PayPal’s recent announcement of its stablecoin is poised to achieve success where Facebook’s previous attempt fell short. The enhanced understanding of cryptocurrency regulations among policymakers in the past three years, coupled with PayPal’s established presence in Washington, positions the company favorably.
This month, PayPal introduced PayPal USD, a digital token tethered to the US dollar, marking it as the second significant global corporation to launch a stablecoin following Facebook’s 2019 Libra initiative. This launch coincides with a transition in leadership at PayPal, as the company announced a new CEO last week.
Despite potential risks associated with the timing of the launch—especially given the political resistance that hampered Facebook’s efforts and the intensified scrutiny on the crypto sector following several high-profile failures—analysts and former officials believe PayPal’s prospects are more promising.
Policymakers today possess a greater understanding of stablecoins, defined as crypto tokens typically linked to a fiat currency. There is also an ongoing push for the establishment of federal regulations regarding stablecoins, which has contributed to their increased legitimacy among lawmakers.
“The environment has evolved substantially since the advent of Facebook’s Libra project, which faced a complete lack of familiarity with stablecoins,” remarked Christopher Giancarlo, former chair of the US Commodity Futures Trading Commission.
“Now, both the administration and Congress, as well as the Federal Reserve, have had the opportunity to comprehend stablecoins and the regulatory landscape surrounding them, aided by considerable lobbying efforts from the industry,” he added.
In contrast to Facebook, which struggled under scrutiny related to privacy and foreign interference issues, PayPal is well-established within the financial regulatory ecosystem in Washington. Last year, PayPal invested $1.13 million in federal lobbying efforts and has consistently advocated for cryptocurrency policies over several years, according to OpenSecrets.
“From a policy standpoint, there is a fundamental difference between Facebook’s Libra and PayPal’s stablecoin,” said Isaac Boltansky, director of policy research at brokerage BTIG. “PayPal’s clear position on one side of the banking and commerce divide should provide reassurance to lawmakers.”
Neither PayPal nor Meta Platforms provided comments on the matter.
PayPal USD will be administered by Paxos Trust, a digital trust company, and will be backed by US Treasury securities and dollar deposits, falling under the regulatory oversight of the New York State Department of Financial Services. A source familiar with the plans indicated that PayPal views itself as a pioneer in payments innovation, with CEO Dan Schulman expressing a vision for the stablecoin to eventually facilitate payments. However, the initial expectation is that it will primarily be utilized by US customers for trading other cryptocurrencies on the PayPal platform.
Dan Dolev, a senior analyst at Mizuho, commented on the development, describing PayPal USD as lacking game-changing potential for investors, labeling it “positive noise.”
Major Concerns
Some policymakers remain wary of PayPal’s move. Maxine Waters, the leading Democrat on the House Financial Services Committee, voiced her concerns regarding the launch of a stablecoin absent of federal oversight aimed at safeguarding consumers and maintaining financial stability. However, the general reaction in Washington has been tempered.
When Facebook originally launched Libra, the stablecoin was managed in Switzerland and tied to a composite of currencies, and its executives were open about their ambition to transform the global financial landscape. The initiative faced severe backlash from lawmakers, who feared that it could grant Facebook undue influence over financial systems and compromise user privacy. The rush to react led to confusion among regulators regarding governance of stablecoins.
In an effort to gain regulatory approval in the U.S., Facebook later rebranded and scaled back its project, transitioning it to a domestic model. One former official noted that discussions surrounding the approval of Libra coincided with President Joe Biden’s administration taking office in January 2021. Although the Federal Reserve had been considering the matter for some time, the outcome ultimately rested with newly appointed Treasury Secretary Janet Yellen, who wanted to take time for thorough examination.
Ultimately, Facebook decided to divest itself of the venture in January 2022 following delays.
The White House and the Federal Reserve declined to comment on the current dynamics. However, a Treasury spokesperson emphasized that Yellen has consistently insisted on the need for Congress to establish a comprehensive regulatory framework for stablecoins.
Over the last two years, the Treasury has actively researched stablecoins. Following the collapse of TerraUSD, Yellen assessed that stablecoins did not represent systemic risks, leading to a decrease in concerns over their potential to replace conventional currencies. Since then, there has been broad consensus that financial regulators should oversee these assets.
“Significant efforts have been made to evaluate the proportional risks associated with stablecoins,” noted Jack Fletcher, head of policy and government relations at blockchain firm R3.
This month, the Federal Reserve outlined procedures for state banks to engage in stablecoin transactions, while the House Financial Services Committee advanced legislation that would augment the Fed’s regulatory authority over stablecoins while retaining the powers of state regulators. In a statement regarding PayPal USD, committee chair Patrick McHenry urged Congress to expeditiously pass the bill to help stablecoins realize their full potential.
© Thomson Reuters 2023
