PayPal bets on crypto’s future with US-dollar-backed stablecoin | CNN Business

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PayPal is rolling out its first stablecoin as it attempts to capitalize on the “emerging potential” of US dollar-backed digital tokens for consumer payments.

The stablecoin, PayPal USD, is fully backed by the US dollar and is “designed to reduce friction” for payments within virtual spaces and provide faster, cheaper transfers of money across borders.

For now, the use case for the new token appears limited to crypto-related and other “web3” applications. But PayPal is betting on a future in which digital currency is more mainstream and merchants may request payment in stablecoins to avoid credit card processing fees. Similarly, crypto holders can send money instantly across borders without incurring remittance fees charged by banks.

“The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the US dollar,” said PayPal CEO Dan Schulman.

Stablecoins, as their name implies, are designed to hold their value steady, making them a vital tool for traders of cryptocurrencies, which are notoriously volatile. Most stablecoins are tightly pegged to a traditional fiat currency, such as the US dollar, or to a commodity like gold. Stablecoins also act as a sort of on-ramp, allowing investors to more easily cash out their crypto holdings for money that can be used in real life.

Their purported stability has made stablecoins such as Tether a pillar in the infrastructure of the $1 trillion digital asset market.

PayPal

(PYPL) said its stablecoin will be “compatible with that ecosystem from day one. It will be available “soon” on Venmo, the popular payments app owned by PayPal

(PYPL).

Stablecoins aren’t always as stable as they purport to be. In May 2022, the “algorithmic” stablecoin TerraUSD collapsed when the crypto token backing it, Luna, collapsed. That triggered a broader panic in the space, wiping about $40 billion from the crypto market. The Securities and Exchange Commission later charged its creator, Do Kwon, with misleading investors about the coin’s stability.

The value of PayPal USD, or PYUSD, doesn’t rely on a complex algorithm the way Terra did. It is issued by Paxos Trust, a blockchain infrastructure firm, and is fully backed by US dollar deposits, Treasuries and similar cash equivalents, according to the companies.

In other words: every PayPal USD should be worth $1.00, no matter what.

With the launch of PYUSD, Paxos and PayPal are “proving the real-world value of blockchain technology,” Paxos CEO Charles Cascarilla said, calling the new token “the most significant leap forward for digital assets and the financial industry.”