What is PYUSD?

Paypal's PYUSD is the first stablecoin issued by a "non-cryptocurrency" company. It represents a general shift in corporate attitudes towards stablecoins and a belief in the future of upcoming policy acceptance.

PayPal's stablecoin, PYUSD, is backed exclusively by US dollar deposits, such as short-term US Treasuries and equivalent assets. Managed by Paxos Trust Company, PYUSD can be converted to USD at a 1:1 ratio through PayPal or the Venmo app.

According to Paypal's press release:

PayPal customers who purchase PayPal USD will be able to:

Transfer PayPal USD between PayPal and compatible external wallets; Make inter-personal payments using PYUSD; Choose to make purchases with PayPal USD at checkout; Convert any PayPal-supported cryptocurrency to and from PayPal USD.

Why PayPal's announcement has a significant impact on cryptocurrency adoption

Until now, the only way to get access to payment stablecoins has been through cryptocurrency companies like Tether, Coinbase or Gemini. Now, with PayPal entering the market, millions of people will be able to enter the cryptocurrency space through one of the world's most widely used payment platforms.

One of the most underdeveloped parts of the cryptocurrency ecosystem is the actual access to the money," said Austin Campbell, former head of portfolio management at Paxos and partner at Zero Knowledge Consulting, on Leviathan News. From that perspective, it's hard to find a better option than PayPal. I think the biggest innovation here is adding a native stablecoin to the PayPal platform."

Campbell further stated that he believes "two and a half years of work went into this product before it was released." Rumors of PayPal's stablecoin development were reported back in 2021, when Jose Fernandez da Ponte, PayPal's vice president and general manager of blockchain, cryptocurrencies, and digital currencies, told the press, "It's still early days." Further rumors were leaked to the press confirming PayPal's plans, but in February of this year, the payments company announced that it was suspending its plans for a stablecoin product because Paxos was under investigation by the New York Department of Financial Services (NYDFS). Six months later, the company apparently decided that the regulatory environment was cool enough to launch their stablecoin.

PayPal chose Paxos to manage and issue their stablecoin, which means it will be fully stocked, have segregated funds, and publish regular transparency reports. Additionally, their stablecoin will be monitored by on-chain analytics firms such as Chainalysis and TRM to prevent illegal use. If criminal activity is involved, PayPal will be able to freeze the funds.

As a result of its relationship with Coin, Paxos drew the ire of regulators, with a series of claimed violations culminating in an order from the New York Department of Financial Services to halt the issuance of BUSD and the receipt of a Wells Notice from the SEC. The New York Department of Financial Services said the order was "due to several unresolved issues regarding the oversight of Paxos' relationship with CoinSafe".

"As directed by the New York Department of Financial Services, effective February 21, Paxos will cease issuing new BUSD tokens and will end its relationship with CoinSafe for the branded stablecoin BUSD," Paxos said in a statement.

Charles Cascarilla, CEO of Paxos, said, "The market has changed and the relationship with CoinSafe no longer aligns with our current strategic priorities."

Coin's relationship with Paxos allows them to mint BUSD directly from the exchange and transfer it to any blockchain of their choice.

The New York Department of Financial Services said, "The department has not authorized the use of CoinSecure-Peg BUSD on any blockchain, nor is CoinSecure-Peg BUSD issued by Paxos."

Now that PayPal is working with Paxos, it means that the investigation is over and the controversial issuer is now free to operate after a rigorous regulatory review.

PayPal Vs Meta.

While the announcement is still new, the reaction has been very different from that of Diem, the failed stablecoin developed by Meta. When Facebook first announced its entry into the market in 2021, the social network came under heavy fire from politicians, economists and activists in front of Congress.

At the time, Facebook was still reeling from the Cambridge Analytica scandal, which became a focal point of the 2020 elections. The company had not yet recovered its image and therefore reacted violently to the news of Diem.

Senator Elizabeth Warren expressed strong opposition to Facebook's "relaunch of cryptocurrencies and digital wallets". Additionally, she and Senators D-HI, D-OH, and others wrote in a letter that "Facebook is once again pursuing digital currency initiatives and has already launched a pilot of a payments infrastructure network, despite the fact that these programs are incompatible with the actual financial regulatory environment - not only for Diem specifically, but also for stablecoins. Diem specifically, but also for stablecoins in general."

According to Campbell, Facebook faces two problems.

First, unlike PayPal, Diem is an entirely new line of business for the company; Facebook is a social network used by more than 2 billion people worldwide, and also owns the Whatsapp and Instagram brands. Adding a payment service would instantly turn Facebook into a giant quasi-bank that could absorb all of its users overnight. Lawmakers and regulators are concerned that Facebook will further abuse its already considerable power to capitalize on the data it collects from users.

Not only does the social giant have access to your friends list, likes, posts, direct messages and geographic data, the addition of Diem has the potential to provide Facebook with unprecedented access to your personal finances. For a company whose image has already been tarnished by scandal, Diem is just a step too far.

The second problem is that Diem is more than just a dollar stabilizer; the deal also plans to issue a currency similar to the Special Drawing Rights (SDR), backed by a variety of foreign currency pairs such as the euro, yen, Australian dollar and Swiss franc. Economists are outraged by the proposal. In their view, global access to a basket of currencies would weaken the ability of central banks to control domestic monetary transmission. What poor schmuck would buy their worthless bonds if their citizens had easy global access to a less volatile stablecoin?

Diem has never gotten out of regulatory trouble. PayPal, on the other hand, shines.

Interest rates rule the day.

In 2023, every major fintech company is a quasi-bank that derives a sizable portion of its revenue from net interest income. coinbase, robinhood, and many others are reaping excess profits from rising interest rates.

Adding stablecoin to their offerings is enticing because it is similar in design to a zero-coupon bond. Stablecoin issuers issue tokens but get to keep all the proceeds they receive from short-term treasury bonds. In a perfectly rational world, no one would own stablecoins or cash without a constrained competitive market. What's the benefit of owning an asset that doesn't generate interest income? In short ...... none.

But we live in a world of huge regulatory hurdles, sanctions, foreign exchange exchange restrictions, domestic capital controls and securities laws. For some, there are more than enough ways to get dollars. In the cryptocurrency space, the need for leverage has far outweighed the need for imported Treasury yields until recently. With short-term yields above 5% and no signs of cooling, a new paradigm has emerged.