Original title: Will PayPal's PYUSD Steal Market Share From Tether and Circle?

Original translation: Kaori, Lucy, BlockBeats

On August 7, PayPal announced the launch of PayPal USD (PYUSD), a stablecoin for transfers and payments. The stablecoin is issued by Paxos and is backed by US dollars, short-term government bonds and cash equivalents. It will be gradually opened to PayPal customers in the United States. Although PayPal has been involved in a lot of crypto business in the past few years, the launch of its official stablecoin can still be regarded as a major event in the development of crypto.

Recently, Laura Shin interviewed José Fernández da Ponte, senior vice president of cryptocurrency at PayPal, and discussed in depth how the financial technology giant has developed a long-term strategy around blockchain-based payments. BlockBeats compiled and sorted the interview, the full text is as follows:

Laura Shin: This week, PayPal launched the stablecoin PYUSD on Ethereum. What is PayPal’s vision for PYUSD and how will it be used?

José Fernández da Ponte: We have been active in the crypto space for the past four years, and PayPal's overall vision has always been to be the bridge between fiat and Web3, bringing mainstream applications to the payment system. We are a payment company that cares very much about payment applications, and the launch of PYUSD is a natural progression of this process. Starting with traditional crypto tokens in applications, then moving to on-chain transfers, entering international markets, and now adding a fully supported and regulated stable value tool that can be used for payments, this is the culmination of the first phase. We do believe that stablecoins are the killer application of blockchain at the moment, and they are very close to the payment market that we care very much about.

 

Laura Shin: So how do you expect it to be applied, like what industries do you think will use it, DeFi? Or do you see it as just simple payments?

José Fernández da Ponte: We do believe that the fundamentals of digital currencies are well suited for payments, with some inherent advantages such as cost, programmability, and settlement time. Interestingly, a lot of discussion has focused on the cost per transaction, while I am more interested in settlement time.

We tend to say they are faster and cheaper, but when you are paying, speed is cheap, and the settlement time advantage is very clear. But it takes time, this revolution will not happen overnight, and we are still a few years away from the mainstream use of stablecoins in daily payments. But there are industries that are already very suitable for stablecoins. There are $122 billion in stablecoins today, mainly used for crypto trading and Web3 use cases, including DeFi, which you mentioned, and we expect PYUSD to be used there as well. We have seen some early use cases, such as remittances, which is an area we are very interested in.

A company called Xoom, which PayPal acquired a few years ago, has been very active in the remittance space, so we do have a role to play in this space, and the convergence between remittances and digital currencies has already begun. In the B2B payments space, we are seeing more and more stablecoin adoption, which makes a lot of sense when you think about it. If you are a company exporting to a foreign country and want to receive payment, instead of receiving a wire transfer that takes three to five days to clear, the timely settlement time is really powerful.

The fourth market segment that we think will be the first to adopt stablecoins, probably in addition to cryptocurrencies, is digital goods. Economies like Minecraft or Roblox have about $100 billion worth of digital goods traded every year. If you are a developer selling digital goods in your game in the current payment system, it may take 15 days to get your money. So if you can do something digitally native and instantly settled within the game, the advantages are very obvious.

Likewise, I think we are still a few years away from mainstream use cases in domestic e-commerce or retail, but there are already very large commercial markets that can use stablecoins.

 

Laura Shin: So you mean DeFi will go further?

José Fernández da Ponte: I think DeFi will be part of the first wave, today you can only get PYUSD on your PayPal wallet. We are increasing the product, but you can be sure that the major exchanges will also offer PYUSD by then, and people can also use it for traditional use cases.

 

Laura Shin: I saw some news saying that PYUSD can be sent to "compatible external wallets". There are some regulations that may prohibit transactions to self-custodial wallets, but I want to confirm, does this include self-custodial wallets?

José Fernández da Ponte: Yes, it is true. Regarding compatibility, I would say that PYUSD is an ERC-20 token, it is deployed on the Ethereum blockchain and can be sent to external wallets that support ERC-20 tokens, that is what compatibility means.

 

Laura Shin: There is something in the user terms that states PayPal can reverse a transaction, but I imagine that only applies to certain specific transactions, such as within the PayPal/Venmo system.

José Fernández da Ponte: I don't know which part you are quoting specifically, but there are transactions related to being a fully backed and regulated stablecoin. Our issuance is approved by the New York DFS, Paxos is the issuer, and New York has very clear and strict requirements in terms of KYC and anti-money laundering regulations, which requires the ability to implement appropriate controls.

 

José Fernández da Ponte: Yeah, I think there are a couple of different factors that make PYUSD a very strong value proposition. The first is obviously the PayPal ecosystem, PYUSD is the only stablecoin that is accepted by the PayPal ecosystem, which includes PayPal now, and soon Venmo, and our bilateral network. So there are millions of consumers and merchants who will be able to get it and can use it as a funding instrument for PayPal transactions. That means if you're shopping at one of the millions of merchants that are part of PayPal, and you have a PYUSD balance on hand, you can use PYUSD as your funding instrument to make payments, which is something that I don't think anyone else can do.

The second aspect is related to the connection of fiat currencies, and PayPal leverages the bank connections we have built over the years. Converting from fiat currencies to stablecoins is a clunky process that sometimes requires transferring wallets to exchanges to pay fees and then withdrawing, a process that takes days. With PayPal, you can transfer PYUSD and sell it, and then withdraw it to your bank account. We think this is an inherent advantage, both for the upside and the downside.

The third point I want to talk about is compliance and regulation. PYUSD is issued by New York Trust, which draws on our 20 years of experience in dealing with and preventing cyber financial crimes.

 

Laura Shin: Speaking of regulation, the stablecoin legislation has now passed the preliminary committee stage in the House of Representatives. Is the timing of your launch a coincidence, or did this give you some confidence to launch?

José Fernández da Ponte: We have been following the legislative process for a long time. Obviously, there are still differences between the parties on what the legislation should be, but it is a democratic process. In general, the fact that these bills are being considered is not necessarily a trigger for us to publish. There is a clear trend happening now on stablecoins, and a few months ago it was MiCA in Europe. Many markets have clear regulations on stablecoins, and now the United States is catching up, which is why we went to New York, because this is the most stringent, powerful, and rigorous framework available today on stablecoins.

 

Laura Shin: House Representative Maxine Waters issued a statement saying, "She is deeply concerned that PayPal has chosen to launch its own stablecoin without the federal regulatory, oversight, and enforcement framework for these assets." What is your response to this?

José Fernández da Ponte: I saw the statement from the senior member, and from the statement I understand that her main point is that she wants legislation to federally regulate stablecoins, and as we just said, this is an ongoing debate in Congress. There are other members of Congress, both Republicans and Democrats, who have different views, and this is part of the legislative process. We are very supportive of regulation through legislation, and as I said, this is the most stringent framework currently in place, and we will comply and abide by any legislation that comes out of Congress.

 

Laura Shin: Does PayPal believe federal regulation is necessary, or does it believe that state regulation of stablecoins is sufficient?

José Fernández da Ponte: We are a payments company in a country where payments are regulated at the state level. I think different places regulate in different ways. For example, in places like MiCA, it has a very clear definition of payment stablecoins. In our opinion, if stablecoins are related to payment activities, it makes sense to include them in the payment framework, which is what is regulated at the state level right now.

 

Laura Shin: A few years ago, Libra, launched by Facebook (now Meta), attempted to create a stablecoin that was not directly pegged to the value of the dollar. But I wonder how that company’s failure, largely due to regulatory reasons, influenced PayPal’s strategy for this launch.

José Fernández da Ponte: We had discussions about Libra, four years ago. But I don't think it affects our approach because we are developing in this space in the same way as we do the rest of our business. We are a technology company, but also a regulated financial institution that has been around for 20 years. Our approach has always been to put regulation first, and sometimes that means we may move slower than other companies, but we care very much about the regulatory and compliance framework and our relationship with regulators. As we have said in the past, we are present in 200 countries, one of the few institutions that can do that. We have always stressed that we will always be in harmony with regulators as we explore this space. So I don't think it's an influence from Libra, it's just our nature.

 

Laura Shin: How do you plan to expand this to other parts of the world? Also, will you launch stablecoins pegged to other fiat currencies?

José Fernández da Ponte: We are already live on the PayPal wallet, and the next step is to focus on getting Venmo wallet to implement this feature, so it will still be based in the United States, but we will also consider international expansion. We have not yet considered other stablecoins denominated in local currencies, and the current priority is to ensure the success of this launch and make it beneficial to the crypto ecosystem.

 

Laura Shin: But I'm sure you have a general idea in your mind whether you plan to launch a euro stablecoin or a pound stablecoin.

José Fernández da Ponte: There are no plans at the moment.

 

Laura Shin: So what does your upcoming monthly reserve report look like, and will it also show proof of reserves?

José Fernández da Ponte: As part of the New York framework, Paxos is the issuer of the token. Regular audits are required. Therefore, this will be similar to other stablecoins issued by Paxos, such as USDP. Users can see an audit report verified by a third party, which shows the amount of reserves and their composition.

 

Laura Shin: But it's not something that identifies an address, and people can't use some function to prove that their own coins are still retained in the reserve.

José Fernández da Ponte: I think the best way for the benefit of all parties is to go to the Paxos website, which provides reports on other stablecoins and you can clearly see the information we provide.

 

Laura Shin: PayPal wants to build in some digital native environments like online gaming, which seems to be different from PayPal's existing user base. How do you plan to attract these users?

José Fernández da Ponte: I'm very interested in payments in the video game industry. If you think about video games, sometimes for an outside observer, they might be considered to be only for a younger demographic. But in reality, the audience for video games is very much in line with the general population, and it's a very large industry with very strict and constrained computing needs. If you look at it from the perspective of solving a difficult technical problem, it's a very hard computing problem.

A lot of computing innovation has been born in video games, and I think a lot of innovation in payments will be born in video games. We envision some payment use cases that are not possible today, and stablecoins may make these use cases possible, such as streaming payments. Imagine that when you watch a video, you pay by the second or minute instead of paying for the entire video? Or can you buy digital goods in the in-game environment and take them away? I think we have seen some very exciting experiments, including NPCs (non-player characters) or AI agents in the game, which can connect to a wallet and carry value, and then this autonomous agent in the game can buy and sell things in the game.

We can't imagine these things out of thin air. What we do is release a platform product and then developers will develop on its basis.

 

Laura Shin: This is one of the reasons why PayPal decided to design PYUSD as an ERC-20 token, and it sounds like they are planning features like smart contracts to make money more programmable.

José Fernández da Ponte: Yes, in the beginning of the process we had to think whether we were going to go the way of open source protocols and a traditional permissionless environment or do something proprietary. And we chose the open way very quickly because we believe in following the developers. You shouldn't tell developers what to do, but let them tell you what to do. Choosing Ethereum was a very clear decision because the developer community was already there.

PYUSD is designed to be a multi-chain, so there is absolutely no reason why we can't expand on other protocols or other layers of the same protocol later. Although Ethereum has higher fees relative to other protocols, there are also many advantages. For certain use cases, such as micropayments or high speed and high throughput as we said, it may be expensive, so we will definitely expand from there, but Ethereum is obviously the preferred deployment platform.

 

Laura Shin: This undoubtedly opens up a new source of income for PayPal. First of all, PayPal can make money from deposits such as government bonds. So the handling fee is 1.5% of the deposit or transaction?

José Fernández da Ponte: Traditionally the monetization mechanism for stablecoins has been through reserve yields, but in the current interest rate environment, this has become a considerable source of profit for the industry, but we do not believe that this should be the only monetization mechanism. The interest rate environment may change, so our vision is that when these stablecoins are adopted, we will monetize them through instruments that are closer to traditional payment businesses. That is, when merchants want to accept stablecoin settlement, they need to pay a merchant discount rate.

In addition, people may convert stablecoins of one currency into other types of stablecoins, which may involve certain fees. Regarding the question of fees, there are no fees when buying PYUSD on the PayPal app, and there are no fees when selling PYUSD. You can buy $1 for $1, and there are no fees involved. You can also sell $1 and you will receive $1 in your PayPal balance. Of course, you can also transfer money, and we will not charge any PayPal fees for these transfers. The only fees that need to be paid are the fees that the Ethereum protocol requires you to pay. In the PayPal ecosystem, we do charge transaction fees, but there are no fees for stablecoins.

 

Laura Shin: Going back to my previous question about PayPal's revenue stream, how big does PayPal think this potential business line will become?

José Fernández da Ponte: It could be very important in the long term, but our expectations for next year are more modest. What's interesting is that this is usually a very polarized environment. Stablecoins have a proven track record, right? There are $120 billion in stablecoins out there, and we hope to take a piece of that market share, but also help expand the overall market.

I saw an analyst report a few days ago that said stablecoins will grow from $122 billion now to $2.8 trillion in five years, which is a huge growth, meaning a 22-fold increase in five years, but I think this is a project that will take years to develop. We hope to establish the right use cases and gradually promote them, and growth will definitely happen, but we are in a long-term development mentality, and this will be a journey that spans many years.

 

Laura Shin: How does the app present this payment method to users? Is it just one option among all the payment options, or are there any incentives for people to try it?

José Fernández da Ponte: There are two different places where it is shown, the first one is when you enter the app, there is a crypto section in the app and you will see it as an additional token and you will see the tokens that we support, Bitcoin, Ethereum, Litecoin and Bitcoin Cash, but also PYUSD, which can be bought there, sold and transferred to external wallets.

During the checkout transaction, we provide consumers with the choice, without pre-defining or directing them to any specific payment method. So it will appear as another payment option, but it will not be given more priority during checkout. If you decide to use PayPal and pay with a credit card, your credit card will be displayed first, and the others will be displayed after that, including PYUSD.

 

Laura Shin: Okay, this has been a very interesting discussion. Is there anything else you would like to mention about PYUSD that I didn’t ask about?

José Fernández da Ponte: As I said at the beginning, we do believe that stablecoins are the killer app in this space. The advantages in settlement time, cost and speed are very important, but it will take some time for them to be adopted in the mainstream payment space. Therefore, we have adopted a crypto-first strategy and then started to explore some retail use cases. When it comes to competition, I believe we will take a certain market share here, but also believe that there is a lot of demand in the market and hope that more fully supported and regulated stablecoins will be a good development for the entire industry.