Digital Dives
Last week, PayPal announced their intent to launch a USD-backed stablecoin called PYUSD. This is a big deal and I think it underscores a powerful theme across digital assets that will see considerable growth in projects that are built on public blockchains, but with a clear objective to be compliant (in so far as regulations are in place). Analysts from Alliance Bernstein share the viewpoint of an evolving landscape of adoption: "from offshore to onshore, unregulated to regulated, crypto-native to mainstream bank integration of stablecoins, generic crypto stablecoins to co-branded consumer-focused stablecoins." Financial services often trend towards oligopolies, so we’ll see how many different platforms adopt their own branded offerings, but I do think that crypto’s “killer app” is likely to see massive growth in the future. For their part, Alliance Bernstein forecasts stablecoins to grow from $125B today to $2.8T of tokenized digital currency, over the next five years.
Forecast Growth in Tokenized Currency Value
How might the industry attain an 85% 5-year CAGR to reach $3T of value? The sponsorship of massive financial services businesses like PayPal is a good start. They’re one of the world’s most trusted brands, boasting more than 400M accounts and having processed over $1.4T in payment volume over the last 12 months (Q2 – Q2). Critically, they’re “increasing consumer and merchant comprehension of cryptocurrencies, stablecoins and central bank digital currencies (CBDCs), while working closely with regulators as the industry evolves.” Digital assets remain nascent, but having large and reputable organizations like PayPal champion their development goes a long way to reduce the frictions of broader adoption.
Does the entry of a giant strike fear into the current operators in the space? It doesn’t appear so, as Circle’s Jeremy Allaire commended the move and elsewhere stated that PayPal's strategy "is a strong signal that near-instant, borderless and programmable payments in the form of stablecoins are here to stay." Because crypto is underpinned by network effects, operators benefit from sticking together and growing the ecosystem. Further, the sponsorship of a well-respected entity helps challenge the pushback from crypto’s detractors.
We were speaking with Jack Tang, a co-founder from one of our portfolio companies, the other day and PYUSD came up. His venture, BoomFi, is building technology to streamline payments across blockchains and traditional payment rails into one seamless, borderless and familiar experience for businesses and merchants. They could be considered a competitor to PayPal, but Jack sees PYUSD as complementary:
Back in 2019, Facebook/Meta attempted to launch a stablecoin, but their approach was shot down rather publicly. I think this was due to a confluence of matters. For one, Facebook had been under considerable scrutiny for data leaks and potential anticompetitive behaviour, so their “move fast and break things” mentality wasn’t all that welcome in the incumbent institutional realm. Further, policymakers understood blockchain technology even less in those days. Finally, it didn’t appear that the company had engaged with regulators on the matter much at all. PayPal’s offering is sure to receive some official opposition, but it seems they’ve prioritized compliance. The Chairman of the House Financial Services Committee, Patrick McHenry, had this to say about the PayPal offering:
While there are other regulated stablecoins, PayPal’s would be the first from a global payments’ provider. The tokens will be issued by Paxos, which is registered as a trust company overseen by the New York Department of Financial Services. The NYDFS is generally considered a prudent regulator and they’ll keep watch over creation/redemption activities, record keeping, and reserve management. PYUSD assets are held outside of the parent and even if Paxos were to go bankrupt, the regulator would step in to ensure the reserves were protected from the associated proceedings. The traditional banking and the digital asset industries have both experienced significant financial losses in recent years, so having these checks and balances help buttress PayPal’s brand as they push further into crypto.
Many proponents of blockchain technology are less sanguine about the idea that web3 should be built in accordance with the rule of law, but to me it’s always been clear that the industry would grow alongside the incumbent institutions rather than in their opposition. BoomFi’s Jack Tang agrees:
Shortly after PayPal’s announcement, Crypto Twitter (Crypto X?) lit up with commentary for and against the initiative. Beyond the puzzling use of an outdated version of solidity, most of the pushback related to the issuer’s centralized nature, that PYUSD would require full KYC/AML disclosure, and that account balances could be frozen or wiped. These frustrations highlight an important dichotomy that remains present in the ecosystem. We want growth and adoption, but not everyone agrees on playing by the rules. Don’t get me wrong, Big Tech and TradFi have their shortcomings, but so too does total decentralization. A thoughtful way forward will contemplate multiple perspectives and weigh their relative merits. From my viewpoint, the digital asset ecosystem is at a point where cooperating with incumbents would be net beneficial; provided the developer community can maintain some of the grassroots values.
I believe we’re seeing a version of this balance play out with PYUSD. That PayPal initially plans to launch the token on the Ethereum blockchain is meaningful. During the last cycle, most incumbent institutions wanted to leverage the trustlessness, security, and efficiency of blockchain technology, but this ignored their most powerful benefits – composability and network effects. PYUSD is not completely permissionless, but it’s available on a blockchain that is. The size of PayPal’s userbase will motivate intrepid engineers and marketers to build novel use cases and experiences around the new stablecoin (and other cryptoassets). Initial progress might be slow, but assuming they’re successful, then general Ethereum adoption would go higher, expanding the blockchain ecosystem and increasing value across the board.
The idea of programmable money through stablecoins has proven to be a significant and enduring benefit for the digital asset economy. Tech platforms and global payments giants have noticed and are attempting to enter the space. Incorporating the network effects of public blockchains with the massive user bases of web2 networks should lead to an eventual explosion of crypto adoption and perhaps even a gradual dismantling of the walled gardens associated with the incumbent corporations. I suspect PayPal and others will take it slow until there are clearer stateside regulations in place, but it’s undeniable that global businesses continue to push further into web3. Their offerings will emphasize compliance.
At Aquanow, we help institutions unlock the potential of digital assets, so if you or anyone you know is considering this functionality, then please get in touch. We’d be glad to leverage our expertise to help you outperform.
If you want to contribute to the web3 movement, Aquanow is on the look for curious and motivated folks to join our team. Feel free to reach out directly or check out the current openings here.
