What does PayPal's stablecoin mean for the crypto market?
In August, PayPal marked a significant moment in the crypto landscape by introducing its stablecoin, PYUSD, for use by customers and merchants. PayPal’s crypto journey dates back to 2013, voicing interest during Bitcoin’s rise. However, it wasn’t until October 2020 that PayPal allowed cryptocurrencies to be held, bought, and sold in the US, with the UK following suit in 2021. On August 7, 2023, PayPal achieved another milestone by becoming the first major US financial company to launch its stablecoin, PYUSD, pegged to the US dollar.
What is a stablecoin?
A stablecoin is a cryptocurrency that is designed to have a stable value, usually pegged to a fiat currency such as the US dollar or the euro. In the case of PayPal, it is pegged to the US dollar. Having a coin pegged to the dollar allows it to be less volatile than other cryptocurrencies, such as Bitcoin or Ethereum where the price can move around quite regularly.
There are two main types of stablecoins:
- Fiat-backed stablecoin: backed by real-world currencies in a 1:1 ratio.
- Commodity-backed stablecoin: backed by commodities such as gold, metals or real estate to provide stability.
What are they used for?
- Payments
- Speculation
- Investment
Is PayPal’s PYUSD the beginning of history for major financial players and crypto? And what might this look like in the cryptocurrency market?
Greater acceptance of cryptocurrency by merchants
In a positive development, PayPal’s new stablecoin could benefit the wider adoption of cryptocurrencies by merchants. These are any type of business that accepts PayPal payments in exchange for goods and services. Currently, there are many big players in the online retail world who accept PayPal for payment, such as Amazon and eBay, brick-and-mortar stores like Starbucks, and even non-profit organisations such as the Red Cross and World Wildlife Fund.
Merchants could benefit from:
- Accept payments from PayPal users all over the world
- Process payments quickly and easily
- Protect themselves from fraud
- Get paid faster
Increased adoption of cryptocurrency
Worldwide, there are currently 426 million active PayPal accounts. In July 2022, PayPal dominated the online payment processing software with a 41% market share. These numbers put emphasis on the power that PayPal holds in the market where the new stablecoin could spark interest in millions of customers, bringing a wave of crypto adoption.
Considering just one of PayPal’s affiliated merchants, Amazon, has a count of worldwide users on the platform that exceeds 310 million. Although it is unclear how many Amazon customers use PayPal, the figures underscore the immense outreach potential of PYUSD and PayPal’s other crypto services. Consequently, its potential to significantly influence the mainstream acceptance of cryptocurrencies becomes abundantly evident.
Increased liquidity in cryptocurrency markets
PayPal’s stablecoin may be attractive to investors because it is less volatile than other coins in the crypto market due to being pegged by the US dollar. This could impact the market in two ways, increasing investor confidence and capitalising on PayPal’s substantial user base of 426 million. The large user network could supply a substantial amount of PYUSD available for trading, paving the way for a significant increase in liquidity within the cryptocurrency market.
Furthermore, the stabilisation of PYUSD’s volatility could be intrinsically linked to its amount of liquidity. A multitude of large traditional financial institutions, although names have not been disclosed, say they are interested in using the firm's stablecoin. This shows the demand for the stablecoin already and as a result provides more sellers that are available to meet the demand for the coin. This will mean the price will not fluctuate as much, maintaining low volatility.
PayPal's robust platform not only facilitates seamless transactions involving PYUSD but also extends its usability to a variety of cryptocurrencies such as Ethereum, Litecoin, Bitcoin, and Bitcoin Cash. This integration, designed for simplicity, has the potential to amplify investor confidence and consequently foster heightened liquidity.
Moreover, the platform's user-friendly nature helps reduce barriers for investors, streamlining the trading process across the cryptocurrency landscape. By providing a straightforward approach to comprehending crypto trading, this initiative could alleviate friction within the market, rendering trading operations more accessible. PayPal also makes it easy for anyone to turn their cryptocurrencies into regular money. This inclusive approach welcomes more types of investors, which in turn adds more activity and trading to the cryptocurrency market, making it more liquid.
Increased need for regulation of cryptocurrency
Undoubtedly, blockchain and cryptocurrencies remain groundbreaking emerging technologies. Drawing a comparison between the development of traditional banking which took decades to regulate and online banking only emerged in the 1990s, it's hard to ignore the remarkable progress in cryptocurrency regulation since the birth of Bitcoin in 2009.
The Bank of England’s regulatory entities ensure the stability and resilience of the UK's banking system, a similar role to that of the US, overseen by the Securities and Exchange Commission. Notably, understanding the importance of regulation to support stability and protection becomes crucial as significant institutions express growing enthusiasm for and interest in the realm of cryptocurrency, seeking participation.
Addressing these concerns, Coincover’s CEO and Co-Founder, David Janczewski, talks about the effects of crypto hacking around the launch of PayPal’s stablecoin. He discusses how it shows regulation surrounding crypto and the protection of people’s digital assets is an issue that needs to be addressed.
“The recent reports of scammers exploiting the excitement surrounding PayPal’s stablecoin launch to create counterfeit PayPal USD tokens on various blockchains are, unfortunately, not surprising.
Scammers are extremely opportunistic and are constantly looking for creative new ways to steal money. These reports only further highlight the urgent need for greater vigilance and comprehensive measures to safeguard both institutions entering the crypto space and the prospective investors they serve.
Hacks and scams like this can cause serious reputational damage for firms and see customers withdrawing funds, which happened to Curve Finance just last week. However, they also cast a shadow over the entire crypto industry and reduce confidence in the industry. Regulatory policy meetings are already taking place to maintain a sustainable future for cryptocurrencies, but we need to ensure the outcome of these meetings results in a well-defined set of regulations to introduce protections, such as protection and governance standards that phase out malicious activity.
However, institutions looking to venture into the dynamic world of cryptocurrencies can take measures to protect themselves against instances of digital theft by implementing preventative technology that actively protects against abnormal transactions, which can significantly mitigate the risks associated with fraud, hacking, and theft, thus reducing the risk of their ventures into crypto.”
Overall, the emergence of PayPal’s stablecoin is largely positive. However, whilst this will grow the appetite for participation in crypto and may bridge the gap for investors who desire more stability, the protection of assets remains a core concern. Get in touch with the Coincover team to learn more about our blockchain protection solutions.