Digital payments company PayPal (PYPL) has just launched a US dollar-pegged stablecoin called PayPal USD, becoming the latest company to offer a stablecoin payment option to its customers.
The central theses
- PayPal has just launched its own US dollar-pegged stablecoin called PayPal USD and is partnering with fintech company Paxos to issue it.
- Paxos, PayPal’s partner in issuing the stablecoin, recently ran afoul of the Securities and Exchange Commission (SEC), which threatened to sue the company in February.
- While the SEC has prosecuted several crypto firms in recent years, it has yet to develop a framework for defining and regulating stablecoins.
PayPal USD would allow customers to transfer the stablecoin between digital wallets, send person-to-person payments, fund purchases using the digital currency, and exchange all PayPal-supported cryptocurrencies to and from PayPal USD.
The new stablecoin is fully backed by US dollar deposits, short-term government bonds and cash equivalents. As with most USD-backed stablecoins, it is redeemable against US dollars at a 1:1 ratio. PayPal is working with Paxos Trust Company, a New York-based fintech company specializing in blockchain, to issue the digital coin.
“The shift toward digital currencies requires a stable instrument that is both digitally native and easily pegged to a fiat currency like the U.S. dollar,” said Dan Schulman, President and CEO of PayPal.
Should you invest?
While PayPal’s stablecoin is backed by the US dollar and can be easily transferred and exchanged, keep in mind that stablecoins, like all cryptocurrencies, are inherently among the riskiest financial assets.
Like derivatives, stablecoins derive their value from another financial asset, which tends to introduce new levels of risk, complexity and volatility. Even stablecoins backed by the US dollar or treasuries are not immune to volatility, given TerraUSD’s stunning collapse last year.
Given that PayPal USD is pegged to the US dollar, any significant devaluation of the dollar could also impact the value of the coin. On the other hand, stablecoins like PayPal USD offer consumers more flexibility and payment options as well as a decentralized financing option.
Shares of PayPal are trading nearly 3% higher as of 1 p.m. ET, but are down 12% so far this year.
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The SEC’s crackdown on cryptocurrencies
Paxos, PayPal’s partner in issuing the stablecoin, recently ran afoul of the Securities and Exchange Commission (SEC), which in February threatened to sue Paxos on the grounds that the company’s Binance USD coin was not a registered security.
This was part of a broader crackdown by the agency against crypto companies that it believes are violating federal investment laws and whose crypto assets could pose a threat to the financial system. Enforcement actions accelerated following the collapse of cryptocurrency Luna and its stablecoin TerraUSD last year.
While the SEC has prosecuted a number of crypto firms in recent years, it has yet to develop a framework for defining and regulating stablecoins. In its February notice against Paxos, the SEC claimed that Binance USD constituted an investment contract with the potential for profit and therefore qualified as a security. This stance differed from the agency’s stance on Terra, which was considered an algorithmic stablecoin not backed by actual investments.
Stablecoins are cryptocurrencies whose value is linked to the value of another financial instrument, usually a currency or a commodity, and can be used as a means of payment. The most widely used US dollar-backed stablecoins include TetherUSD, USD Coin and Binance USD.
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