Unlike a bitcoin ETF — which locks people even further into a reliance on Wall Street — PYUSD could actually onboard those next millions into crypto
This article was initially published on Blockworks
The launch of PayPal’s stablecoin — PYUSD — is the biggest crypto news in 2023, more significant than news about any future bitcoin ETF approval.
PayPal has always been an early crypto adopter relative to their banking and fintech peer group. In September 2020, they helped initiate the bull cycle by being the first large fintech to allow their millions of users to buy crypto.
PayPal’s entry into crypto helped legitimize it as an asset class and changed the agenda of board meetings globally — directors started asking CEOs “what is your crypto strategy?” and companies rushed to develop slide decks, partnerships and a broad suite of products: The impact could be felt globally from Mexico to Brazil and beyond.
Chad Cascarilla, the CEO of Paxos, summarized the industry sentiment well — “Before they were afraid to be first, now they’re afraid to be left behind.”
PYUSD is a similar watershed moment for the industry, coming at a critical time when stablecoin volume outstanding is increasingly moving to offshore options such as USDT.
PayPal entering the crypto space adds legitimacy to stablecoins and paves the way for additional companies to incorporate regulated stablecoins into their platforms or launch their own.
Back to the headline — why is this bigger news than the bitcoin ETF?
Through PYUSD, PayPal is on a journey to onboard millions of people to crypto and public blockchains, while a bitcoin ETF would instead ultimately lock users into the traditional financial system. PYUSD can be sent to public Ethereum addresses 24/7/365, as opposed to ETF products that would trade only during market hours.
To be clear, the bitcoin ETF is a great milestone for our industry. But it ultimately comes with the same legacy challenges of a closed system — consumers still need accounts issued by intermediaries to access the ETF and need to pay recurring fees to hold the asset. A bitcoin ETF would enable a greater swath of the traditional financial system to gain price exposure to bitcoin, but it still does not help make public blockchains universally useful or accessible.
PYUSD, however, increases both utility and accessibility, enabling anyone globally (across borders) to permissionlessly access and use trusted US dollars in legacy and novel financial products. It also further legitimizes public blockchains as reliable platforms for value exchange and innovation.
Why would Paypal launch a stablecoin?
The first reason for PayPal to launch a stablecoin is to capture payments that would otherwise be completed through other channels.
A major challenge of closed loop payment systems is that they require both sender and receiver to have accounts. PYUSD, however, enables an open loop system — it’s possible to use this stablecoin without even having a PayPal account at all.
Said differently, the advent of a PayPal stablecoin makes a user’s PayPal balance more universally useful.
If a consumer wants to pay with PayPal but the merchant doesn’t have a PayPal account, the merchant can simply provide a blockchain address and the PayPal app could issue a PYUSD withdrawal to immediately settle the transaction. Without an open system, the transaction would have been completed through a different payment channel or not completed at all.
Second, PayPal is uniquely positioned to solve the massive opportunity of fiat onboarding — they have the banking relationships, regulatory framework and infrastructure to onboard millions of dollars to millions of wallets.
Seamless fiat on/off boarding is still a largely unsolved but important unlock for the crypto ecosystem, and a key opportunity for brands like PayPal to build recurring relationships with customers. And critically, by both being a fiat on-ramp and a stablecoin issuer, PayPal can maintain a customer relationship after onramping the dollar into PYUSD, unlike other onramps where value is derived during the transaction alone.
Thirdly, I expect that PayPal’s stablecoin could dramatically reduce costs for their global settlement operations.
PayPal makes it easy for someone like me to checkout at a small merchant on a trip to Colombia, but the merchant is charged high fees (up to 4%) to help PayPal cover the settlement costs from USD to local currency and fund the banking operations. However, if PayPal can settle the transaction in USD instead of needing to convert to local currency, they can dramatically reduce their cost basis while still providing currency conversion services upon request, perhaps even through on-chain software instead of banks.
Lastly — and importantly — stablecoins are good businesses, especially in high interest rate environments. Tether alone made $800+ million last quarter from stablecoin issuance. Even if PayPal can capture $500+ million from interest payments, not including the other revenue streams stablecoins unlock, they could increase their net income by almost 50% and provide recurring, low-risk free cash flow.
Where PayPal goes from here
Either at launch or soon after, PayPal will likely focus on PYUSD withdrawals to private wallets, merchant payments and issuance on additional blockchains to build more reasons for users to hold and use PYUSD.
I also expect their entry will formally kick off the stablecoin wars, driving many positive narratives and launches for crypto over the next six months.
While other known stablecoin issuers are facing declining volumes or regulatory headwinds, PayPal is well positioned to expand stablecoin adoption through its advantages: A trusted brand, a strong regulatory stack and a large e-commerce network.
Disclaimer: I was previously a Product Lead at Paxos from 2020-2022 and worked directly with the PayPal team. I’m now a Partner at 6th Man Ventures and have no working affiliation with PayPal or Paxos but do own Paxos equity. My views are my own.