For the first time, a major American financial company is launching and making available a stablecoin with a fixed value pegged to the US dollar. This company is PayPal, a payment giant, and the stablecoin is called PayPal USD (PYUSD).
Stablecoins are cryptocurrencies whose values are tied to an underlying asset, with the US dollar being the most common. According to the company, PayPal USD will be issued by Paxos Trust Company, headquartered in New York, and will be built on the Ethereum network.
It will be an ERC-20 token, allowing PayPal customers to transfer it between compatible digital wallets, cryptocurrency exchanges, and the company’s wallet.
The announcement by PayPal, which led to a 2.5% increase in its stock value, is seen as a sign of confidence in the crypto industry. Despite facing regulatory challenges over the past year, PayPal’s move into stablecoins demonstrates a shift towards embracing cryptocurrencies.
Immediate availability
PayPal USD will be available immediately, and users will have the ability to make purchases with it in the coming weeks.
It will be backed by dollar deposits and short-term bonds, with Paxos responsible for publishing a monthly report confirming the value of the reserves.
Notably, Paxos had stopped offering another stablecoin, Binance’s BUSD, due to pressure from US regulatory authorities.
Recall that the first major attempt by a company to issue a stablecoin was Libra by Meta (formerly known as Facebook). However, that initiative faced strong regulatory backlash and was met with skepticism due to concerns about disrupting global financial stability.
The current environment is different. Several major economies, such as the UK and the European Union, have established regulations regarding stablecoin circulation and management. In the US, a proposed bill aims to create a federal regulatory framework for stablecoins.
Why Stablecoins?
Stablecoins offer benefits such as faster, cheaper, and safer cross-border transactions, making international money transfers more efficient. They can also be used by individuals in less developed economies to convert savings, providing an alternative to potentially volatile national currencies.
Currently, the total market capitalization of stablecoins is around $120 billion, with Tether and USD Coin being the dominant players.
One challenge with stablecoins is their dependence on the credibility and transparency of the entity holding the reserves. Even with 100% dollar backing, risks still exist, such as bank collapses or mass withdrawal requests. However, if a “too big to fail” institution issues a stablecoin with even indirect backing from the Federal Reserve, it could herald a significant change.
When the speed of transferring money across borders with zero transaction fees and currency conversion costs becomes feasible, the appeal of crypto technology will become evident.
As for which blockchain will host these transactions, PayPal’s decision to use Ethereum indicates a turning point. Ethereum’s daily active users range between 300,000 to 400,000, according to Etherscan. This is a fraction of potential users if major financial institutions adopt it.
The sudden interest in Ethereum from institutional players indicates that significant developments are on the horizon.
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