PayPal USD Expected to Do Better Than Facebook’s Libra in Stablecoin Market

PayPal’s stablecoin is more likely to succeed the place Facebook’s failed, because of the cost big’s standing in Washington and policymakers’ higher understanding of the problems within the final three years. 

PayPal this month stated it was launching PayPal USD, a crypto token pegged to the US greenback, making it the second main international firm to launch a stablecoin after Facebook, now Meta Platforms, unveiled Libra in June 2019. 

The transfer, which comes as PayPal transitions to a brand new CEO introduced final week, appears dangerous after Facebook’s stablecoin was crushed by political opposition, and as regulators residence in on the crypto sector following a number of meltdowns. 

But PayPal is in a stronger place than Facebook, stated former officers, executives and analysts. Policymakers are extra aware of stablecoins, crypto tokens sometimes pegged to a fiat forex, than they had been in 2019. A push to create federal stablecoin rules has additionally helped enhance their legitimacy within the eyes of lawmakers.

“The world has changed dramatically since Facebook’s Libra project. There was no familiarity with stablecoins whatsoever,” stated Christopher Giancarlo, former chair of the US Commodity Futures Trading Commission. 

“Since then the administration, Congress and the Federal Reserve have had time to get their minds around stablecoins and stablecoin regulation and there has been very extensive public relations by the industry, including a lot of lobbying.”

In contrast to Facebook, a social media giant that had been under sustained scrutiny over privacy issues and Russian election interference, PayPal is an established financial operator in Washington. It spent $1.13 million (nearly Rs. 9.40 crore) on federal lobbying last year, according to OpenSecrets, and has been lobbying on cryptocurrencies for several years, records show.

“From a coverage perspective, there’s a seismic distinction between Facebook’s Libra and PayPal’s stablecoin,” said Isaac Boltansky, director of policy research for brokerage BTIG.

“There remains to be a wall between banking and commerce, so understanding that PayPal may be very clearly on one facet of that wall ought to assuage lawmakers.” 

PayPal and Meta declined to comment. 

PayPal USD will be issued by digital trust company Paxos Trust, backed by dollar deposits and US Treasuries, and subject to oversight by the New York State Department of Financial Services. 

PayPal launched a stablecoin because it sees itself as a leader in payments innovation, said one person familiar with the plan, and CEO Dan Schulman has said he envisages it will eventually be used for payments. But PayPal expects the stablecoin will mostly be used by US customers to buy and sell other crypto tokens on its platform, the source said.

Dan Dolev, a senior analyst at Mizuho, said PayPal USD is not a game-changer for PayPal investors. “It’s optimistic noise,” he added. 

Grand ambitions

To be sure, some policymakers have concerns. Maxine Waters, the top Democrat on the House Financial Services committee, expressed alarm that PayPal is launching a stablecoin without federal oversight to protect consumers and financial stability. But mostly the reaction in Washington has been muted. 

When Facebook unveiled Libra, a stablecoin whose operations were based in Switzerland and which was pegged to a basket of currencies, executives made no secret of their ambitions. They said they wanted to revolutionize the global financial system. 

The project ran in to fierce opposition from policymakers alarmed that Libra could give Facebook too much control over the money system, and infringe on users’ privacy. Caught by surprise, regulators were confused about who should oversee stablecoins. 

Facebook rebranded Libra, scaled it back and moved the project to the United States, in a bid to win US regulatory approval.

According to one former official with direct knowledge of the matter, the decision on approving Libra coincided with the transition to President Joe Biden’s administration in January 2021. While the Fed had been working on the issue for some time, the decision ultimately fell to the new Treasury Secretary Janet Yellen. She wanted time to fully analyze the issues, this person said. 

Tired of waiting, Facebook sold the venture in January 2022.

The White House and the Fed declined to comment. A Treasury spokesperson noted that Yellen has “repeatedly referred to as on Congress to create a complete regulatory framework for stablecoins.”

The Treasury has studied stablecoins over the past two years. After TerraUSD collapsed last year, Yellen said stablecoins did not pose systemic risks. Since then, fears that stablecoins could supplant traditional money have subsided, and the Treasury and Congress have broadly agreed that prudential regulators should oversee them. 

“There’s been an terrible lot of labor executed … to grasp what the proportional danger of these items is,” said Jack Fletcher, head of policy and government relations at blockchain company R3.

The Fed this month outlined the process for state banks to transact in stablecoins, while the House Financial Services committee last month advanced a bill giving the Fed more power to oversee stablecoins while preserving state regulators’ authority. 

The committee’s Republican chair, Patrick McHenry, said in a statement on PayPal USD that Congress should move fast to pass that bill, “enabling stablecoins to realize their full potential.”

© Thomson Reuters 2023