Following the news that payments giant PayPal attained a conditional licence from the New York Department of Financial Services to offer its existing user base the chance to buy and sell cryptocurrency from within the PayPal app, a nuanced debate has risen about the pros and cons of the bold move.
The recent announcement that PayPal is to offer support for cryptocurrency to its 346 million users and 26 million merchants have pushed the price of Bitcoin beyond $13k this week, garnering excitement from within the crypto community and from reputable investors and traders in the stock market. However, many in the crypto space feel that the increasing centralization of cryptocurrency is a detriment to the technology, which has sparked debate about the perceived dangers that this announcement poses to the wider crypto community.
The new service will initially support Bitcoin, Ethereum, Bitcoin Cash and Litecoin, allowing users to use crypto to pay for goods and services online. These services are made available thanks to a recent partnership with fintech firm Paxos. Users will be able to buy and sell cryptocurrencies using the PayPal app, and crypto payments made to merchants will be settled in fiat, with no incremental fees.
In 2014, Paypal clamped down on the sale of Bitcoin mining equipment and publicly dismissed this new digital asset class. After previously questioning the validity and legitimacy of cryptocurrency as a safe and secure payment method, PayPal is now embracing it.
A Change In Sentiment
The age-old adage that cryptocurrencies are used primarily for illegal or nefarious activities is quickly diminishing. Many prominent investors and including Paul Tudor Jones have completely changed their tune about the value proposition of cryptocurrencies, in particular Bitcoin, as a hedge against inflation. It is now almost a given for any forward-thinking investor to have at least a small allocation of their portfolio in Bitcoin as the dollar weakens and the US stock markets peer over a cliff in the face of socio-economic and political uncertainty.
The move by PayPal to integrate cryptocurrency services for its huge user base reflects this change in sentiment, as confidence in cryptocurrency continues to flourish and poses a threat to the traditional financial system. Banks will surely be left behind if they fail to keep up, which is evident by the rapid acceleration of central bank digital currencies.
Over the course of just a few months, institutional investment in cryptocurrency has become huge, with publicly-traded companies rushing to allocate capital into cryptocurrency as a hedge against the dwindling dollar.
Shortly after PayPal announced plans to offer support for cryptocurrencies, the company’s stock price skyrocketed, reaching a new all-time high earlier this week. This is a clear reflection of the shifting sentiment around cryptocurrencies. Many traditional investors may still be too risk-averse to hold Bitcoin, however, shareholders of the companies that have holdings in Bitcoin are now indirectly exposed to the asset class.
The faith placed in Bitcoin and other cryptocurrencies by the likes of Grayscale, Square and Microstrategy is expediting the adoption of blockchain technology in traditional finance and enterprise. At the time of writing, 3.74% of all Bitcoin, or 785,999 BTC, is held by publicly-traded companies, according to bitcointreasuries.org.
PayPal is well-positioned for this intersection between finance and technology, and could further bolster this newfound trust in Bitcoin among other enterprises and large companies watching from the sidelines that may soon begin to test the water.
PayPal was part of the initial Libra Consortium before pulling out late last year. The ambitious project was scaled back in 2019 after regulatory approval became a significant hurdle, amid fears that the project could pose a threat to the US dollar.
The Facebook-led project was initially proposed as a permissionless, global currency that would be accessible to anyone with an internet connection, serving over 1 billion people that have no access to basic banking services.
Key players such as Mastercard, Visa, and Swipe joined PayPal in quitting the project. U.S. Senators Brian Schatz and Sherrod Brown both wrote to Swipe, Visa, and Mastercard to warn of the “chilling effects” the Libra project could have on the global economy and the additional scrutiny it could place on existing business models.
After immense regulatory and political pressure, Libra 2.0 would eventually end up looking just like any other payment processor. This appears to be one of the key reasons for PayPal leaving the project, however, the payments giant may have had plans to go alone for quite some time.
The Reserve platform is a flexible pool of stablecoins that aims to reduce risk in cryptocurrency transactions through decentralized governance. Reserve is a network of fiat gateways that makes it easy to buy, sell, and hold digital dollars on the blockchain in a decentralized way.
Such stablecoins would be in keeping with PayPal’s primary goal of facilitating online payments, while also looking to the future of blockchain-based digital payments as the global financial infrastructure awaits a complete overhaul.
The Reserve Rights governance token (RSR) rose by almost 50% after the PayPal news. This may be in part due to one of the major investors in the project. Peter Thiel, co-founder of PayPal and early investor in Tesla and SpaceX, is one of many high-profile investors in the RSR project, which includes Coinbase Ventures, and VP of Marketing at PayPal, Eric M. Jackson.
Many speculate that RSR is part of a long-term goal that has urged PayPal to circumvent the Libra arrangement. CSO of CoinShares, Meltem Demirors has hinted that PayPal may be looking to introduce its own payments-focused cryptocurrency token that somewhat resembles the digital dollar. If this were to come to fruition, some believe that the Reserve platform could play a key role in creating a PayPal digital dollar, and considering the performance of RSR in tandem with the PayPal news, it would appear that the market seems to agree.
In an interview with CNBC, Demirors went on to state that PayPal’s Venmo will be the perfect platform to target the next generation of millennial retail crypto investors that are already using the app on a regular basis.
If Reserve was to fulfill its goal of providing a stable, borderless and transparent digital asset, this could have a major impact on global financial disparity.
Remittances and cross-border payments are one of the core features of PayPal. Despite somewhat hefty fees, PayPal is a much faster way of sending cross border payments than using SWIFT, and is preferred by many small businesses and freelancers.
Cryptocurrency has become a highly-efficient and effective way to transact anywhere in the world, free from capital control or censorship. Despite the recent congestion on the Ethereum network and the sometimes painful Bitcoin transaction confirmation times, the blockchain is quickly becoming the preferred method for businesses and individuals to transact in countries experiencing severe economic turbulence.
This emerging market is too big of an opportunity for PayPal to squander. By infiltrating emerging economies that rely on cryptocurrency for payments, the payments giant could acquire a larger user base than ever before. Traditional banks using the SWIFT system will have to move quickly if they want to retain a dominant position in the market.
Payment technologies is a rapidly evolving landscape. PayPal has been at the forefront of digital payments, dominating the sector for many years. Recently, however, contenders such as Square’s CashApp have knocked the veteran down a notch or two as the industry embraces recent technological advancements and demands.
Innovation in the payments space is increasing, with the rush toward blockchain technology accelerating the race to the top. By not adopting cryptocurrency, PayPal would likely lose favour in the coming years.
Entering the cryptocurrency space at this time, one could argue that PayPal is late to the party. That being said, it would make little sense for PayPal to build every new feature from scratch. This may go some way to explaining the decision to offer limited services at this time, but moving forward, PayPal may need to do more if they want these crypto services to gain adoption.
As such, PayPal has reportedly begun acquisition talks with crypto custodian BitGo, with an agreement that could be completed in a matter of weeks. A monolith in the payments industry, PayPal could continue this trend of acquisition as many successful crypto start-ups are now looking to sell and take profits.
Just as Facebook was quick to acquire Instagram and WhatsApp, PayPal would be extremely well-positioned to scoop up any existing businesses that could help to facilitate the rollout of additional features.
Though users will be able to pay for goods and services using cryptocurrency, merchants will receive payment in fiat.
The initial iteration of PayPal’s offerings will mean that crypto assets will not leave the PayPal platform. To begin with, it won’t be possible to transfer crypto assets to other wallets, instead, PayPal will operate an internal ecosystem that essentially gives exposure to digital assets while offering an all-encompassing custodial service.
Until PayPal introduces a withdrawal function, any Bitcoin that enters the platform is essentially entering a black hole, from which it will not be recirculated into the crypto markets. This effectively reduces the tradable supply of Bitcoin while concentrating the asset in the hands of one of the biggest companies in the world.
Despite the wave of adoption and new exposure to digital assets, the move to offer crypto services could be bad for business, as increasing cryptocurrency adoption does not necessarily mean an increase in trading volumes. The additional cost of the new infrastructure could prove to be a detriment to Paypal’s balance sheet.
The company’s initial hesitation to adopt cryptocurrency may have been due to a lack of regulation in the industry. With new scams and hacks appearing almost daily, a payments processor with the prestige of PayPal would understandably approach the crypto market with caution. However, this could prove to be a thorn in the side of PayPal as they try to establish the brand as a legitimate cryptocurrency platform.
Square managed to establish itself within the crypto space in 2018 and has since gone from strength to strength, in part, due to the higher risk tolerance associated with being a less-established firm. What we see now is an opportunity for crypto regulation to be incentivized as major players from other financial sectors enter the space.
The overlapping of centralized finance and cryptocurrency has become increasingly apparent in recent months. Crypto exchange Kraken recently received a US banking licence which gives users access to crypto services alongside traditional banking.
We are witnessing a polarization within the blockchain industry. Decentralized finance has been responsible for a great deal of the hype around the coming bull market, with decentralized exchange Uniswap briefly reaching higher trading volumes than Coinbase.
Soon, KYC and AML laws could be a requirement for all centralized exchanges, if not for regulatory reasons then in order to stay relevant. The same regulatory scrutiny that pushed PayPal away from the Libra project in 2019 could be what drives higher levels of security and safety in crypto.
The divide between decentralized exchanges and centralized exchanges is widening. While decentralized platforms have been responsible for much of the innovation in the space in recent years, it could be the interoperability between well-regulated centralized crypto exchanges and fintech firms that pushes the adoption of cryptocurrency to new highs.
Some see PayPal’s move as the next phase of the Bitcoin legacy, as interoperability between the traditional financial sector, central banks and blockchain firms continues to expand. However, the decision by PayPal to begin offering crypto services, much like the trend of publicly-traded companies moving into crypto, could be a sign that confidence in the dollar and the broader global economy could be the main catalyst for the move.
What is clear though, is that fintech and payments firms are flocking to crypto, leaving commercial banks and the legacy financial system behind in a rapidly evolving economic landscape.
Though PayPal customers will not be gaining full exposure to crypto immediately, users will still have the chance to dip their toes into this relatively new asset class, without the fear and uncertainty that has prevented so many people from investing in cryptocurrency in the past.
PayPal is paving the way for mass adoption of cryptocurrency by laying the foundations for highly scalable blockchain solutions on an enterprise level, that can be harnessed to utilize blockchain technology at the heart of a new technological and economic paradigm.
If supply and demand have anything at all to do with the cryptocurrency market, it seems logical that these offerings from PayPal are going to increase demand. The growing demand for Bitcoin is evident, and on-chain indicators show that the supply of Bitcoin on exchanges is at record lows.
PayPal integrating crypto was not written in the gospel of Satoshi, and many would argue that increasing centralization is harming the crypto industry and that this type of retail adoption is not conducive to the overall mission of Bitcoin. That being said, if Bitcoin is to achieve any sort of status as a reserve currency, it can only do so with mass adoption, which will be far easier to achieve with this sort of integration.
A payments company the size of PayPal entering the crypto space has the opportunity to drive a great deal of innovation in the fintech industry that would see other such companies follow suit by adding cryptocurrency to their services. This could be the beginning of a new wave of interoperability between the traditional financial sector and the blockchain industry that takes crypto to the next level.
On the other hand, with such a rapid increase of major businesses entering the space, cryptocurrency and blockchain technology more broadly, could become increasingly centralized over time.
If this centralization leads to concentration of assets, then this will likely result in Bitcoin becoming just like any other tradable stock, asset, or commodity. However, with mass adoption, comes innovation. And innovation is hard to predict.