Last week, Paypal, known as Alipay in the United States, announced the issuance of the stable currency PaypalUSD ("PYUSD" for short), and the crypto field was once again stirred up.
As the largest third-party payment institution in the United States, Paypal released a stablecoin at the juncture of intensifying SEC regulation. Its motives are inevitably confusing, considering that its stablecoin was issued on Paxos, and just two months ago, due to the SEC’s prosecution, the currency An urgently removed the stablecoin BUSD that cooperated with Paxos.
From an industry perspective, many people have high hopes for Paypal, believing that the entry of large institutions will likely lay the foundation for the relaxation of regulations. But behind the release, the myth of centralization and limited scenarios are also lingering.
Speculations sparked by Paypal are continuing to ferment.
01. Helping in times of need: the past and present of PYUSD
On August 8, 2023, the US payment giant Paypal officially announced the launch of its stablecoin PYUSD, becoming the first traditional large financial institution in the United States to issue a stablecoin.
According to the official website, PYUSD is issued by Paxos Trust Company in cooperation with Paypal and can be anchored 1:1 to the US dollar. To ensure its solvency, similar to Tether, PYUSD is fully collateralized by US dollars, short-term US Treasury bonds, cash and equivalents, and Paxos will begin publishing Paypal's public monthly reserve report on US dollars from September 2023, detailing its reserve details. Paxos will also entrust an independent third-party accounting firm to conduct public attestation of the value of PYUSD reserve assets, and perform regular inspections in accordance with the attestation standards established by the American Institute of Certified Public Accountants (AICPA) to ensure the security and integrity of its assets.
PYUSD introduction, image source: official website
From the perspective of actual application scenarios, PYUSD can support the conversion of US dollars and other cryptocurrencies, including but not limited to transfers in compatible wallets, peer-to-peer stablecoin payments, and PYUSD payments. The stablecoin will be used first in Paypal, and will then be expanded to the small payment program Venmo, and gradually promoted to other applications. Currently, the currency is limited to US users, but because it is issued on the Ethereum blockchain, it can be opened to developers, wallets and Web3-related communities.
It is worth noting that in order to avoid the risk of unregistered securities issuance that Paxos was previously accused of, Paypal publicly stated that it would not provide returns to users of the PYUSD stablecoin. Usually, the annual interest rate of Paypal deposits is as high as around 4.3%.
For those who are not familiar with Paypal, they may be surprised by its sudden entry into the market. But as early as 10 years ago, Paypal had paid attention to cryptocurrency.
As early as 2013, when cryptocurrencies first emerged, David Marcus, then president of Paypal, expressed his consideration of adding cryptocurrencies to financing tools. In 2014, Paypal established its first cooperation with crypto companies such as Coinbase, BitPay and GoCoin.
In 2018, Paypal submitted a patent application for an "Accelerated Virtual Currency Transaction System" to the United States Patent and Trademark Office (USPTO). In the same year, Coinbase allowed US users to withdraw fiat currency directly from Coinbase to their Paypal accounts for free.
In October 2020, Paypal officially entered the crypto market, supporting US users to trade in cryptocurrencies such as Bitcoin, Ethereum, BCH and Litecoin. At the time, the platform only allowed customers to purchase through internal IOU vouchers, but did not allow withdrawals or transfers between wallets, which was more like an internal payment voucher.
This year, PYUSD was officially released. Looking at the timeline, Paypal's entry into the market was far from being achieved overnight, but rather the result of a long period of preparation. As the largest payment institution in the United States with 431 million active users, Paypal's entry at this time is undoubtedly a timely help for the crypto field that is deeply trapped in the regulatory vortex, and it also makes industry insiders feel a rare positive signal in recent times.
After all, it is rare for traditional institutions to enter the market at present, and Paypal's huge payment channels, potential audience groups, and complete infrastructure have a positive effect on the expansion of cryptocurrencies. In terms of compliance, the strong Paypal will be closer to regulators than other companies.
The consensus in the industry is that at this stage when Coinbase and Bianance have been sued one after another and Paxos has been forced to stop issuing BUSD, it is quite delicate for traditional institutions to issue stablecoins.
Last June, Paypal successfully obtained a local cryptocurrency license. Its partner, Paxos, is a legal trust institution under the jurisdiction of the New York State Department of Financial Services. Whether in terms of market size or qualification review, regulators can only be extremely cautious about it. Paypal also disclosed that it had held extensive discussions with US regulators and policymakers before the launch of PYUSD.
As expected, after the release, Maxine Waters, the Democratic leader of the House Financial Services Committee, publicly criticized that the anchored assets were not under supervision. Ironically, Republican Patrick McHenry's description was very different from that of the Democrats, believing that Paypal's stablecoin showed promise as a payment system. The wavering political inclinations between the parties on stablecoins and encryption means that the competition between the two parties will also directly determine the direction of encryption, and among them, the political attributes of Paypal are more obvious.
But in any case, Paypal’s entry is still a positive thing, but it also raises a question: why issue stablecoins at this time?
02. Paypal Strategy: Profit Margin Crisis and Stablecoin Survival
From a time perspective, Paypal's stablecoin strategy has been full of twists and turns. It dates back to last year, in January 2022, when developers discovered "PayPal Coin" in the source code of the iPhone app, and Paypal had no choice but to reveal to the media that it was exploring stablecoins. Later, according to Wu's report, Paypal tried to cooperate with FTX last year, but was suspended due to the subsequent thunderstorm incident. The same scenario also happened this year. PYUSD, which was originally scheduled to be released in February, was suspended again due to Paxos' review.
The on-chain data also fully demonstrates this. On November 8, 2022, Paypal completed the first issuance of a total of 1.1 million PYUSD. On February 1 this year, 26.4 million pieces were minted, but on the 23rd, the existing 25.5 million pieces were destroyed, and then on August 3, 24.9 million pieces were re-minted.
It can be seen that Paypal is actually eager to issue the currency, but due to the repeated delays in supervision, it is very likely that the current release is due to the loosening of supervision. Although there is no absolute evidence to prove this, from the performance of the event, Ripple's victory in the lawsuit and the US Republican Party's successive proposal of two key bills to support the encryption field can provide some confirmation from the side.
From the perspective of the purpose of issuance, Dan Schulman, president and CEO of Paypal, described the move as a hope to consolidate its leading position in digital payments with stablecoins. The statement is quite euphemistic, but the fact that can be seen from the stock price is that Paypal, which is struggling to grow, urgently needs cryptocurrency as a new economic growth point.
In terms of business composition, Paypal is no different from other payment institutions. As an integrated payment service provider covering consumers and merchants, its core products include Paypal, Venmo, Xoom, Braintree, Zettle and Hyperwallet. Among them, Venmo has social attributes, Xoom provides cross-border payment, Braintree provides acquiring services, Zettle provides offline payment equipment, and Hyperwallet provides institutional payment services.
It can be seen that Paypal is very similar to Alipay in my country, but unlike Alipay's absolute leading position in operation, Paypal's market competition is more intense. The payment landscape in the United States is particularly complex, and the competition among Paypal, Square, and Stripe is fierce. Traffic giants such as Amazon and Google are not far behind, and they have seized market share by building their own payment networks. Therefore, Paypal, which is positioned as a third party, needs to give network commissions upstream and seize the merchant, institutional, and consumer markets downstream. The control of marketing, R&D, and management expenses is particularly passive. Under this premise, the company's profit margin disadvantage is prominent.
Paypal has high handling fees, with regular handling fees as high as 4.4%, which is almost the highest among similar competitors, but due to extremely high operating costs, profit margins continue to decline. For the whole year of 2022, Paypal's net profit margin was 8.79%, lower than 16.43% in 2021, of which total operating costs were 21.151 billion, accounting for 76% of total revenue. In horizontal comparison, VISA, which has similar total revenue, has operating costs of only US$2.7 billion and a net profit of 50%. From the perspective of TPV, Paypal's total payment amount of 1.36 trillion, compared with a net income of US$27.056 billion, has a commission rate of about 1.98%. The commission of the same type of Alipay in my country is as low as 0.11%.
Paypal's transaction profit margin has continued to decline this year. Source: Deep Value Ideas
In short, because the cost is too high, Paypal is expensive, but earns very little. The dilemma brought about by this is that the business is highly fragile and needs to spend more to maintain such expensive rates, otherwise it will fall into a negative cycle.
The data is consistent with the actual performance. Although Paypal's business performance in the second quarter was acceptable, the reduced profits attracted more attention from investors. The report shows that in the second quarter of 2023, Paypal's net revenue was US$7.3 billion, a 7% increase from US$6.8 billion in the same period last year. However, the transaction profit margin continued to decline to 45.9%, from 47.1% in the previous quarter and 49.7% in the previous year. The decline in the moat can also be seen from the number of users. As of June 30, 2023, the total number of active Paypal accounts was 431 million, down from 433 million on March 31, marking the second consecutive quarter of month-on-month decline.
Affected by the lower-than-expected profit margin in Q2, Paypal's stock price plummeted by more than 9.2% that day, now reporting $6.327 billion, down 37.67% year-on-year. Susquehanna, Raymond James and other rating agencies downgraded Paypal's rating. In this context, Paypal, whose revenue is highly dependent on Venmo, turned its attention to other directions. In recent years, loans, cross-border payments, and buy now, pay later (similar to Huabei) all originated from this, and the lucrative and long-established encryption field naturally appeared in its field of vision.
Paypal's stock price trend over the past year, source: Google Finance
As we all know, stablecoins are the most profitable industry in the crypto field. Because of the scale effect, the marginal issuance cost of stablecoins is infinitely close to 0, and its 1:1 fiat currency exchange business model can be said to be very profitable.
In layman's terms, during the exchange process, users exchange real US dollars for cost-free US dollar stablecoins. After the issuing institution obtains the cost-free US dollars, it can increase the value by purchasing government bonds, cash equivalents, etc., and at least obtain a risk-free interest rate, which is almost equivalent to making money without doing anything. This does not involve handling fees and service fees, let alone the repurchase of stablecoins caused by market fluctuations, which are all part of its revenue contribution.
Take Tether, the issuer of USDT, for example. In its 2023Q2 certification opinion, Tether's operating profit from April to June 2023 exceeded US$1 billion, a quarter-on-quarter increase of 30%. It is not an exaggeration to say that it is making a fortune every day. Compared with Q1 data, Tether's net profit in the first quarter of this year was US$400 million, even surpassing China Unicom, one of the three major operators in my country, by a difference of about RMB 600 million.
From this point of view, it is understandable that Paypal is targeting the stablecoin field. Judging from the unbinding of other cryptocurrency exchanges, the subsequent Swap function is just around the corner. Swap has high-frequency transaction scenarios and a fairly stable commission rate, which can contribute to revenue sustainably. Taking MetaMask as an example, the handling fee rate is 0.875%, and its revenue in 2021 is as high as 250 million yuan.
03. Subsequent impact: Stablecoin structure and regulatory swings
After discussing the reasons, let’s look at the impact. It is generally believed that PYUSD will directly impact the current stablecoin landscape.
According to Coinmarketcap statistics, the current total market value of stablecoins is about 125.2 billion US dollars, among which USDT issued by Tether has the highest market share, 66.53%, about 83.3 billion US dollars; USDC issued by Circle accounts for 20.77%, about 41.5 billion US dollars; BUSD dropped to fourth place after the suspension of issuance, and the third place was taken by decentralized stablecoin DAI, accounting for 4.28% with 5.36 billion US dollars. It can be seen that the top three stablecoins basically account for 90%, and the concentration of the top is prominent.
Stablecoin market capitalization ranking, source: Coinmarketcap
Compared with other centralized institutions, Paypal is quite strong, and the institutions it serves are widely distributed globally. More importantly, due to the compliance trust nature of the issuer, customer assets do not depend on the survival of the issuer, and the endorsement advantage is more obvious. As it stands, the market value of stablecoins has been declining. Not only is the total market value at a historical low, but in the past week, the market value of the top four stablecoins has fallen by US$419 million, of which USDT has fallen by US$325 million due to the negative impact of the lawsuit.
Mainstream institutions have been undercurrents regarding the emergence of PYUSD. Tether’s Chief Technology Officer Ardoino said that since PYUSD was launched in the United States and Tether mainly focuses on emerging markets, the two did not interfere, but other competitors were not like that, implying that the US domestic stablecoin USDC was more susceptible to the impact.
USDC was not to be outdone. Circle CEO Jeremy Allaire tweeted back that it is estimated that about 70% of USDC is used outside the United States, and the fastest growing markets are emerging and developing markets.
In addition to the relevant stablecoin institutions, the industry also has mixed opinions on PYUSD.
Since PYUSD is currently only used in Paypal and Venmo, it is not yet integrated with the Defi ecosystem. Some people in the industry believe that it is more like a kind of virtual points, a derivative of traditional finance, and not a true cryptocurrency. Even if it is recognized as a cryptocurrency, the stablecoins issued on Paxos are mostly tepid except for the strong BUSD, and PYUSD is more likely to repeat the same mistakes.
In addition, because the code version used by PYUSD is too low and expensive, and all variables related to the currency can be controlled and changed by Paypal, the crypto community believes that it has a high degree of centralization problem.
However, the industry generally believes that the launch of this currency will promote the relaxation of regulation. Patrick McHenry, chairman of the House Financial Services Committee of the Republican Party, has repeatedly proposed that Paypal has a positive effect on the Payment Stablecoin Transparency Act that has passed the House of Representatives.
McHenry released a statement on PayPal’s announcement of a stable currency for payments, sourced from the House Financial Services Committee’s official website
For now, it is too early to discuss the industry and regulatory impact when PYUSD has not yet been listed on the exchange. However, unlike the relaxed verbal performance, mainstream institutions have taken defensive actions. Circle said that it has prepared more than $1 billion in cash buffer to cope with the competition from Paypal, and MakerDAO has also adjusted the DAI deposit rate of Spark Protocol to 8% to reduce the risk of capital outflow. On the other hand, Paypal has come on strong and recently made it clear that launching CEX as soon as possible is a priority and will be integrated with the DeFi ecosystem.
It can be seen from this that the offensive and defensive battle of stablecoins is about to begin, and the partisan struggle among regulators will once again enter deep waters. The stagnant water of encryption has finally been stirred up by Paypal.