PayPal Launches a Stablecoin

Stablecoins have become a core component of DeFi business models. Aave and Curve, for example, have both recently launched their own respective stablecoins using a collateralized debt position (CDP) system. Tether and Circle issue their stablecoins (USDT and USDC) against customer deposits. Interest revenue generated from issuing one's own stablecoin flows directly back to the protocol or company itself, rather than splitting it with liquidity providers. PayPal, the payments giant, announced it has now entered the stablecoin issuance domain with its PayPal USD (PYUSD) stablecoin.

PayPal will use Paxos as its issuer and is the first major U.S. financial or payments company to issue its own stablecoin. Similar to both the Tether and Circle models, PYUSD is “fully backed by U.S. dollar deposits, short-term U.S. treasuries and similar cash equivalent,” according to its press release. PYUSD is live on Ethereum Mainnet as an ERC-20 token. Support for the stablecoin is yet to launch for PayPal users, though is expected to be rolled out over the coming weeks to users in the U.S.

Issuing stablecoins in this manner is a lucrative model, especially when short-term U.S. treasuries can yield 5% or higher. Combining those yields with $83 billion and $26 billion of USDT and USDC supply, respectively, it’s understandable why PayPal is joining the ranks.

There will be limited demand drivers at the outset for PYUSD. The next step for PayPal will be converting this launch into actual demand for the stablecoin itself. Given its existing integration on both the merchant and consumer sides, distribution channels are in place for PYUSD. But merchants have to be comfortable accepting and holding PYUSD. If PayPal can position PYUSD to reduce merchant fees (ranging between 1.5% to 3.5%) at PoS systems or incentivize consumers to hold and spend PYUSD, then the economics may begin to make sense, given the high fees many retailers currently face. But given the regulatory uncertainty that still exists in the U.S. around DeFi and stablecoins, it may take time for PYUSD to find demand.