PayPal’s recently launched PYUSD stablecoin encounters legal challenges and reduced capabilities.

While a definitive regulatory framework for digital assets is still pending in the United States, PayPal — one of the largest financial technology firms in the country — revealed on Aug. 7 its U.S. dollar-pegged payment stablecoin, PayPal USD (PYUSD).

A representative from PayPal informed Cointelegraph that PYUSD is significant because the widespread adoption of future digital experiences will necessitate a stable digital asset that is inherently crypto-native and easily linked to fiat currencies. Despite the ambiguous regulatory landscape for digital assets in the U.S., the representative stated:

“Our experience indicates that the time is right to modernize and enhance the technological framework of the financial system — and we aim to assist businesses and consumers in adapting and engaging. This is why we are introducing a PayPal stablecoin, which is intended to mitigate the price volatility associated with other digital currencies while facilitating secure payments.”

The argument for PayPal’s potential to influence stablecoin adoption through this new initiative is compelling, as recent data reveals that over 426 million PayPal accounts are actively utilized. The company also holds a market share of slightly more than 50% in the global online payment processing sector.

Examining the potential effects of PYUSD

While the launch of PYUSD by PayPal is certainly noteworthy, there are several factors to consider.

Alex Tapscott, co-founder of the Blockchain Research Institute and a business author, shared with Cointelegraph that PayPal clearly recognizes that stablecoins will be essential to the future of financial services, particularly in payments. He noted that stablecoins have already demonstrated significant profitability as a business:

“It’s understandable why PayPal and others might seek to enter this market. PayPal is currently encountering increased competition in its traditional payments sector and is exploring avenues to diversify into higher-margin segments. Stablecoins are a logical choice and potentially a profitable one, especially considering Tether’s recent earnings report suggests it may achieve a larger profit than Starbucks, BlackRock — and even PayPal itself.”

Nonetheless, there are both pros and cons that are likely to emerge with PYUSD. One of the most apparent advantages is that PYUSD could facilitate the onboarding of mainstream users into the Web3 environment.

“The primary benefit of PYUSD is that it is more likely to be integrated into our digital economy as a payment tool accessible to everyday users,” Tapscott stated.

To illustrate this point, Pegah Soltani, head of payments products at Ripple, explained to Cointelegraph that stablecoins act as a means to tokenize fiat currencies, such as the U.S. dollar.

“By tokenizing a real-world asset — in this case, fiat — stablecoins help to broaden the crypto ecosystem because these assets enable trades or payments in the crypto economy to connect back to fiat,” she remarked.

However, Soltani pointed out that PayPal’s closed payments ecosystem may primarily enhance efficiencies for itself: “This may not be revolutionary for consumers who already benefit from relatively low fees and quick transaction times when operating within the PayPal suite of applications.”

Conversely, Soltani noted that if PayPal encourages its users to utilize PYUSD beyond its own ecosystem, it is possible that the stablecoin could capture more market share relatively swiftly. Although PYUSD has only recently been introduced, some international cryptocurrency exchanges, such as Changelly, have announced plans to list it.

It is also crucial to recognize that millions of users rely on PayPal for financial transactions. Soltani highlighted that one of the potential drawbacks of a stablecoin is that it is not a trustless system.

“It necessitates that the buyer trusts the issuer to ensure that their funds are genuinely backed 1:1. Given that PayPal is a well-established brand, there is potential for greater perceived trust among those entering this space for the first time,” she elaborated.

While all these factors are significant, it should not be surprising that one of the primary concerns regarding PYUSD is the absence of regulatory clarity for digital assets in the United States.

“PayPal selected a particularly intriguing moment to launch a stablecoin, considering the lack of regulatory clarity surrounding crypto and the challenges this poses for the entire crypto sector,” Soltani remarked.

The issuance and custody of PYUSD are managed by Paxos, a qualified custodian regulated by the New York State Department of Financial Services. Margaret Rosenfeld, chief legal officer at Cube Exchange — a digital asset exchange set to debut in Australia — informed Cointelegraph that this means the assets must be maintained in a bankruptcy-remote trust, in fully segregated accounts. “Paxos, not PayPal, is holding the assets that back the stablecoin,” she stated.

Today, we’re unveiling a new stablecoin, PayPal USD (PYUSD). It’s designed for payments and is backed by highly liquid and secure assets. Starting today and rolling out in the next few weeks, you’ll be able to buy, sell, hold and transfer PYUSD. Learn more https://t.co/53RRBhmNHx pic.twitter.com/53ur2KmjU7

— PayPal (@PayPal) August 7, 2023

Rosenfeld further noted that while Paxos received a Wells notice from the U.S. Securities and Exchange Commission in February 2023 concerning the Binance USD (BUSD) stablecoin, it is noteworthy that a seasoned fintech company like PayPal still maintains a partnership with Paxos.

“This highlights the significant challenges faced by traditional finance in adopting digital assets in the United States. This is particularly relevant as U.S. banks continue to face pressure from federal regulators to avoid the perceived risks associated with digital assets,” she commented.

Aside from regulatory issues, Tapscott believes that PayPal encounters an additional challenge with PYUSD due to the existence of other stablecoins that were launched much earlier. “Initially, PYUSD will likely have lower liquidity and reduced functionality compared to more established counterparts. Tether and Circle together dominate nearly 100% of the market, with Tether, in particular, holding nearly 80%,” he explained.

Additionally, the fact that PYUSD operates on the Ethereum network for transactions may also raise concerns.

Mark Heynen, vice president of business development at the Stellar Development Foundation, conveyed to Cointelegraph that while Ethereum is extremely popular, it is not fundamentally a network designed for payments.

“Cost and scalability could become distractions in PayPal’s pursuit of adoption,” he stated.

In light of this, Soltani suggested that it would be intriguing for PayPal to consider issuing its stablecoin across multiple chains in the future.

PayPal optimistic about blockchain technology and digital assets

While it is premature to fully gauge the impact PYUSD will have on the Web3 ecosystem, one fact remains clear: PayPal will persist in its innovation efforts. The company’s representative stated:

“We will continue to provide the products and services necessary to enhance financial health and broaden economic opportunities in the new digital era. This encompasses the new capabilities enabled by digital assets utilizing blockchain technology, including digital currencies and stablecoins.”