What is PayPal’s stablecoin PYUSD?

What is PYUSD?

PayPal USD (PYUSD) is a stablecoin from the payment giant PayPal.

The issuer of the asset is the infrastructure company Paxos. The latter is supervised by the New York State Department of Financial Services (NYDFS).

PYUSD is pegged to the US dollar in a 1:1 ratio and is created on the Ethereum blockchain according to the ERC-20 standard.

The coin’s smart contract contains the functions of freezing and erasing funds from the balance.

In February 2023, it became known that the company had suspended the development of the stablecoin amid news of the NYDFS investigation into the activities of Paxos, the issuer of BUSD and USDP.

The infrastructure company later reported a constructive dialogue with the US Securities and Exchange Commission, which warned of its intention to go to court.

PYUSD was launched on August 7, 2023.

As of September 18, the market supply of stablecoin from PayPal is 44.3 million. The asset is on the 414th line of the CoinGecko rating.

Why did PayPal need a stablecoin?

PayPal is the largest centralized platform that allows individuals and businesses to transact online.

In its first-quarter 2023 earnings report, the company revealed that it holds about $1 billion in cryptocurrency for its clients. The total number of active PayPal users worldwide exceeds 350 million.

Rumors about the payments giant’s plans to launch a “stable coin” began in May 2021. Six months earlier, PayPal opened up access to cryptocurrencies for clients. In April 2021, the company added support for Bitcoin, Ethereum, Litecoin and Bitcoin Cash in its mobile payment service Venmo.

The firm believes that PYUSD will simplify transfers and international payments, as well as promote further adoption of digital assets.

“PayPal USD is designed for digital payments and Web3, as well as compatibility with the most widely used exchanges, wallets and applications,” the release states.

Clients will be able to:

• transfer PYUSD within the service and between external wallets;
• send payments to individuals;
• pay for purchases;
• convert to any of the supported cryptocurrencies.

“The transition to digital currencies requires a stable instrument that is both digital and easily connects to a fiat currency such as the US dollar,” said company CEO Dan Schulman.

Bank of America (BoA) experts are confident that the launch of PayPal USD, a “stable coin”, will increase the efficiency of payments and improve the quality of customer service. However, experts at the financial conglomerate are skeptical about the long-term prospects of the payment instrument, predicting competition from central bank digital currencies and income-generating stablecoins.

BoA also does not rule out regulatory risks, especially if non-banking organizations are prohibited from issuing “stable coins.”

What is the PayPal stablecoin backed by?

According to the payments giant’s release, the asset is fully backed by “US dollar deposits, short-term Treasury bills and similar cash equivalents.”

Since September 2023, Paxos has been publishing a monthly PayPal USD reserve report. The latest one states that, as of August 31, the total assets in the PayPal account “meet or exceed the balance of PYUSD tokens.”

As of that date, there were $44.4 million worth of PYUSD in circulation. Paxos accounts held assets valued at $44.5 million at face value for the benefit of PayPal stablecoin holders.

97% of reserves ($43 million) came from overnight reverse repurchase agreements on US government bonds. Counterparties to transactions are “reputable financial institutions.” The remaining amount goes to deposits in insured FDIC institutions.

“In the event of a counterparty default, Paxos may liquidate the collateral. Since all transactions are overbooked, the risk of loss is not considered significant,” the report said.

The company may suffer certain financial losses in the event of insolvency of a partner bank, since insurance does not cover the entire amount of deposits.

Where to buy PYUSD?

The centralized exchange HTX (formerly Huobi) was one of the first to announce the listing of a new asset, shortly after the launch of PYUSD. Then a similar step did the largest American cryptocurrency company Coinbase.

PayPal’s stablecoin is also traded on Kraken, BingX, Gate.io, Crypto.com and the Uniswap decentralized exchange.

Nansen analysts noted low demand for stablecoins. Their report indicates that more than 90% of the total PYUSD issuance is on the balance sheet of the company that issues it, Paxos. Only 7% of the coin supply is held in user wallets linked to Kraken, Gate.io and Crypto.com.

“We are seeing a lack of demand for PYUSD from cryptocurrency users when other alternatives exist,” experts noted.

How did regulators perceive the emergence of a stablecoin from PayPal?

American congressmen reacted ambiguously to the release of a “stable coin” by the payment giant PayPal, calling for regulatory oversight of the “stable coin” segment.

US Representative Maxine Waters expressed “deep concern” about the launch of PYUSD. She pointed out the lack of a regulatory framework for such assets.

“PayPal’s 435 million customers worldwide exceed the total number of online accounts at all megabanks. Given its size and reach, federal oversight and compliance of its stablecoin operations are necessary to ensure consumer protection and mitigate risks to financial stability,” the congresswoman said.

Chairman of the US House Financial Services Committee Patrick McHenry also emphasized the need for stablecoin legislation.

“This announcement is a signal that stablecoins, if issued in accordance with a clear regulatory framework, promise to become the foundation of our 21st century payments system,” he wrote.

How does the crypto community assess the prospects of PayPal’s stablecoin?

Not only regulators, but also the crypto community had mixed reactions to the launch of PYUSD. In particular, Blockware Solutions chief analyst Joe Burnett statedthat those who support the launch of PYUSD have “gone crazy.”

“Buy Bitcoin and store it in a cold wallet. That’s what innovation is, not “dollars on the blockchain” from big tech corporations,” he wrote.

Multiple smart contract auditors indicatedthat the functions of “freezing” and “erasing” funds written into the PYUSD code are textbook examples of centralization attack vectors in Solidity contracts.

Other 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 the smart contract, as well as the lack of mechanisms for saving gas during its execution.

As Mark Letsyuk, head of analytics and research at HAPI Labs, explained to ForkLog, a smart contract may be susceptible to known attacks (like a re-entry attack), errors or vulnerabilities that have already been fixed in future releases.

Some members of the crypto community noted potentially high transaction costs due to the use of the relatively expensive Ethereum network and lack of support for second-layer solutions.

Supporters have been positive about the new coin’s impact on the Ethereum blockchain in the context of its wider adoption. According to Bankless co-founder Ryan Sean Adams, the network of the second largest cryptocurrency by capitalization could become the “money layer of the Internet.”

“430 million accounts actively use online payment processing, meaning that more than 5% of the world’s 8 billion people could theoretically be connected to Ethereum through PayPal’s new stablecoin,” explained He.

Allbridge.io co-founder Andrei Veliky admitted that the new stablecoin could take off, since there is a major player behind it.

“But the regulator will influence him, so he will be little trusted, especially because funds can be blocked at the smart contract level,” he pointed out.

JPMorgan analyst Nikolaos Panigirtzoglou said PYUSD could benefit the second-largest cryptocurrency by increasing the total value locked (TVL) in the ecosystem.

“This has the potential to increase activity on Ethereum and improve its network utility as a stablecoin/DeFi platform. In other words, in the future, more companies will choose blockchain (or L2 solutions based on it) for their projects,” the expert said.

According to him, additional benefit for Ethereum could come from filling the PYUSD niche created by a $20 billion reduction in the supply of the BUSD stablecoin from Binance.