The crypto news was abuzz last week with the news of PayPal launching a USD stablecoin.
However, what does it mean? What are the pros and cons?
Let’s try to unpack these questions.
What Is the PayPal USD Stablecoin?
A stablecoin is a way for a crypto currency to stay pegged to the US dollar. The connection to USD provides it the same stability that USD has. Hence the name stablecoin. What PayPal has basically done is to create an Ethereum blockchain based stablecoin.
For example, we all know that using bitcoin or any other cryptocurrency to buy and sell things is risky. 1 bitcoin in 2020 could buy you $65,000 worth of goods. Within a few months, that same bitcoin would buy you only $25,000 worth of goods. So essentially, you lost more than half your money.
Just like the stock market, this large and unpredictable fluctuation in price is good for people who can hold bitcoin for many years as an investment. However, for the rest of us who have bills to pay, it’s very risky.
In contrast, the market risk for USD or a stablecoin is essentially a function of the unknown.
This is because we all know at a general level what drives the US stock market (stable trade conditions, a working law and order system, no natural disasters, etc.). We also know that any economic uncertainty will pass, even one brought on by the US Fed mistakenly thinking it can control all kinds of inflation by hiking interest rates. Indeed, the market has proven itself resilient many times in history.
However, what drives bitcoin’s price? It’s anyone’s guess at this point. It’s mostly a speculator’s game. As a result, cryptocurrencies have a little bit of an adoption and peace of mind problem.
PayPal USD and other stablecoins solve that problem by bringing stability to the table.
What About Risk or Control Over Your PayPal USD Stablecoins?
PayPal USD stablecoin is issued by PayPal. To get it issued you need to have a Venmo account.
So, like with every centralized issuance, the PayPal stablecoin is not control or risk free.
PayPal can, if they want, freeze your account, take your USD stablecoin, and leave you fighting in court. That’s true of any such stablecoin or payments service.
And given where we are going with courts under activist pressure to enforce the laws creatively, it’s going to be pretty uncertain territory. We saw that with the trucker’s strike in Canada when the Canadian government forced the banks to freeze the truckers’ bank accounts and also the donations from supporters. PayPal, like many businesses, will have no option than to comply.
Moreover, since employees are welcome these days to bring their whole-self aka their open prejudices to work, they may also internally root for your accounts being frozen because they don’t like your cause either. Just like the Twitter files finally proved, it’s pretty easy for anyone to be trigger happy with your freedom, health, and money.
So holding a crypto using PayPal is absolutely not risk free.
However, this is not to dunk on the banking or the corporate system. Ultimately, it’s just people risk. For example, if you decide to let Coinbase or Voyager hold your crypto instead of managing your own keys, then you can still lose everything. During the Voyager bankruptcy, thousands of crypto holders lost everything that the bankruptcy didn’t pay for.
With a true cryptocurrency however, if you have your own wallet, you maintain full control. While you may not be able to convert a crypto back to USD easily, at least your crypto is still yours.
Is PayPal USD Stablecoin Free to Use?
PayPal won’t charge you for using the USD stablecoin.
However, the PayPal USD is issued on ethereum blockchain network. Which means that every transaction also incurs a gas fees. The gas fees is just a pretty name for blockchain fees similar to the fees that banks and credit cards charge for normal transactions.
In fact, this blockchain fees on etherum is very unpredictable and depends on time of day, amount, and other factors. In general, most routine transactions on PayPal USD stablecoin on the ethereum network will probably end up with a 1-3% blockchain fees imposed on them, if not more.
Converting the USD stablecoin to another cryptocurrency will require additional conversion costs on the blockchain too – if Venmo supports that cryptocurrency.
So using a PayPal USD stablecoin is not “free”.
What are The Benefits of PayPal USD Stablecoin?
Using a PayPal USD stablecoin is beneficial in multiple ways.
First it allows PayPal to make more money. They can invest the money you paid them to buy the stablecoin. That way they can earn a lot of interest and other income from it. So it definitely helps their bottom line. If you a PayPal shareholder you should be very happy.
Second, you can theoretically use the USD stablecoin to pay other people after you pay the blockchain fees. Given, that most friends and family payments are free on PayPal or Venmo anyway, this blockchain fees is a cost that you can consider as your charitable donation to the people who keep the blockchain running. Even though this fees you pay is not tax deductible today, it should still help you feel good about doing your part to help the world.
Third, if you use the PayPal USD stablecoin to pay other people, it means that they will be forced to use the stablecoin as well despite them really having no use for it. So you are closing the loop in helping PayPal make more money, thereby completing a virtuous cycle. And also helping your charitable ambitions at the same time. Seems to be a win-win-win.
Finally, given that the US banking regulators are still trying to figure out after 15 years what a cryptocurrency is, there’s a lot of regulatory uncertainty as well. That uncertainty allows you a little more time – no one really knows how much – to hold and enjoy your cryptocurrency.
Can I make international Payments with PayPal USD Stablecoin?
Sending money via the paypal USD stablecoin is a great use case where you just pay the blockchain fees, not the banking fees.
And it’s much faster too. You can get your money in a few minutes versus the 3 days it takes for a traditional wire transfer.
In contrast, modern services like Wise and Xoom will also transfer your money in few minutes too but they only charge commission and not a blockchain fees. As a result, even though you may end up spending the same, you won’t really have the satisfaction of sticking it to the man.
Here’s another wrinkle. When (if) you send your money, your receiving party outside of the USA will receive the USD stablecoin instantly. They will then need to run their operations so they’ll want to quickly convert their shiny new PayPal USD Stablecoin into local currency. For that, PayPal will likely require them to have a Venmo account. As of now, Venmo allows only US based accounts. So that’s that.
So making international payments is a little bit tricky. If PayPal doesn’t control who can own the stablecoin then things should be fine. But, given that PayPal will be on the hook for regulatory compliance on AML (anti-money laundering) and KYC, it’s unlikely they’ll allow the stablecoin to be used by non PayPal / Venmo users. Which means, international payments are likely off the table.
Summary
The PayPal / Venmo USD stabelcoin is a wonderful innovation.
It has several pros and cons for average users like us.
- It doesn’t earn you any interest (right now)
- PayPal can make a lot of money with what you pay them for the USD stablecoin
- It’s pegged to USD so doesn’t appreciate – like you can’t become a millionaire if Elon tweets or Xs about it.
- Pro: It won’t depreciate – so you won’t lose your life’s savings if the crypto market crashes as it does frequently for no reason at all
- PayPal can take your USD stablecoin away if you decide to support causes that they or their whole-self / prejudiced employees (if they have any) don’t support.
- You can’t really use it for payments internationally because Venmo allows only US based customers (this one is tricky)
- For US payments, we can meet our philanthropic goals or we might as well do our counterparties a favor and use Zelle or regular Venmo.
Bottom-line: This is just the beginning. PayPal will no doubt do more with this. So watch this space but no action is really needed now. For many of us, our money is probably safer in a 4% checking account (hopefully you have opened one – there are many in the US as of August 2023).
PS: Nothing in this tongue-in-cheek blog should be construed as financial or charitable contributions advice.