How Will Paypal’s New Stablecoin Affect the Crypto Ecosystem?

In this article, Eric Ma, CEO of TIDEX, comments on PayPal USD; a straight-forward(ish) primer on Stablecoins, their rising importance; and their implications for the broader digital asset landscape, moving forward.

With fintech giant Paypal tangibly throwing its hat into the crypto ring by announcing that it’s creating its own stablecoin, many are proclaiming the move as a herald of crypto’s victory over its detractors.

PayPal’s launch of its own US dollar-pegged stablecoins, PayPal USD (PYUSD), supported by short-term US treasuries and circulated through blockchain infrastructure provided by Paxos Trust Company, certainly signifies a pivotal moment — whether it’s the grand crypto vindication that many deem it to be remains to be seen.

On the launch of PayPal USD, PayPal President Dan Schulman says: “The vision over time is that this becomes a part of the overall payments infrastructure.”

It may just be what PayPal needs too, after seeing a 33% slump in share price over the last year following a dip in pandemic-fuelled online payments and a costly hack a few years back.

Taking a wholly positive outlook and avoiding bad faith arguments (as will be the enduring theme of this article) the move to create PayPal USD not only offers users the ability to transact between external wallets and PayPal but also, sort of, indicates a step towards integrating traditional financial systems with the emerging crypto landscape.

Commenting, Eric says: “Obviously a smart move by PayPal. PayPal is a Web2 company who understands the importance of first mover advantage. Not only will this move help facilitate payment systems, the tech also allows the concept of programmable money to come into play. This not only means more business options for PayPal, but also the potential for new products for PayPal customers.”

Stability Amidst Volatility

Stablecoins address a fundamental concern in the crypto market: price volatility. While cryptocurrencies like Bitcoin are known for their price fluctuations, stablecoins offer a reliable alternative. Pegged to real-world assets like the US dollar on a 1:1 basis, stablecoins such as PayPal’s USD-backed token provide a stable and predictable value, making them suitable for everyday transactions. Well, when they’re working as they should — TerraUSD serves as a cautionary tale against blind faith in stablecoins.

Again, avoiding bad faith arguments, Stablecoins, when they work, offer practical solutions for businesses, enabling efficient digital in-experience payment mechanisms. Moreover, stablecoins like PayPal’s USD can facilitate cross-border transactions, fund flows between developers and creators, and support brands’ expansion into the digital asset domain.

Stablecoins maintain their value through various mechanisms. While some are backed by real-world assets like cash, others employ algorithmic processes to stabilise their value. However, recent incidents like the previously mentioned TerraUSD and Luna collapse underscore the challenges algorithmic stablecoins can face, highlighting the importance of a balanced approach to stability.

Promoting Adoption and Trust

The introduction of stablecoins by major players like PayPal undoubtedly paves the way for greater legitimacy and recognition of the entire cryptocurrency ecosystem. This endorsement could — potentially — encourage other businesses and financial institutions to consider incorporating cryptocurrencies into their operations, thereby expanding the adoption of digital assets.

While PayPal may have its own reasons for launching PayPal USD, its launch may also have long-lasting effects on the future adoption rates of crypto.

This is an established, largely trusted financial institution for money transferring, so will its adoption of crypto spur consumer interest in digitally-traded assets?

Eric concludes by saying: “For many people, PYUSD will be the first time they’ve ever interacted with cryptocurrency. This exposure will help lessen the fear held by many when it comes to cryptocurrencies. As we move from Web2 towards Web3, it’s important builders from both sides reach out towards each other to close the chasm and allow mainstream users to embrace Web3 and all that it has to offer.”