What’s Good For PayPal Is Good For America

As I am sure you have noticed, there was an interesting development in the world of stablecoins this week with the news that PayPal
PYPL
is going to issue its own digital dollar. The market liked the news. While many observers are asking what its purpose is. Jose Fernandez da Ponte, PayPal’s senior vice president and general manager of blockchain, crypto, and digital currencies is clear about their advantage: “We have always said that our role in crypto and digital currencies is trying to build that conduit between fiat and web3” and they do indeed have potential as an “on ramp” for retail users.

Another Digital Dollar

While the cryptocurrency purists may be unhappy that PayPal’s stablecoin PYUSD (an ERC-20 token issued on the Ethereum
ETH
blockchain) retains centralised control (PayPal is able to cancel accounts, block transactions and so on) I think it is important to see the bigger picture here. The purpose of PayPal’s stablecoin (apart from attracting billions in interest-free loans!) is not to be a competitor to a cryptocurrency such as Bitcoin
BTC
, Dogecoin
DOGE
or whatever else coin. The key role of this new digital currency will be to act as a mass market on-ramp for millions of (initially) Americans who want to access a convenient means of transferring value from what we might loosely label “web 2 money” (online credit cards and bank accounts) to web3, the world of decentralised finance and tokens.

Why do I focus on this? Well, it’s because I agree with Elliot Hentov, head of macro policy research at State Street Global Advisors, who says that the technological revolution in financial services is in the coming tokenisation of wide swaths of financial and real assets. He is absolutely correct to note that these digital assets will require a “corresponding” (i.e., shared ledger-based) digital currency to make a functioning market in which protocols are used to exchange fungible and non-fungible assets (eg, both the dollars and the ticket for the Taylor Swift concert will be tokens).

Will the specific digital currency PYUSD get traction? Well, apart from anything else we know that lots of people around the world want to use digital dollars. And America will benefit from supplying them whether via public or private infrastructure because digital dollars are more than a new electronic payments mechanism, they are a means to reinforce the post-WWII international monetary order and American “soft power”.

Here is an example to illustrate the potential: I saw a tweet from someone who had just sent money to a friend in Latin America using a stablecoin, USDT (Tether
USDT
). It was the recipient’s preferred method of payment. The tweeter pointed out that the recipient had access t0 Bitcoin, but did not want it. What this confirmed to me was that in many places, people want cryptocurrency only as a second-best way of getting the fiat currency that they want. They don’t want Dogecoin, they want Dollars.

Right now a lot of the digital dollars out there are in the form of Tether (USDT) and offshore. But if the digital dollars are supplied in digital form by a globally-recognised, trusted, audited, regulated and well-run company such as PayPal, I suspect that a great many people will prefer them.

(That example of cross-border payments is often put forward as a key driver for cryptocurrency take up and given the size of the global market, you can see why. Cross-border retail spending and remittances will reach around $5 trillion this year and business-to-business payments are worth eight times that. If even a fraction of those payments are made using PYUSD, then the future looks pretty bright for PayPal’s ecosystem.)

Interestingly, the same week that PayPal announces its stablecoin, the Federal Reserve establishes its new “Novel Activities Supervision Program” to enhance the supervision of the banking organizations in its remit. It will focus on activities related to crypto-assets, shared ledgers and technology-driven partnerships with non-banks to deliver financial services to customers. The Feds says that this will be risk-focused and complement existing supervisory processes. I think that in this context, PYUSD will have its most significant impact on the market: Legitimising stablecoins as an activity for regulated institutions.

(Incidentally, I cannot help but wonder whether one of the users of PYUSD might well be X. After, all, Mr, Musk helped found PayPal and knows a fair amount about the payment system. PayPal’s digital dollar might be a very convenient way of moving value in and out of the X ecosystem!)

Transition Time

I think it is entirely consistent with the evidence to remain sceptical about the impact of cryptocurrency on the wider economy, while at the same time being excited about tokenisation and the transition to that web3 world of decentralised finance protocols, exchanging digital assets backed by regulated institutions with digital currencies, similarly backed by regulated institutions. In this respect, PayPal’s move will, I am sure, be seen in hindsight as a cusp moment and a vote of confidence in the web3 world.