PayPal has launched its own stablecoin, PYUSD, making it the first major U.S. financial institution to issue a proprietary digital currency pegged to the dollar. PYUSD is built on the Ethereum blockchain and backed 1:1 by cash reserves held by PayPal.
Initially available to U.S. PayPal and Venmo users, PYUSD aims to facilitate low-cost peer-to-peer and merchant payments within PayPal’s ecosystem. Holders can also use PYUSD to purchase other cryptocurrencies supported by PayPal.
PayPal will publish monthly reports detailing the composition of reserves backing PYUSD, including short-term government bonds. This could allow PayPal to earn yields of around 5% on reserves while not paying interest to PYUSD holders.
Some critics argue PayPal should have built PYUSD on a blockchain more friendly to retail transactions rather than Ethereum, which could result in high fees. But the Ethereum choice reinforces it as the blockchain of choice for institutional adoption.
The launch provides a rare bright spot for PayPal after a 10% stock decline this year despite the bull market. It also expands PayPal’s early 2021 foray into enabling users to buy, sell and hold cryptocurrencies.
The move signals growing institutional adoption of blockchain technology. However, it faces pushback from regulators concerned about adequate oversight. House Finance Committee Democrat Maxine Waters argued an appropriate federal framework is not yet in place to regulate such assets. PYUSD’s reserves also introduce counterparty risk absent FDIC insurance on deposited cash.
While innovative, PayPal will need to tread carefully given regulatory scrutiny of stablecoins. Its mass market reach gives PYUSD huge potential scale, but guardrails and transparency around reserves will be critical to establishing trust.
Overall, PYUSD represents a major milestone for cryptocurrency adoption by legacy payments providers. But regulatory concerns and questions around long-term stability temper the excitement as this experiment in tokenized fiat currency unfolds.