PayPal’s Crypto Future, Explained: The American CBDC?

On August 7th, PayPal announced their most forward-thinking and crypto-positive product yet: the PYUSD stablecoin. Their new Ethereum-based token will be available both on their website and app, as well as transferrable by anyone with an Ethereum address. This release is the first time a major financial or technology company has directly joined the blockchain space by releasing a token and using a public blockchain. Let’s explore PYUSD and what it could mean for the future of blockchain.

PayPal initially demonstrated interest in and acceptance of cryptocurrencies in 2020 when they introduced a cryptocurrency exchange supporting Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. In 2021, they introduced a “Checkout with Crypto” feature to use their customer’s holdings. However, both of these solutions never saw massive adoption and did not represent a significant investment of reputation or time for the fintech company. 

PYUSD, on the other hand, is an incredibly significant development, as it makes PayPal the current leader among major financial institutions adopting public blockchain technology. The token, which is already live on the Ethereum blockchain, is issued by Paxos, a veteran in the stablecoin industry also responsible for Binance’s BUSD and a gold-backed stablecoin called PAXG. Interestingly enough, Paxos was ordered to cease issuance of BUSD after the New York Department of Financial Services cited “several unresolved issues related to Paxos’ oversight of its relationship with Binance.” Given PayPal’s US-based status and long history in the fintech space, this partnership will unlikely see a similar fate. Additionally, the token is 100% backed by US-dollar equivalents, including Treasury Bills and cash deposits, and is redeemable 1:1 for USD. 

The deployed smart contract holds interesting information about the mechanics of the stablecoin, none of which look promising for decentralization. As expected, PayPal will have the authority to freeze account balances or even forcefully remove PYUSD from an Ethereum account, even if it is off the PayPal platform. None of this is surprising, given current regulatory guidelines prohibiting PayPal from not including these features and given that USDC has similar safeguards in place, but it is nonetheless disappointing to see.   The coin is effectively a central bank digital currency, or CBDC, issued by a tech company instead of a government and settled on the Ethereum mainnet instead of a permissioned or private chain. This view is backed up by a remark from Financial Services Committee Chairman Patrick McHenry, who called stablecoins with proper regulation “a pillar of our 21st century payments system.” 

Regardless of its less-than-ideal implementation, PYUSD remains a bullish signal for the future of blockchain and cryptocurrencies. For the first time, consumers can access a financial institution’s token and, if PayPal does not prevent it, use the tokens in DeFi protocols like Uniswap and Aave. The deployment of the token on Ethereum specifically demonstrates that the Ethereum ecosystem is the preferred choice of financial institutions and is incredibly positive news. Every time a transaction with PYUSD occurs, ETH will be used as a transaction fee, so holders and stakers will directly benefit from the token’s adoption. While it would have been nice to see a token deployed on Layer 2 so users could have lower fees and faster finality, there may be future implementations on other chains or layers. Furthermore, this rollout will likely pressure other crypto-curious payment companies and financial institutions, like JP Morgan, Mastercard, and Visa, to roll out competing products on public blockchains. The current status quo is to utilize existing infrastructure instead of creating centralized and prohibitive permissioned blockchains. 

The full release of PYUSD is expected to take place over the coming weeks, at which point anyone with a PayPal account will be able to buy and sell PYUSD with zero fees, withdraw it to an Ethereum account, or use it to pay at any PayPal-integrated website. 

Just four years ago, the announcement of a PayPal stablecoin seemed like a pipe dream. Now, they are laying the groundwork for the United States’ future payment rails on Ethereum with support from government officials. And while it is unfortunate that the token has strict centralized controls, other stablecoin alternatives are permissionless and can never be displaced. Though it may have its ups and downs, the blockchain industry is certainly maturing and coming closer to achieving its promise of a trustless global settlement layer.

By Lincoln Murr

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