Basics
PayPal's recent entry into the stablecoin market with PYUSD has generated both excitement and debate within the cryptocurrency community. As a significant player in online payments, PayPal's venture into stablecoins indicates a noteworthy change in the digital finance landscape. Let's explore the implications and reactions to PYUSD's introduction.
What Is PayPal USD (PYUSD)?
PayPal USD is a stablecoin introduced by the payment giant PayPal, issued by the infrastructure company Paxos, which operates under the supervision of the New York State Department of Financial Services (NYDFS).
Backed 1:1 by the US dollar, PYUSD is built on the Ethereum blockchain, adhering to the ERC-20 standard. The smart contract for this coin includes features that allow for freezing and erasing balances. PayPal USD is fully backed by a combination of U.S. dollar deposits, short-term treasury bills, and similar cash equivalents, according to a release from PayPal.
In February 2023, development of the stablecoin was temporarily halted following news of an NYDFS investigation into Paxos, the issuer of BUSD and USDP. Subsequently, Paxos reported engaging in a constructive dialogue with the U.S. Securities and Exchange Commission (SEC), which had issued a warning of potential legal action.
The Need for PayPal's Stablecoin
PayPal, a leading centralized platform for online transactions, reported that it holds approximately $1 billion in cryptocurrency for its customers, with over 350 million active users globally. Rumors about PayPal's intention to launch a stablecoin began circulating in May 2021, six months after it allowed customers access to cryptocurrencies. By April 2021, PayPal had integrated support for Bitcoin, Ethereum, Litecoin, and Bitcoin Cash into its mobile payment service, Venmo.
The company believes that PYUSD will simplify transfers and international payments while promoting the adoption of digital assets. According to their release, "PayPal USD is designed for digital payments and Web3, and is compatible with the most widely used exchanges, wallets, and applications." Customers can:
- Transfer PYUSD within the service and to external wallets;
- Send payments to individuals;
- Make purchases;
- Convert to any supported cryptocurrency.
CEO Dan Schulman emphasized, "The shift to digital currencies requires a stable instrument that is both digital and easily connected to fiat currency like the US dollar."
Bank of America experts believe that PayPal USD will enhance payment efficiency and customer service. However, they are skeptical about its long-term prospects, anticipating competition from central bank digital currencies and income-generating stablecoins. They also highlight regulatory risks, especially if non-bank entities are restricted from issuing stablecoins.
Where Can I Purchase PYUSD?
HTX (formerly Huobi) was among the first to announce the listing of PYUSD shortly after its launch, followed by Coinbase, the largest American cryptocurrency company. PYUSD is also available for trading on Kraken, BingX, Gate.io, Crypto.com, and the decentralized exchange Uniswap.
According to data from CoinGecko, analysts from Nansen have observed low demand for the stablecoin. Their report indicates that over 90% of the total PYUSD issuance is held by its issuer, Paxos. Only 7% of the coin's supply is held in user wallets connected to Kraken, Gate.io, and Crypto.com.
"Users show little demand for PYUSD when other alternatives exist," noted experts.
Regulatory Response to PayPal's Stablecoin
The launch of PYUSD by PayPal drew mixed reactions from American lawmakers, with calls for regulatory oversight of the stablecoin segment. Maxine Waters, a U.S. House representative, expressed "deep concern" over the launch of PYUSD, citing the absence of a regulatory framework for such assets. She emphasized the need for federal oversight and compliance to ensure consumer protection and mitigate risks to financial stability.
Patrick McHenry, Chairman of the House Financial Services Committee, also highlighted the necessity of enacting legislation regarding stablecoins. He stated, "This announcement signals that, if issued under a clear regulatory framework, stablecoins have the potential to underpin our 21st-century payment system."
Cryptocommunity's Perspective on PayPal's Stablecoin
The launch of PYUSD by PayPal has stirred varied responses within the crypto community. Joe Burnett, the chief analyst at Blockware Solutions, criticized supporters of PYUSD, stating that they are overlooking the innovative aspect of storing Bitcoin in cold wallets.
Auditors of smart contracts highlighted potential vulnerabilities in PYUSD's code, particularly concerning freezing and wiping functions, which they deem susceptible to centralization vectors in Solidity contracts. They also noted that PayPal can alter the PYUSD smart contract at any time.
Blockchain engineer Patrick Collins criticized the choice of an outdated version of Solidity for PYUSD's smart contract programming, along with the absence of gas-saving mechanisms during execution. According to Mark Letcuk, head of analytics and research at HAPI Labs, PYUSD's smart contract may be susceptible to known attacks, errors, or vulnerabilities that have already been addressed in subsequent releases.
Some members of the crypto community raised concerns about potentially high transaction costs due to Ethereum's relatively expensive network and the lack of support for second-layer solutions. However, proponents viewed the impact of the new coin positively on the Ethereum blockchain in the context of its broader adoption. Ryan Sean Adams, co-founder of Bankless, envisioned Ethereum as a "money layer of the internet," potentially connecting over 5% of the world's population through PayPal's new stablecoin.
Andrey Velikiy, co-founder of Allbridge.io, acknowledged the potential success of the new stablecoin due to PayPal's backing but cautioned that regulatory scrutiny might hinder trust, particularly if funds could be blocked at the smart contract level.
JPMorgan analyst Nikolaos Panigirtzoglou suggested that PYUSD could benefit Ethereum by increasing the total value locked (TVL) in the ecosystem, thus boosting activity and network utility as a platform for stablecoins/DeFi. He also noted that Ethereum could gain additional advantages by filling the void left by the reduction of $20 billion in the BUSD stablecoin supply from Binance.
Conclusion
Backed 1:1 by the US dollar and built on the Ethereum blockchain, PYUSD offers a stable instrument for digital payments and Web3 applications. While regulatory responses vary and concerns about potential vulnerabilities exist, the launch of PYUSD signals a notable step towards mainstream adoption of digital assets, with implications that extend beyond the cryptocurrency community.