Do you need to invest in PayPal’s launched USD-pegged stablecoin?
- NewsMarket Analysis
- August 7, 2023
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Do you need to invest in PayPal’s launched USD-pegged stablecoin?
- PayPal just launched its own U.S. dollar-pegged stablecoin called PayPal USD and is collaborating with fintech company Paxos to issue it.
- Paxos, PayPal’s partner in issuing the stablecoin, has recently run afoul of the Securities and Exchange Commission (SEC), which threatened to sue the company in February.
- While the SEC has gone after several crypto firms in recent years, it has yet to develop a framework for defining and regulating stablecoins.
Using PayPal USD, customers can transfer the stablecoin between digital wallets, send person-to-person payments, fund purchases, and convert any of PayPal’s supported cryptocurrencies.
The new stablecoin is fully backed by U.S. dollar deposits, short-term Treasurys, and cash equivalents. As with most USD-backed stablecoins, it’s redeemable for U.S. dollars at a 1-to-1 ratio. PayPal is partnering 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 connected to fiat currency like the U.S. dollar,” said Dan Schulman, PayPal’s president and CEO
Should You Invest? PayPal’s stablecoin is backed by the U.S. dollar and is easily transferred and exchanged, but stablecoins, like all cryptocurrencies, are inherently risky.
Like derivatives, stablecoins derive their value from another financial asset, which tends to add new layers of risk, complexity, and volatility. Even stablecoins backed by the U.S. dollar or Treasury bonds are not immune to volatility, given the stunning collapse of TerraUSD last year.
Given PayPal USD’s peg to the U.S. dollar, any significant depreciation of the dollar could also affect the coin’s value. On the other hand, stablecoins like PayPal USD offer consumers increased flexibility and payment options, as well as a decentralized means of finance.
Crackdown on Crypto
Paxos, PayPal’s partner in issuing the stablecoin, has recently run afoul of the Securities and Exchange Commission (SEC), which threatened to sue Paxos in February on grounds that the company’s Binance USD coin was not a registered security.
It was part of a broader crackdown by the agency on crypto companies that it believes are violating federal investment laws and whose crypto assets could pose a threat to the financial system. As a result of last year’s collapse of Luna and TerraUSD, enforcement action accelerated.
Despite taking action against a number of crypto firms in the last few years, the SEC has yet to create a framework for defining and regulating stablecoins. According to the SEC’s February notice against Paxos, Binance USD qualifies as a security because it is an investment contract with profit-earning potential. As a result, the agency took a different stance than Terra, which it considered an algorithmic stablecoin that was not backed by actual investment.
Cryptocurrencies known as stablecoins are cryptocurrencies whose value is based on the value of another financial instrument, usually a currency or commodity. The biggest stablecoins backed by the U.S. dollar are TetherUSD, USD Coin, and Binance USD.
