In a groundbreaking move, PayPal has solidified its presence in the cryptocurrency market by introducing PayPal USD (PYUSD), a dollar-backed stablecoin. This development marks a significant milestone, making PayPal the first major U.S. financial company to venture into the world of stablecoins.
Stablecoins, as the name suggests, are cryptocurrencies designed to maintain a stable value by being backed by physical assets like gold or fiat currencies such as the U.S. dollar. Unlike traditional cryptocurrencies like Bitcoin, which can exhibit extreme price volatility based on market demand, stablecoins like PYUSD offer a consistent value, with one PYUSD being equivalent to one U.S. dollar and vice versa.
What sets PYUSD apart is its robust backing. PayPal's press release states that it is "100% backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents." This high level of backing ensures that PYUSD remains a reliable and secure digital representation of the U.S. dollar.
Paxos Trust Company, a blockchain-focused financial technology company, is responsible for the issuance of PYUSD. Notably, the New York State Department of Financial Services ordered Paxos to stop releasing Binance's stablecoin, BUSD, in February, underscoring the regulatory scrutiny of stablecoins.
PayPal's foray into the cryptocurrency space isn't new. The company began facilitating Bitcoin and Ethereum transactions last year, allowing users to transfer, send, and receive these cryptocurrencies. However, the introduction of PYUSD takes PayPal's crypto offerings to a new level.
Starting immediately, PayPal USD buyers will have the ability to move their stablecoins to external cryptocurrency wallets, engage in peer-to-peer transactions, make online purchases, and convert their PYUSD into other accepted cryptocurrencies. This flexibility enhances the utility of PYUSD, positioning it as a versatile digital currency.
PayPal's CEO, Dan Schulman, emphasized the importance of having a stable instrument connected to fiat currencies in the digital age. He stated, "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."
Additionally, Omid Malekan, an adjunct professor at Columbia Business School and cryptocurrency expert, suggests that PayPal's stablecoin approach aligns with its business model. PayPal primarily generates revenue by charging merchants for payment processing. Using Ethereum coins for transactions could potentially eliminate these fees, making stablecoins a strategic move for the company.
However, investors should exercise caution when dealing with stablecoins. Despite their name, not all stablecoins are equally reliable. Malekan points to the recent terraUSD (UST) meltdown in May, which cost investors significant losses. Unlike PYUSD, UST relied on algorithms rather than cash reserves to maintain its peg to the U.S. dollar.
Malekan's advice to investors is to acquire stablecoins from reputable and licensed issuers. He warns of the emergence of counterfeit PYUSD coins on decentralized exchanges, emphasizing the importance of conducting due diligence before investing.
PayPal has indicated that PYUSD will be exclusively available through its platform, with no plans to list it on third-party cryptocurrency exchanges. This move ensures that PayPal retains control over its stablecoin and reduces the risk of speculative trading.