter the crypto space (e.g. BlackRock filing a Bitcoin ETF application).
In particular, cross-border payments are a very relevant use case. Stablecoin payments could lower transaction costs for cross-border payments and provide (almost) real-time settlement. This is ultimately a great advantage in the context of remittances, where fees are still high today, and provides great value for society.
Still, before evaluting the initiative in every detail, it needs more clarity, e.g., on which external wallets to pay out the stablecoin are „compatible“, how PYUSD will be embedded in the developer communities, which markets will be addressed, and on which use cases PayPal will focus, amongst others.
Further, let’s not forget that the US does not have a stablecoin regulation in place yet, while working on it. The design of this regulation will also heavily impact PYUSD as well as the whole US crypto ecosystem.