PayPal (PYPL) has entered the cryptocurrency business with the PayPal Stablecoin (PYUSD).
I think PYUSD could be a gamechanger because hundreds of millions of PayPal users have access to it. There were 431 million active PayPal accounts in the second quarter of 2023, Statista estimates.
However, the number of active PayPal accounts fell from 435 million in the fourth quarter of 2022. Thus, I think PayPal entered the stablecoin business because its market share is shrinking.
What is the PayPal Stablecoin?
PayPal (PYUSD) is a stablecoin designed for payments and issued by the Paxos Trust Company.
A stablecoin is a cryptocurrency that makes payment in fiat currency. For example, the PYUSD makes payment in US dollars held in bank accounts. Thus, a PYUSD does not contain US dollars. Instead, it contains a digital mechanism known as a smart contract that makes in US dollars when you spend a PYUSD.
The New York State Department of Financial Services regulates the Paxos Trust Company. Hence, a government agency will regulate the PYUSD. They will back the PYUSD with a combination of US Treasury Debt and Repurchase Agreements, cash held in bank accounts, and other cash equivalents. PayPal claims this means US Dollars back every PYUSD.
However, PayPal admits the Federal Deposit Insurance Corporation (FDIC) does not insure the accounts that back PYUSD. To explain, the FDIC insures US bank accounts up to $250,000 per depositors.
However, the FDIC will cover larger amounts in times of crisis, such as bank collapses. For example, the FDIC insured all the accounts at the failing Silicon Valley Bank in March 2023. Many Silicon Valley Bank accounts contained far more than $250,000.
How they will back the PayPal Stablecoin (PYUSD)
New York State law requires Paxos to hold the assets backing PYUSD in bankruptcy remote accounts. Theoretically, that means a Paxos bankruptcy will not affect the money in the accounts.
Unfortunately, reserve reports and attestations for PayPalUSD are not available. However, Paxos claims it will start issuing such reports in September 2023.
Paxos issues the popular Pax Dollar (USDP) stablecoin. Paxos also issues Paxos Gold and formerly issued the Binance USD (BUSD) stablecoin. They publish monthly attestation reports for the Pax Dollar.
For example, on 31 July 2023. They backed the Pax Dollar with $24.975 million in US Treasury Bills, $341.701 million in US Treasury Collateralized Reserve Repurchase Agreements, and $191.723 million in Total Cash Deposits. Hence they backed the Pax Dollar with $558.397 million in Total Net Assets on 31 July 2023.*
I think Paxos will use the same cash equivalents to back the PayPal Stablecoin (PYUSD). Thus, cash will back the PayPal stablecoin. More importantly, that cash will be US dollars which serve as the world’s reserve currency. To elaborate, the reserve currency is the fiat currency that financial institutions and big business use for cross-border transactions.
“The U.S. dollar is overwhelmingly the world’s most frequently used currency in global trade,” the Federal Reserve reports. For example, US Dollar transactions comprised 96% of trade invoices in the Americas between 1999 and 2019, the Fed estimates. Additionally, dollar transactions comprised 74% of Asia-Pacific trade invoicing, and 79% of trade invoices in the rest of the world between 1999 and 2019.
Hence, the US Dollar will give the PYUSD its value.
How the PayPal Stablecoin (PYUSD) will work
PayPal claims users can buy, sell, hold, and transfer PYUSD at the PayPal website and app. Hence, PYUSD is an additional payment mechanism they are adding to PayPal.
Users can also send PYUSD to an Ethereum wallet address through the PayPal website. This is important because Ethereum is the most popular blockchain. This is important because they build most decentralized finance (DeFi) applications in Ethereum. For example, DeFiprime estimates they built 166 of the 195 DeFi projects it identified were built in Ethereum.
They claim PayPal users can “checkout with crypto” (pay) at millions of online stores. PayPal will finance PYUSD transactions by selling PayPal USD (PYUSD). However, they do not say if you can pay with PYUSD at brick-and-mortar stores.
PayPal users can buy PYUSD using their PayPal balance, checking account balance, and credit card or debt card balances.
A convert feature allows users to buy the other cryptocurrencies PayPal supports with PYUSD. For example, you could buy Ethereum (ETH), Litecoin (LTC), or Bitcoin (BTC) with PYUSD. Unfortunately, they do not say if you can convert PYUSD to cash at ATMs. Nor do they say if you can convert PYUSD to other fiat currencies such as the Euro. Plus, they do not say if Central Bank Digital Currencies (CBDCs) such as the Digital Yuan (ECNY) will work with PYUSD.
Conversely, PayPal does not say whether they have plans for non-dollar stablecoins. For example, a PayPal Euro stablecoin.
Finally, they claim you can send PayPal USD to friends in the US without fees. However, they do not say if you can send PYUSD through PayPal’s peer-to-peer (P2P) payment app Venmo. Nor do they say if you can send PYUSD to people in other countries.
Thus, PayPal is trying to turn a stablecoin into a full-blown payment solution.
What Value Does PayPal USD (PYUSD) offer?
CoinMarketCap lists PYUSD as an “untracked listing.” This means they have had no data about PayPal USD.
However, some stablecoins can achieve enormous value. For example, Tether (USDT), the most popular stablecoin, was CoinMarketCap’s third largest cryptocurrency, with an $505.915 billion Market Capitalization and a $2.028 billion 24-Hour Market Volume on 13 August 2023. Conversely, the Pax Dollar (USDP) ahd a $503.360 million Market Cap and a $2.809 million 24-Hour Market Volume on 13 August 2023.
In contrast, the Pax Dollar was CoinMarketCap’s 74th largest cryptocurrency on 13 August 2023. The second most popular cryptocurrency, USD Coin (USDC) had a $26.160 billion Market Capitalization and a $1.586 billion 24-Hour Market Volume on 13 August 2023. The USD Coin was the sixth-most-trending cryptocurrency on 13 August 2023.
How Much Money does PayPal (PYPL) make?
Interestingly, PayPal (PYPL) is a publicly traded company. That means PayPal, unlike most cryptocurrency issuers, will have to report all of its financial information to the Securities and Exchange Commission (SEC). Hence, we know how much money PayPal makes. We also know how much debt PayPal has.
For example, PayPal reported quarterly revenues of $7.253 billion, a $2.822 billion quarterly gross profit, and a quarterly operating income of $1.133 billion on 30 June 2023. Furthermore, PayPal reported a -$200 quarterly operating cash flow and a -$2.079 billion quarterly ending cash flow on 30 June 2023.
However, PayPal can generate enormous amounts of cash. It reported a quarterly ending cash flow of $17.694 billion and a quarterly operating cash flow of $1.17 billion on 30 June 2023.
PayPal reported $9.902 billion in cash and short-term investments and Total Assets of $74.579 billion on 30 June 2023. Thus, PayPal is a cash-rich company which is what you want in a stablecoin issuer. PayPal has a history of generating cash from its business. However, PayPal had $10.459 billion in total debts on 30 June 2023.
What Value does PayPal (PYPL) offer?
However, Mr. Market is skeptical of PayPal’s stock. He paid just $61.54 for it on 11 August 2023. PayPal’s share price fell from $99.11 on 11 August 2022. Thus, one reason they are building a PayPal stablecoin is to rebuild stock value. They also want to rebuild assets. PayPal’s total assets fell from $77.81 billion on 30 June 2022.
In the final analysis, I think the PayPal Stablecoin (PYUSD) is an interesting asset speculators need to examine. I think the PayPal stablecoin could achieve widespread use because a company with $74.579 billion in total assets, $9.902 billion in cash, and 431 billion in active user accounts backs it. All speculators need to watch PayPal USD closely because it could prove that commercial stablecoins are a viable business.