PayPal, Bitcoin and the Road Ahead
Today, 21st October 2020, at approximately 12.45pm UK time, the giant payment processor known as PayPal suddenly announced via Reuters that it would “allow customers to buy, sell and hold bitcoin and other virtual currencies using the [..] company’s online wallets.”
Many of us in the industry knew that PayPal had been hanging around the “alternative” digital payments scene for some time, having initially been involved with Facebook’s Libra project when it began back in June 2019. Just four months later PayPal dropped out, along with other key players such as Visa, Mastercard, Stripe, Mercado Pago and eBay, leaving the future of Libra uncertain as I discussed in this article.
Although the exact reason for the PayPal’s decision was never precisely clear, it was quite apparent that the organization was actively exploring avenues involving established cryptocurrencies, especially Bitcoin, from comments made by senior executives and various press articles.
It should be noted that PayPal had not been historically supportive of cryptocurrencies prior to early 2019 and therefore represents yet another organization which has found itself changing its narrative in the face of increasingly positive evidence.
However, there had been nothing specific or concrete from the company in terms of timescale, service offering or whether it would even be doing anything directly with any cryptocurrency.
Initially, US account holders will be able to buy, sell and hold cryptocurrencies in their PayPal wallets as soon as “the coming weeks”. Clearly the service rollout is imminent, but it also implies that this is definitely limited to US customers for the time being.
This may be linked to provisions of the license that PayPal has obtained from the New York State Department of Financial Services which is described as “conditional” and is also linked to their partners in this enterprise, Paxos Trust Company.
However, the release does go to say that “some [other] countries” will be included in the first half 2021, although it is unclear which ones they are likely to be.
Interestingly, the tone of some of the commentary changed a little when the small print was later examined by leading analysts, something that had been omitted in the initial announcement. The pseudo-anonymous trader known as “Plan B”, for example, was less than impressed when he tweeted as follows:
This was prompted by PayPal’s apparent “walled garden” approach whereby it is stated deep in the Q & A’s that all Bitcoin (also Bitcoin Cash, Litecoin and Ethereum) bought on the platform cannot be transferred outside of it. This marks a different approach to most wallets and exchanges where this is always possible.
Technically, this makes PayPal nothing more than a big database of “who owns what bitcoin” on their platform and, at first glance, significantly reduces the impact of the news.
However, he later played down his “nothing burger” comment and, in my view, this was the right call because there is still very significant value to this move. For example, while it may not immediately work in the way we (those us already in the world of Bitcoin) would expect it to, for new and lay users this will still be an excellent first step in learning about and using bitcoin.
I also suspect that, over time, PayPal will improve their service to become closer to a full custodial wallet solution, thereby enabling payments in and out. Not only is it the natural next step, I’d go further and suggest it’ll be considered essential if PayPal ultimately wants to remain relevant as the ecosphere expands.
In the meantime, as many other commentators have pointed out, it’s already possible to buy, sell and hold Bitcoin and other currencies with relative ease using such “user friendly” apps as Square and Robinhood. However, it's the sheer scale of PayPal’s reach that is attracting the headlines. And for good reason.
PayPal currently has 346 million active accounts around the world and processed $222 BILLION in payments in just the second quarter alone, a figure, incidentally that almost exactly matches the entire market cap of Bitcoin.
Well, at least until the announcement anyway.
The words of the CEO
One of the comments made by Dan Schulman, the President and Chief Executive of PayPal, is worth pulling out separately and examining in detail.
“We are working with central banks and thinking of all forms of digital currencies and how PayPal can play a role”
Such a short sentence could be construed to contains many meanings and, depending on your own agenda, you can infer different ones.
For example, does he mention CBDCs (Central Bank Digital Currencies) because he feels he needs to position PayPal as an ally to the banking system it works with and as a nod to the powers that be that granted the license? A form of reassurance that PayPal is not going “off the national agenda” should any be needed?
Or is it a veiled dig at those same authorities who, as yet, have not even agreed to work on a CBDC for the USA, something that Jerome “Jay” Powell confirmed only 48 hours ago during the IMF live stream event? After all, if the “Crypto-Dollar” had been up and running, there’s no doubt in my mind that it would have precedence over Bitcoin and the license would probably reflect that.
Instead, it seems Bitcoin will become the main and default standard for purchasing goods online via the 26 million merchants it supports, giving it a direct route to becoming firmly established as the number one “brand” in the peoples’ minds until it happens. And it almost certainly will.
That said, as PayPal also made clear, merchants will actually receive payment in their local currency rather than Bitcoin itself, something that is likely to be the case for some time in my view.
This means that PayPal are effectively acting as the front end of a large scale currency conversion system. This is the same way that Visa based companies such as Wirex operate — by taking the Bitcoin from your wallet and converting at point of sale to pounds, dollars or euros. It’s a lucrative proposition and one that was bound to be explored at some point by the major payment processors as Bitcoin continued to grow.
So, what happens next?
This could well go down in history as a watershed moment, the point at which Bitcoin goes ‘properly’ mainstream, even if some of the detail isn’t quite what it first appeared.
Sentiment around the orange coin had been positive for some time as the institutional narrative had quickly shifted in the light of the changes in the financial landscape. This process has only been accelerated by the effects of Coronavirus.
Significant investments by Microstrategy, Square and Grayscale have already publicly endorsed the flagship cryptocurrency, thereby encouraging more investment and interest and driving the same cycle further.
But PayPal’s move is far bigger and contains far greater implications. Not only is this about giving direct accessibility to hundreds of millions of users, this is about doing it in a clearly regulated way through a trusted, regulated and highly recognized brand.
There is no doubt that those “on the fence” about Bitcoin due to fear, lack of understanding or simple problems with accessibility are likely to be swayed.
At the same time, those negative towards the currency will find this move difficult to explain away or play down, setting the stage for a wider acceptance still. Bitcoin is not without its problems — some of which have yet to be properly resolved — but there can be no doubt that major payment processors now consider it a viable asset on its own merit.
From this pivotal moment, the desire to accumulate Bitcoin both as a store of value and as a simple payment mechanism will be increased. Far from being an unusual, quirky move, the heads of institutions may well find themselves having to explain to shareholders why they are not adopting a “Bitcoin Standard” or, at the very least, preserving company wealth through acquiring it as part of their treasury reserves.
Of course, there will be speculative pressure in the short term and both PayPal’s stock and bitcoin’s dollar price are likely to benefit. However, speculative pressure is unpredictable so short term volatility would probably also play out. The long term trend is, of course, the important one.
Finally, because this article was written a mere hour or two after the announcement was made, there will almost certainly be other considerations that are not yet clear.
For example, we have recently seen the blurring of the line between sovereign and private sector mining operations as entire nations try and establish a lead for hash power. Is it possible this act will drive the first announcement of a country using Bitcoin as part of their national reserves?
Suddenly, that doesn’t seem so far fetched, does it?
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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics. An earlier, shorter version of this story first appeared on Voice.com
Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. If you found this content interesting, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand Service.