Paypal launches dollar-backed stablecoin

Paypal launches dollar-backed stablecoin

The payment service provider Paypal has introduced a stablecoin in US dollars. The US company announced this on Monday. Paypal is the first major financial technology company to use its own digital currency for payments and transfers.

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Stablecoins are crypto assets whose monetary value – as the name suggests – seeks to be pegged to a stable asset, in this case the US dollar. While they’ve been around for years, they’ve yet to find their way into the mainstream consumer payments ecosystem.

Approaching cryptocurrency

Paypal has been approaching the cryptocurrency world for some time. In the fall of 2020, PayPal launched a cryptocurrency buying, selling, and storing service for its US customers. Since March 2021, PayPal has allowed users in the USA to make direct payments with cryptocurrencies. Since then, Bitcoin, Ethereum, Bitcoin Cash and Litecoin can be converted directly into US dollars, at least for payments in online shops.

So now PayPal’s own stablecoin. This is called Paypal USD and is said to be backed by US dollar deposits and short-term US government bonds. It is issued by the cryptocurrency company Paxos Trust Company.

That may come as a surprise, given that Paxos, the firm behind Binance’s (BUSD) stablecoin, came under the scrutiny of regulators earlier this year. At the time, New York regulators ordered Paxos to stop issuing BUSD. The reason for the move was concerns that Paxos would not be able to “securely” issue the token.

Tighter regulation of the cryptocurrency market

In the summer of 2021, investigations into the stablecoin Tether led to tremors in the cryptocurrency market. In the course of a general price slide on the crypto markets in May last year, the then fourth-largest stablecoin TerraUSD and the associated coin Luna completely collapsed and caused huge losses for investors and private investors. The billion-dollar system around the coins collapsed as a result. It was also the prelude to a series of bankruptcies in the cryptocurrency industry.

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Since the collapse of crypto trading platform FTX and the arrest of its founder, Sam Bankman-Fried, the US government has tightened its scrutiny over the crypto industry. In early June, the US Securities and Exchange Commission sued Binance, the world’s largest crypto exchange. The civil lawsuit alleges that Binance operated an illegal exchange, mishandled funds and violated securities laws. In March, the US capital markets authority CTFC filed a lawsuit against Binance and founder Changpeng Zhao. The accusation: The crypto exchange is said to have deliberately enabled terrorist financing and money laundering and automatically destroyed evidence.

A day after the crackdown on Binance, the SEC also filed a lawsuit against US crypto top dog Coinbase. Last month, the US House of Representatives Committee on Financial Services introduced legislation to create a nationwide regulatory framework for stablecoins, focusing on rules for the registration and licensing process for stablecoin issuers.

A number of major economies, from the UK or Canada to the European Union, have also established rules for stablecoins. The EU guidelines are intended to contain crypto exchanges and make anonymous trading in crypto assets more difficult.

Meta’s cryptocurrency project fails

In turbulent times for the crypto market, Paypal is now the first major fintech company to launch its own US dollar-backed stablecoin. Previous attempts by large mainstream companies to launch stablecoins have met with fierce opposition from financial regulators and policymakers. In 2019, when Facebook unveiled its own stablecoin called Libra, which was later unchristened Diem, regulators expressed concerns it could hurt global financial stability. The plan was ambitious: A global digital money that can be bought with different national currencies and exchanged back again. Libra should be secured by a basket of various currencies.

Facebook had to make major changes to its Libra/Diem project right from the start, and well-known allies such as Mastercard, Visa, eBay, Paypal and the payment service provider Stripe jumped out again in autumn 2019. Eventually the project failed. Paypal is still trying to do this on its own.

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