PayPal Likes Digital Currencies? Yawn

Ryan Selkis
Feb 20, 2014 at 13:40 UTC
Updated Feb 20, 2014 at 15:48 UTC

It’s hard to not get frustrated when everyone starts jumping for joy after a televised interview in which eBay CEO John Donahue told Bloomberg that PayPal is building a digital wallet for multiple cryptocurrencies. Because, of course, it is. The e-payments giant would be silly not to.

Paypal, which is owned by eBay, is the pioneer in digital payments and they already accept over 25 foreign currencies – basically, all of the ones that matter, with the exception of the Chinese RMB.

New digital currencies like bitcoin will likely interact with PayPal’s systems in the same manner as existing fiat currencies – when they are big enough. That’s because, like Coinbase and BitPay, you would expect PayPal to lock-in fiat prices for merchants accepting bitcoin.

They would also be likely to batch transactions ‘off-block chain’ in order to cover transaction risks during the 10-minute confirmation window.

What they said

In the interview, Bloomberg’s Matt Miller told Donahue that he thinks digital payments like bitcoin will rule in the internet commerce of the future and have the potential to make PayPal defunct unless the company starts preparing now.

However, it is absurd to infer that PayPal is useless in the long-term, and neglects the fact that PayPal owns some serious e-commerce real-estate. This is like saying that Amazon, after utterly dominating the book industry, would never be able to move into electronics (or any other category that they have since dominated).

Miller speaks with an irritating certainty about bitcoin. It’s safe to call me a fanatic, but Miller is already in outer space on his way to the moon.

Finally, the idea of the “head start” PayPal would get for spinning off now makes some sense until you consider what he is really saying. This is, that PayPal should essentially spin-off to the highest bidder before it dies an inevitable death. Is Miller suggesting a perverse corporate pump and dump?

Donahue’s no fool. He coolly pointed out there’s nothing that’s holding PayPal back from integrating digital payments today as part of eBay, in fact:

“PayPal is pursuing digital payments and is the leading digital payments alternative in many different environments. So it’s not a matter of eBay holding PayPal back.”

What Donahue is really saying of course is: we will do with bitcoin what we want, when we want to, because we are really, really good at payments.

He doesn’t need to utter the word ‘bitcoin’, because that particular currency would be lower volume for PayPal today than the Russian ruble. Miller is like a dog with a bone though: “Until everyone starts using bitcoin, and then there will be no reason to use PayPal.”

Then Donahue responded with the bombshell:

“[That is just what] PayPal is doing in building a wallet that can hold multiple types of digital currency.”

So, we can assume that, as soon as cryptocurrencies are actually worth PayPal’s time and regulatory uncertainties over the commercial use of cryptocurrencies are removed, the company will integrate them into their system. And will very likely be a force from day one.

It’s really not a matter of if PayPal enters the bitcoin industry, but when and, more importantly, how.

Build or Buy?

E-commerce

PayPal has enormous resources at its disposal in terms of financial and human capital, but the company seems to have a much better option than building their own bitcoin products from the ground up – on the merchant side, at least.

If PayPal could acquire BitPay, it would be a great deal for both parties.

Not just because BitPay is the leading bitcoin payment processing company and that PayPal would gain all their expertise, while dotting the global map with locations that accept the virtual currency overnight.

Or because their joint DBA (‘doing business as’ title) is already flawless – what’s not to like about BitPayPal?

But because BitPay’s business model would compliment, not cannibalize, existing PayPal sales.

A lot of people have the misconception that bitcoin will crush PayPal’s margins. That’s not likely.

PayPal could drop their prices for bitcoin transactions overnight by a full percentage point and make the same gross margins, because the company wouldn’t be exposed to the same interchange or credit card fees.

In addition, PayPal could become an instant bitcoin market maker.

Contrasting cultures

BitPay is really two businesses: a SaaS (software as a service) company that offers merchant services and a ‘long’ hedge fund that benefits from jumps in the price of bitcoin.

Multiple sources have told me the company sits on over 40,000 bitcoins. That’s a lot of exposure to price swings, but it is also a valuable asset.

Ownership of BitPay would allow a company like PayPal to kill two birds with one stone via an acquisition: acquire the talent and IP and seamlessly acquire the necessary underlying currency.

Will this acquisition actually happen, though? Probably not. But the move would make a lot of sense for Paypal.

Ryan Galt is a blogger, entrepreneur and freelance opinion writer for CoinDesk. His opinions do not necessarily reflect those of CoinDesk. You may email him at 2bitidiot@gmail.com, or follow him on twitter @twobitidiot.

Disclaimer: CoinDesk founder Shakil Khan is an investor in BitPay.

E-commerce image via Shutterstock