PayPal’s Regulated Stablecoin Is ‘Watershed Moment’ in Crypto, Says Partner Paxos

The dominant players in stablecoins, cryptocurrencies designed to mimic U.S. dollars, don’t appear to be flustered by fintech giant PayPal launching its own PYUSD token, but it’s a “watershed moment” in terms of bringing regulation to the business, according to Paxos Trust, the firm that is issuing the new stablecoin.

The vast majority of stablecoins in circulation are either USDT or USDC. USDT was created in the early days of crypto by crypto firm Tether. Its market cap reached an all-time high of $83.2 billion in June. USDC is issued by payments company Circle in cooperation with crypto exchange Coinbase (COIN). Its market cap stands at about $26 billion. The overall stablecoin market is about $125 billion.

Walter Hessert, head of strategy at Paxos Trust, says there's a big difference between PayPal's PYUSD token and the other stablecoins, because of Paxos’ status as a trust company that is regulated by the New York Department of Financial Services, or NYDFS.

Read more: What Is a Stablecoin?

“The difference is significant because we have a prudential regulator,” Hessert said in an interview with CoinDesk. “In our case, you have a regulator overseeing every activity involved in the issuance, including the reserve management. It means no matter where you are in the world, anybody who has this token is protected by the oversight and the rules that are set for us by New York.”

In terms of those rules, a big one is the removal of bankruptcy risk, Hessert said. “Customers' assets are protected, including if Paxos were to go bankrupt — a situation we now see with a bunch of companies in crypto. If you can end up sitting in line as a general creditor of a private company that issued you a stablecoin, that’s not as good as a physical dollar,” he said.

If Paxos were to file for bankruptcy, Hessert explained, the NYDFS would step in and PYUSD would be held out of the bankruptcy so that customers wouldn't become unwitting creditors in a bankruptcy and funds would be returned to every token holder.

Read more: I Have 1M Questions About the PayPal Stablecoin. Here Are 5

Paolo Ardoine, chief technology officer of Tether, said PayPal’s move into the stablecoin market won’t likely have much impact on Tether, because Tether has yet to enter the U.S. market. PYUSD, however, could become a worthy competitor to USDC, which has seen a steady decline in market cap following the collapse of ​​Silicon Valley Bank, where Circle kept some of its USDC reserves.

Circle co-founder and CEO Jeremy Allaire said in a statement to CoinDesk that PayPal's entry into the stablecoin market "is a strong signal that near-instant, borderless and programmable payments in the form of stablecoins are here to stay."

PayPal has evolved in crypto. In 2020, it began to allow users to buy, sell and hold some cryptocurrencies on its platform, essentially following the likes of Block and CashApp. Introducing its own stablecoin takes it even deeper into crypto.

As with Tether and Circle, reserves will be held in U.S. Treasury bills. The interest earned on those bills will be shared between PayPal and Paxos.

“USDT and USDC are pretty similar these days,” Hessert said. “They are both unregulated, and they both are fairly transparent now.”

PayPal didn't immediately respond to a request for comment.

UPDATE (Aug. 7 20:24 UTC): Added statement from Jeremy Allaire.

CORRECTION (Aug. 7 20:58 UTC): A previous version of this story incorrectly stated that PYUSD is the first stablecoin to be overseen by a regulator. It is the first stablecoin from a global payments company to be overseen by a regulator, and there are other regulated stablecoins.