Will PayPal Play by Crypto’s Rules?

PayPal has launched a stablecoin on the Ethereum blockchain. What could be its impact – and why does the giant payment provider do it? – by Christoph Bergmann

The PayPal USD (PYUSD) is a stablecoin that runs as an ERC20 token on the Ethereum blockchain. It is 100 per cent backed by dollars, short-term US government bonds and other cash-like assets and can be redeemed 1:1 for dollars. Its issuer is Paxos, a fully regulated New York-based company best known for the stablecoin BUSD, which was closely linked to the exchange Binance. Because of this, Paxos was sued by the SEC.

PayPal is successively bringing the PYUSD into the wallets of US customers. They can send it to other PayPal customers, but also to external wallets, pay with it online and exchange it for any other cryptocurrency that PayPal supports. So you can do the same thing with the PYUSD as with conventional dollars.

This raises the question: Why? What is the point of the PYUSD in a crypto ecosystem already overflowing with thousands of coins and tokens?

PayPal claims that its stablecoin reduces friction and allows quick money transfers to friends and family. But from the customer’s point of view, none of this goes beyond what dollars in the account can already do today. PayPal’s official press release also states that the PayPal dollar “will be available to an already large and growing community of external developers, wallets and Web3 applications, and can be easily integrated by exchanges.”

This brings us closer to an answer, although a confusing one: the stablecoin is more interoperable than dollars in the bank. It can be transferred to other wallets, exchanges and decentralised apps (Dapps) in no time. But what does PayPal get out of it?

Usually, it is the company’s policy to form as closed an ecosystem as possible. However, already with its integration of Bitcoin, PayPal opened up as it allows Bitcoins to be sent to external wallets as well. With the stablecoin, it is apparently taking this approach further. So is PayPal acting from a defensive position? Is crypto forcing it to tear down its own walls, not with enthusiasm, but out of insight into what is necessary?

We find a further explanation in the official release. It states that most of the current stablecoin volume is in a Web3-specific environment and that PYUSD will be compatible with it from day one. This is where PayPal’s announcement gets important.

PayPal would probably not be claiming this if the PYUSD did not work with most Web3 apps. To do this, it has to work like a traditional ERC token, without whitelists or other backdoors that would make integration into an open ecosystem of dapps difficult or impossible. So the PYUSD seems to act like other stablecoins – with the one attractive difference that you can pay with it in pretty much every online shop in the world.

In a way, PayPal is dwarfing itself with the PYUSD to become one Web3 wallet among many. To be precise: one of the worst Web3 wallets out there. It allows no export and import of keys, no connection to Web3 apps, no rollups and sidechains, no free choice of tokens.

So if you want to do something with the PYUSD that the dollar in your PayPal account can’t do, you first have to transfer it to an external wallet, like Metamask, Defiant, Enkrypto etc. These wallets will benefit from the PYUSD due to its wide acceptance.

Why would PayPal do this? It seems a bit too altruistic to be true: PayPal is giving the Web3 ecosystem a strong stablecoin – but one that shows its own customers how inadequate the PayPal wallet really is.

PayPal’s CEO Dan Schulman

At this point, two explanations are possible. One explanation is that PayPal just mimics Tether’s business model: a stablecoin is highly profitable when backed by government bonds and other interest-bearing assets. This means that PayPal also profits when people use the stablecoin with other wallets. The stablecoin’s business model rewards those who open up to the outside world. It encourages cooperation instead of selfishness.

But even more interesting is another explanation: PayPal might plan to become a full-fledged Web3 wallet itself. In other words, a wallet that can be connected to dapps, that recognises any token and allows the export of keys. There is probably still a long way to go, but I could not imagine a better prospect for bringing decentralised finance into the mainstream than the PayPal dollar. It could become the decisive lever.

Whatever PayPal’s specific goals maybe: The launch of a stablecoin on Ethereum shows clearly that PayPal is willing to submit to the rules of crypto in order to continue being a significant player in the future.

Amendment by the editor: I learned that the PYUSD’s smart contract contains a feature called the assetProtectionRole. It can freeze and unfreeze the PYUSD balance of any address on chain, as well as wiping the balance of an address after it is frozen to allow the appropriate authorities to seize the backing assets. It seems that our guest author Christoph Bergmann was not aware of this, otherwise his article would probably be less enthusiastic. If PayPal keeps this feature, it would make their stablecoin an absolute no-go.

Christoph Bergmann runs Bitcoinblog.de, Germany’s leading publication on cryptocurrencies. This article was originally published there in German and translated and edited by Aaron Koenig.