PayPal’s leap into the Crypto Industry
On Wednesday, October 21st, 2020, the online payment services giant PayPal have announced that it will allow its users to hold Bitcoin and other prominent crypto coins such as Ethereum, Bitcoin Cash, and Litecoin on their platform. This great leap into the world of cryptocurrency had already been predicted by us in one of our blog posts here.
Furthermore, PayPal has offered up plans on how their 346 million users will be able to spend their cryptocurrency at any one of the 26 million merchants that are operating on the PayPal network. PayPal will be responsible for the logistics of settling such massive volumes of payments on their platform, which opens up opportunities for a large scale crypto payment ecosystem. This is in stark contrast to how traditional crypto payment services work, which simply allows its users to have access to the blockchain network that holds their cryptocurrency rather than acting as a central authority, verifying and then processing payments via their own means. These are some big changes that PayPal has declared and can be expected “in the coming weeks” according to Reuters.
US PayPal account holders will also have the added benefit of being able to buy, sell and trade cryptocurrency on the platform, essentially turning PayPal into a crypto wallet. This is all possible through their partnership with the Paxos Trust Company who will offer these services to US PayPal accounts.
PayPal’s subsidiary Venmo will also be part of its expansion into the crypto industry. Venmo, which currently services over 40 million people in the US, says that its users can expect to utilize cryptocurrency similarly to the PayPal platform in early 2021.
As mentioned in our previous blog post, this move follows PayPal’s competitor Square who gave their users the option to hold Bitcoin back in late 2018. In the first quarter of 2020, Square’s Cash App generated $528 million in revenues, $306 million of which came from Bitcoin. In addition to this, Cash App purchased 4,709 Bitcoin worth $50 million earlier this month, making it one of the largest cryptocurrency purchases by a registered company.
PayPal announcing their commitment to entering the crypto industry has caused waves throughout. This has been marked by many crypto pundits and experts alike as a massive step towards the mass adoption of cryptocurrency by the people and for it to go fully mainstream.
However, this change is not without its problems as many blockchain and crypto experts have pointed out. Some concerns and caveats regarding PayPal’s support of cryptocurrencies are:
Scalability — A problem that has been plaguing the adoption of cryptocurrency since its inception, scalability has largely prevented the mass adoption of cryptocurrencies such as Bitcoin and Ethereum. Both of which can process approximately 7 and 10 transactions per second respectively. These numbers are obviously insufficient, especially when compared to the almost 200 transactions per second that PayPal currently processes. With such low scalability, it raises concerns about how PayPal will tackle this issue diligently for its 346 million users.
Volatility — As many of you know, most cryptocurrencies are notoriously volatile. For example, Bitcoin dipped to an all-year low in March 2020, going as low as $3,400, and now is currently worth 12,900 at the time of writing, only 7 months apart. This is great for speculators but terrible for customers and merchants who would prefer to trade with a more stable currency.
KYC and Compliance — No doubt a company as large and reputable as PayPal will not risk their company’s reputation and profitability by not having the most stringent KYC policies for customers. As it stands, to create an account on PayPal and begin using its financial services, users must submit a litany of documents and wait for PayPal’s lengthy approval process. On top of this, PayPal has announced that it will not allow cryptocurrency being held on other crypto wallets to be sent to the PayPal wallet. This is probably a measure to ensure cryptocurrencies that are being serviced by PayPal were obtained through transparent, KYC, and regulatory compliant means.
Partnering with central banks — One of the main benefits of using cryptocurrency is that it is decentralized and does not need a central authority to process transactions. PayPal has announced that it will “prepare its network for new digital currencies that central banks and companies may develop.” This is a real issue for many crypto purists, many of whom believe that central banks are the greater part of the problem in the world of finance. It will be difficult for many crypto users to reconcile this open partnership between PayPal and the so-called “digital currencies” developed by central banks.
To solve the problem of scalability and volatility, PayPal as stated these issues will be addressed by settling the merchants in traditional fiat currencies. This essentially means that PayPal will probably convert your chosen cryptocurrency into fiat, and settle merchants with the converted sum. By doing so, merchants do not have to worry about receiving a heavily volatile digital currency, which is a primary concern of many merchants who choose not to accept crypto. Presumably, this means transactions will be handled on PayPal’s centralized servers, meaning scalability isn’t much of an issue, although users will have to sacrifice some decentralization and privacy to reap the benefits.