When PayPal announced plans this August to issue its own dollar-backed stablecoin, it felt like a moment to define an era.
Stablecoins are already a bone fide success story in crypto, with a market cap of about $140 billion and thousands of daily users, and here was a company with the acumen, network and regulatory credibility to take the product to a new level.
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There are sizable companies issuing stablecoins linked to the U.S. dollar today (notably Tether with USDT and Circle with USDC, which dominate the market). But PayPal is in a whole different category, given its size and legitimacy as a long-time fintech powerhouse. Launched in 1998, PayPal helped define e-commerce and was a big part of why companies like eBay became household names. It was fintech before fintech really became a thing in the 2010s.
PayPal's move into stablecoins this year came at an opportune time for an industry weathering the storm of sagging asset prices, regulatory scrutiny and the fallout from FTX and other crises. It was a strong endorsement from Silicon Valley for a technology that many have written off as unreliable, hard-to-use, even pointless.
PayPal has 450 million customers. It's available in 200 countries. And, as a company, it has deep experience in the payments field, with proven user-centric tech and legal compliance in all those jurisdictions. With its Ethereum-based stablecoin (PYUSD), PayPal has an opportunity to mainstream crypto technology for the masses – bringing faster, more useful internet-based payments to a large number of people around the world.
The man behind this announcement was Jose Fernandez da Ponte, a bespectacled, unassuming Spanish-American, who moved to the U.S. 12 years ago. In a recent interview with CoinDesk, Da Ponte explained how PayPal came to make its move and why, and how he sees stablecoins changing the world of payments.
Da Ponte looked at ease as he spoke, happy with life in California with his wife and three boys. Recently, he'd said he'd been watching the Rugby World Cup. I asked him if he read Noam Chomsky, a libertarian socialist philosopher, like Circle CEO Jeremy Allaire. He said he was more of a John Rawls fan, a philosopher of egalitarian liberalism. "I would love to read more fiction and just can't find the time," he said.
Speed, cost, contracts
PayPal was drawn to stablecoins by the promise of superior cost, programmability and speed, Da Ponte said.
"I'm a payment person more than I'm a crypto person," he said. "When I look at how you can move value around 26 times cheaper than with banking rails, [I take notice]. You think 'OK, the markets and adoption and regulation can defy gravity for a while.' But, if you have a technology that allows you to do things 26 times cheaper, you know there is something here."
Cost aside, stablecoins also settle in minutes compared to days-long lag times with bank transfers, Da Ponte said. Also, transactions can do more than transfer money; stablecoins can be programmed with smart contracts that settle business transactions (say, that a company has delivered goods as agreed) along with payments.
PayPal could be forgiven for moving more slowly. Following last year's crypto scandals, the industry isn't exactly flavor-of-the-month among policymakers and the public, and the possibility of regulatory interference is high. The U.S. currently lacks specific legislation covering stablecoins, meaning that regulators are arguably empowered to make their own judgments as to whether companies like PayPal are playing within the rules. In early November, PayPal revealed that it received a subpoena earlier this year from the U.S. Securities and Exchange Commission (SEC) requesting documentation about its USD stablecoin.
PayPal's long game with PYUSD
The question going forward is whether policymakers will go along with PayPal's idea. Arguably, PayPal is doing on a public-facing network (Ethereum) what Facebook wanted to do on a private one with the ill-fated Diem/Libra project. Both projects were stablecoin ventures. Will the U.S. allow a company like PayPal to control a stablecoin if it was generally aghast at Facebook issuing one?
Da Ponte is undeterred by this question. PayPal is playing a long game, he said. It expects the regulatory environment to be clearer in 2024 and for companies with strong compliance and fully attested reserves to win out over time. Stablecoin market leader Tether, which has a market cap of $90 billion, is based offshore and has long been criticized for a lack of transparency in its accounting and reserves management (USD stablecoins, which are designed to maintain their value, are backed by reserves held by their issuers).
"We think that in the long game, you need to have a strong regulatory structure. You need to have transparency on reserves. You need to have strong on-ramps and off-ramps," Da Ponte said.
"And you need very strong network effects. You see some stablecoins launch that never get to critical mass and you see some stablecoins where adoption is a bit of an S-curve. I think that there are a couple of stablecoins out there that have this curve, but, five years ago, there were no stablecoins at all. I don't think the landscape is defined at all."
"My hypothesis is that we will see 10X growth in the asset size of stablecoins in the next five years. We are in such early innings that I don't think that anyone has a position or a market share that is secured."
Most of the innovation in fintech in the last 20 years has come in the form of better user interfaces and functionality, while the underlying bank-based infrastructure has remained largely unchanged, Da Ponte said. Stablecoins allow individuals and businesses to transmit value directly over the internet without the usual intermediaries. That's a game-changer in locations that lack solid infrastructure and where costs and settlement times are higher than in the U.S. or Europe.
"I did a lot of work in payments in Latin America before I came to the U.S., so I'm very aware of the pains of things that we take for granted in Europe and the U.S.," Da Ponte said. "I think you will see adoption first in a few places geographically, like Africa and Latin America and Southeast Asia that are already driving that adoption. But also I think that you will see a lot of cross-border flows between the U.S. and the European Union, and these markets."
Da Ponte said PayPal chose Ethereum because it's already used by other USD stablecoins like USDC and USDT (Tether). It has a healthy community of developers behind it and regulators are used to monitoring flows on that network. But PayPal's blockchain chief sees potential in other blockchains, too.
"I'm sure that we will go and deploy on other protocols in the future as well," he said. "I think that there is going to be a combination of layer one and layer 2s [in the future]. For us, the most decisive factors are scale and throughput."
Regardless, PayPal is committed to the ethos of public blockchain infrastructure over the closed networks that carry the world's financial transactions today.
"One of the reasons that we wanted to go to open-source protocols is that we don't think that there should be a PayPal protocol," Da Ponte said.
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