What is PYUSD? Look into Paypal's New Moves in Web 3.0

What is PYUSD

PayPal USD (PYUSD) is a stablecoin issued on the Ethereum network, fully backed by US dollar deposits, US treasury bills, and cash equivalents. According to official statements, this stablecoin was introduced primarily to facilitate smoother virtual payments.

On August 8, PayPal officially announced the launch of the stablecoin PYUSD, making the payment giant the first large traditional financial institution in the US to issue a stablecoin. As detailed on the official website, PYUSD was issued in collaboration between Paxos and PayPal, maintaining a 1:1 peg with the US dollar. To ensure its ability to redeem, PYUSD has adopted a mechanism similar to Tether, being fully collateralized by US dollars, short-term US treasury bills, and cash or equivalent assets.

Paxos is a company with considerable experience in the stablecoin domain. Besides issuing its own stablecoin called Pax dollar (USDP), it previously collaborated with Binance to launch Binance USD (BUSD).

Based on official information, starting from September 2023, Paxos will release public monthly PYUSD reserve reports, periodically disclosing details related to reserve funds. Paxos will also commission an independent third-party accounting firm to publicly verify the value of PYUSD's reserve assets, conducting regular inspections according to standards set by the American Institute of Certified Public Accountants (AICPA), ensuring the safety and integrity of its assets.

According to PayPal's future plans, PYUSD will initially be introduced on its payment application, Venmo. Moreover, PayPal's Senior Vice President of Cryptocurrency Business mentioned in a recent interview that they plan for PYUSD to be listed on major exchanges as soon as possible, expanding its circulation and ultimately covering traditional payment sectors. Currently, PYUSD has been listed on the centralized exchange BitMart and was launched on the centralized exchange Kraken on August 21.

Applications of PYUSD

As of now, more than 26.9 million PYUSD coins have been minted, but they haven't yet started circulating widely. Based on official information, this stablecoin is currently only available to eligible PayPal users in the U.S., who can obtain it by purchasing or exchanging through PayPal.

However, since PYUSD is issued on the Ethereum blockchain, it can essentially be made available to a broader range of Web 3.0 users.

The primary use cases for PYUSD currently announced are:

• Buying and selling PYUSD within the PayPal application at a 1:1 price ratio to the US dollar without any transaction fees. In other words, the price of each PYUSD is pegged at 1 dollar.
• Transferring PYUSD freely between PayPal accounts or compatible external wallets like MetaMask.
• Using PYUSD for payments.
  • During this process, the app will automatically perform two consecutive actions: sell PYUSD in exchange for US dollars, and then use those dollars to complete the payment.
  • If PYUSD is sold during the first phase of a transaction, but the subsequent purchase doesn't actually take place, the dollars obtained from the sale of the tokens will remain in the user's PayPal account.
• Buying/selling/exchanging other cryptocurrencies (with trading pairs that include PYUSD).
  • Similar to the payment function, this process also consists of two steps: selling one type of cryptocurrency in exchange for dollars and then using those dollars to buy the target cryptocurrency.
  • Implementing this feature requires a certain fee. The official fee structure is outlined in the table below.

Besides, PayPal also announced the launch of the "Cryptocurrencies Hub" (referred to as "Hub"). The Hub acts as a centralized wallet provided by PayPal, or more specifically, a custodial wallet. While the balance in the Hub represents the user's ownership of crypto assets, they don't hold the digital assets themselves. Users can purchase, sell, receive, and send various cryptocurrencies through the Hub. According to its terms, this feature is currently only available to American users who own a personal PayPal account and a Balance Account in good standing

Significance and Challenges of PayPal's Entry into Stablecoin

PayPal's Crypto History

Those unfamiliar with PayPal might be unaware that almost a decade ago, this FinTech giant started focusing on the crypto market.

• In 2013, PayPal's then-president, David Marcus, publicly acknowledged the massive potential of the crypto market. He believed that cryptocurrencies would revolutionize existing businesses and economies. He also mentioned that PayPal would step into the crypto space once legal and policy aspects became clear.

PayPal's collaboration with the crypto market dates back to 2014.

• In September 2014, PayPal teamed up with several Bitcoin payment service providers, including BitPay, Coinbase, and GoCoin, to enable merchants to accept Bitcoin payments. However, by September 2015, due to regulatory challenges and concerns, PayPal ceased its support for Bitcoin payments.
• In 2018, PayPal filed a patent application for an "Expedited Virtual Currency Transaction System," proposing the creation of secondary private keys (or "secondary wallets") to reduce transaction times. That same year, Coinbase allowed US users to withdraw fiat directly to their PayPal accounts for free. This service was expanded to over thirty European countries within two months.

In 2020, PayPal officially entered the crypto market.

• In October 2020, PayPal allowed users to buy, sell, and hold cryptocurrencies like Bitcoin, Ethereum, Bitcoin Cash, and Litecoin directly in their PayPal accounts. This not only marked a milestone for PayPal but was also of great significance to the crypto market. The vast user base from a Web 2.0 payment giant now had a familiar and trusted platform to access and trade crypto assets. This opened broader possibilities for crypto application scenarios and market demand.

It can be said that the launch of PYUSD is not a short-term strategy for PayPal but rather a longer-term vision for the crypto market. The official launch of PYUSD also faced several challenges:

• In January 2022, PayPal unintentionally revealed its stablecoin development plans due to a discovery by a programmer.
• In February 2023, due to an investigation into their partner Paxos by regulators, PayPal announced a temporary halt to its stablecoin project's development. Reports suggest that PayPal had hoped to launch its stablecoin product within a few weeks.

One could speculate that without regulatory challenges, PYUSD might have been introduced earlier. This indirectly reflects PayPal's high hopes for this stablecoin. So, what exactly can PYUSD bring to the crypto market?

Potential Positive Impacts of PYUSD

Better Integration of Traditional Finance with the Crypto Market

PayPal's influence in the Web 2.0 domain is undeniable. Its entrance into the crypto space and issuance of its stablecoin signal a clear commitment to bridging traditional finance with the crypto market. This means even those who previously hadn't ventured into the crypto world can easily access and use PYUSD for transactions – a feat difficult for other stablecoins to achieve.

From this perspective, PYUSD not only helps promote the widespread adoption of stablecoins and enhances the recognition of the crypto market, but it also encourages more traditional financial institutions and individual users to venture into the crypto space. This offers a broader range of applications for crypto assets, such as the previously mentioned payment scenarios, bringing more opportunities and possibilities to the entire market. In the long run, this signifies a positive move towards a more integrated fusion of traditional finance and the crypto market.

Additionally, given the bridging role of stablecoins between traditional finance and the crypto market, if the launch of PYUSD sets a precedent in the stablecoin arena or spurs the formulation of relevant regulations for such tokens, it will significantly promote a smoother integration of traditional finance with the crypto market and foster the development of regulatory frameworks in the crypto space.

Boost to Ethereum

As an ERC20 token deployed on the Ethereum network, PYUSD holders can engage more actively in the Ethereum ecosystem. As the use and acceptance of PYUSD grow, it's likely to bring more active users and higher transaction volumes to the Ethereum ecosystem, thereby bolstering the value and development of Ethereum and the DeFi sector.

Boosting Confidence in the Stablecoin Arena

Stablecoins serve as bridges in the crypto market. However, after incidents with crypto-friendly banks like SVB, the inflow of US dollars into the crypto market was significantly reduced, causing a decline in the total market cap of stablecoins in the first half of the year. PYUSD, backed by financial giant PayPal, may offer the market more options and confidence. As a trusted platform, PayPal might also provide users with a more robust and reliable avenue for funds.

Challenges Faced by PYUSD (and its Holders)

Ambiguous Regulatory Issues

Despite the general market belief that payment giant PayPal should have a closer and more harmonious relationship with regulatory bodies, compliance remains an ever-present Sword of Damocles hanging over all stablecoins.

Apart from the ever-watchful SEC, stablecoins have consistently been a topic under intense scrutiny by various politicians. Democratic leader of the House Financial Services Committee, Maxine Waters, openly criticized PYUSD, suggesting that these so-called pegged assets operate without a regulated, supervised, and enforced federal framework. She also mentioned that "if stablecoins become widely adopted, it becomes even more challenging to protect the economy from inflationary pressures or support maximum employment."

Paxos, the issuer of PYUSD, operates with compliance qualifications and is regulated by the New York Department of Financial Services (NYDFS). This means if Paxos goes bankrupt, the NYDFS will intervene to ensure investors retrieve their funds. However, even with this, before clear regulatory rules are in place, who can assure that the challenges faced by BUSD, another stablecoin issued by Paxos and regulated by NYDFS, won't recur with PYUSD? Who can confidently claim that the SEC, which has deemed BUSD as a security, won't categorize PYUSD the same way tomorrow?

Currently, Paxos is still embroiled in litigation with the SEC, and BUSD is still not being minted.

Limited Audience in the Short Term

As previously mentioned, PYUSD is currently only available to users within the US. This could potentially limit the growth of PYUSD users and the full exploration of its application scenarios. The crypto market has widely accepted stablecoins already in place. Given this competition, the demand for PYUSD in the short term may remain limited. If potential users don't see a significant incentive to hold PYUSD, it might be challenging for it to disrupt the current landscape of the stablecoin arena.