On August 7, payment giant PayPal launched the PayPal USD (PYUSD) stablecoin, issued by infrastructure company Paxos. It’s already available outside of the US. For US customers, the service will roll out in the coming weeks.
The news met with mixed reactions from the community. Some announced positive prospects for the crypto industry, others pointed to potentially high commissions, and others warned about the risks of a new asset, focusing on centralization.
In turn, regulators called for speeding up regulatory oversight of the stablecoin segment.
Architecture and tasks
PayPal USD was created on the Ethereum blockchain according to the ERC-20 standard. The smart contract of the coin contains the functions of freezing and erasing funds from the balance.
The stablecoin is pegged to the US national currency at a ratio of 1:1. According to the company, the asset is fully collateralized by “US dollar deposits, short-term treasury bills and similar cash equivalents.” At the time of writing, the supply of PYUSD is 26.9 million tokens.
At an early stage, stablecoins are used in the cryptocurrency and Web3 sectors, for example, for exchange for other coins or for payments in games. Later, the asset will spread in the field of money transfers and micropayments. At the same time, it will work in tandem with other PayPal crypto services, and will also receive compatibility with popular exchanges, wallets and applications.
Starting in September 2023, Paxos will publish a monthly PYUSD reserve report backed by public attestations from third-party accounting firms.
PayPal CEO Dan Shulman told Bloomberg that the company aims to consolidate its dominant position in digital payments by making transfers instant and affordable without the participation of a central intermediary. Over the past year, as the surge in online payments during the COVID-19 pandemic eased, the firm’s shares have fallen more than 35%.
Rumors of the payment giant’s plans to launch a “stablecoin” surfaced in May 2021. According to information knowledgeable sources, in 2022, PayPal also considered partnering with FTX for the first issue of a coin on the Solana blockchain. However, due to the collapse of the stock exchange, work was suspended.
In February 2023, the initiative was once again postponed due to the tightening of the policy of American regulators, in particular against the backdrop of an investigation into Paxos, chosen at that time as a new issuer of PYUSD.
PayPal allowed its customers access to cryptocurrencies in November 2020. Since April 2021, the company has added support for Bitcoin, Ethereum, Litecoin, and Bitcoin Cash to its Venmo mobile payment service.
In its Q1 2023 earnings report, the company revealed that it holds about $1 billion in crypto for its customers.
The total number of active PayPal users in the world exceeds 350 million people.
Community reaction and market outlook
A number of crypto enthusiasts reacted negatively to the PayPal initiative. In particular, Blockware Solutions Chief Analyst Joe Burnett said that those who support the launch of PYUSD have “lost the plot.”
“Buy bitcoin and store it in a cold wallet. This is what is innovation, not “dollars on blockchain” from big tech corporations,” he wrote.
Skeptics also believe that the new coin will be a kind of “poorly designed and censored CBDC.”
Supporters praised the impact of the new coin on the Ethereum blockchain in the context of its wider adoption. According to Bankless co-founder Ryan Sean Adams, the network of the second cryptocurrency can become the “money layer of the Internet.”
“430 million accounts are actively using online payment processing, which means that more than 5% of the 8 billion people in the world could theoretically be connected to Ethereum through the new PayPal stablecoin,” he explained.
Coin issues
Several smart contract auditors have pointed out that the “freeze” and “wipe” functions written into the PYUSD code are textbook examples of centralization attack vectors in Solidity contracts.
Cryptocurrency researcher Chris Black expressed concernthat PayPal will use the controversial features where appropriate. Other smart contract auditors addedthat the PYUSD smart contract can be changed by PayPal at any time.
Blockchain engineer Patrick Collins named “suboptimal” is the choice of an outdated version of the Solidity language for programming a smart contract, as well as the lack of mechanisms for saving gas during its execution.
The potentially high cost of transactions with a new asset has become a major stumbling block in the crypto community.
“PayPal is launching a stablecoin on the Ethereum mainnet, rather than the literally dozens of two-cent cumulative rollups they could use instead — it’s honestly a brilliant way to make sure their own exorbitant fees look like an inconsequential grain next to gas.” ”, noted Web3 enthusiast David Phelps.
Amid the controversy, Tron co-founder Justin Sun suggested considering issuing PYUSD on his blockchain.
“The Tron network is characterized by high transaction speed, security and operational efficiency. Every day, transfers in the equivalent of $ 12 billion pass through it, ”he wrote in a tweet.
However, taking into account the fact that the tokens of the main public blockchains are SEC like securities, experts consider the probability of PYUSD spreading to other L1 blockchains is relatively low.
Impact on other stablecoins
According to CoinGecko, the total capitalization of existing stablecoins currently exceeds $125 billion. The largest of them is USDT with $83.4 billion.
Tether CTO Paolo Ardoino told The Block that the launch of PayPal’s “stablecoin” would not affect their company as the firm does not serve users in the US.
At the same time, he positively assessed the growth of competition and the prospects for PYUSD to enter international markets.
“This is interesting. Another stablecoin in the US. This could lead to a reduction in payments revenue, which mainly fueled Mastercard and Visa. It will also help the industry grow further and achieve sensible regulation,” Ardoino added.
Experts also do not expect the new coin to have an immediate impact on the second-largest ($26.1 billion) USDC stablecoin from Circle.
According to David Wells of Enclave Markets, PYUSD and USDC are likely to compete for customers in regulated US stablecoins and DeFi markets. However, for this it is necessary to wait for the listing of a new asset on major trading platforms.
At the moment, no major crypto exchange has announced support for a stablecoin from PayPal.
Regulatory response
Against the backdrop of PayPal’s announcement, US House Financial Services Committee Chairman Patrick McHenry stressed the need for a “stablecoin” bill.
“This announcement is a signal that stablecoins, if issued in accordance with a clear regulatory framework, promise to be our main payment system of the 21st century,” he wrote.
Expert opinions
The USDT giant cannot be moved today and, most likely, PayPal created this tool to improve its internal operations, Andrey Tugarin, managing partner of GMT Legal, said in a comment to ForkLog.
At the same time, experts remain skeptical about securing a stablecoin, mindful of the collapse of TerraUSD in May 2022.
“The process of auditing stablecoin reserves is periodically subject to external criticism for the alleged lack of guarantees that the company really has the declared reserve funds in the accounts,” said Yulia Privalova, head of the FinTech & Crypto practice at DRC law firm.
She recalled that in 2019, the chief lawyer of Tether Limited, Stuart Hogner, recognized the backing of USDT with fiat reserves by only 74%.
Another important aspect is the lack of regulation of the stablecoin market in the US.
“If stablecoins can really confirm and maintain their collateral and be used to pay for purchases through PayPal, this will certainly be the new universal currency,” Privalova believes.
Allbridge.io co-founder Andrew the Great added that the new stablecoin could take off as there is a big player behind it.
“But the regulator will influence him, so he will be poorly trusted, especially due to the fact that funds can be blocked at the level of a smart contract,” he said.
A more serious problem for the new asset may be the threat to its security and the overall functionality of the smart contract due to the use of the old version of Solidity in the code. As Mark Letsyuk, head of analytics and research at HAPI Labs, explained to ForkLog, a smart contract can be subject to known attacks (like a reentry attack), bugs, or vulnerabilities that have already been fixed in future releases.
In addition, it reduces the efficiency of the maintenance and renewal process while increasing the price of gas.
“Updates and improvements to the Ethereum network may make contracts using older versions of Solidity incompatible with newer systems. This can lead to unexpected behavior or even to the termination of the contract, ”the expert noted.
Also, using an older version may limit access to support and community resources.
Letsyuk emphasized that even with repeated tests of the old version of Solidity and a certain level of stability, its use cannot be considered completely safe.
“Security is an ongoing process, and upgrading from previous versions is not only about preventing current threats, but also about being prepared for future risks and changes. It is necessary to take into account the specific context of the project, the security risks and the need for new features,” he concluded.
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