PayPal’s prospective triumph in the stablecoin arena stands in stark contrast to Facebook’s previous setbacks, primarily attributed to the notable influence that the payment behemoth wields in Washington and the increased comprehension demonstrated by policymakers concerning the intricacies of the domain over the past three years.
In the current month, PayPal made a significant announcement regarding the introduction of PayPal USD, a cryptographic token that is pegged to the United States dollar. This move solidifies PayPal’s position as the second prominent multinational corporation to unveil a stablecoin, following in the footsteps of Facebook, now known as Meta Platforms, which introduced its stablecoin, Libra, in June of 2019.
This strategic initiative by PayPal, coinciding with the recent announcement of a new CEO, is not without its inherent risks. Notably, Facebook’s foray into the stablecoin realm encountered substantial challenges due to political resistance, resulting in significant setbacks for its stablecoin endeavor. Additionally, the regulatory spotlight has intensified within the cryptocurrency sector subsequent to a series of notable market upheavals. These developments necessitate a cautious approach as regulatory authorities closely scrutinize the crypto domain.
However, according to insights garnered from former officials, industry executives, and analysts, PayPal holds a more advantageous position compared to Facebook. Notably, policymakers have attained a heightened familiarity with stablecoins, which are cryptographic tokens typically tethered to a traditional fiat currency. This enhanced understanding marks a notable departure from the scenario in 2019, when Facebook unveiled its Libra stablecoin project. Importantly, the impetus to establish comprehensive federal regulations for stablecoins has substantially contributed to enhancing their credibility and acceptance among legislative stakeholders. This growing regulatory framework has progressively bolstered the legitimacy of stablecoins in the discerning eyes of lawmakers.
Christopher Giancarlo, former chair of the US Commodity Futures Trading Commission, succinctly captures the evolving landscape by stating, “The world has undergone significant transformations since the inception of Facebook’s Libra project. Back then, the concept of stablecoins was largely unfamiliar and novel.” This assertion underscores the substantial shift in awareness and understanding that has occurred within the stablecoin domain over the intervening period.
“Subsequent to that point in time, the administration, Congress, and the Federal Reserve have been afforded the opportunity to thoroughly comprehend the nuances of stablecoins and the imperative for their regulatory oversight. Notably, this period has witnessed extensive public engagement by industry participants, marked by robust public relations initiatives and concerted lobbying efforts.”
In a marked departure from Facebook’s scenario, characterized by intense scrutiny pertaining to privacy concerns and foreign election influence, PayPal possesses the distinct advantage of being an entrenched financial operator with a recognized presence in Washington. Demonstrating its commitment to proactive engagement, PayPal allocated $1.13 million (approximately Rs. 9.40 crore) to federal lobbying efforts in the preceding year, as reported by OpenSecrets. Notably, the company has engaged in cryptocurrency-related lobbying initiatives for a number of years, as indicated by available records.
Isaac Boltansky, the Director of Policy Research at brokerage firm BTIG, aptly underscores the substantial policy distinction between Facebook’s Libra and PayPal’s stablecoin, emphasizing a seismic shift between the two initiatives.
“The clear demarcation between banking and commerce persists, underscoring that PayPal is unmistakably positioned on one side of this demarcation. This unequivocal distinction should serve to allay concerns and apprehensions among lawmakers.”
Both PayPal and Meta have chosen not to provide comments on this matter.
PayPal USD, as planned, will be issued through the auspices of Paxos Trust, a digital trust entity. This issuance will be substantiated by the collateralization of dollar deposits and US Treasuries, with stringent oversight falling under the purview of the New York State Department of Financial Services.
The impetus behind PayPal’s introduction of a stablecoin stems from its perception of being a frontrunner in the realm of payments innovation, as indicated by an individual with knowledge of the strategy. CEO Dan Schulman has articulated his vision of the stablecoin eventually serving as a facilitator for payments. Nevertheless, it is anticipated that the primary utilization of PayPal’s stablecoin will revolve around US-based customers engaging in the buying and selling of various other cryptocurrency tokens on its platform, according to the aforementioned source.
Dan Dolev, a senior analyst at Mizuho, has expressed the perspective that PayPal USD does not possess the potential to be a transformative element for investors of PayPal. He characterizes it as “positive noise,” signifying that while the introduction of PayPal USD holds positive implications, it may not significantly alter the investment landscape for the company’s stakeholders.
While grand aspirations undoubtedly underlie this venture, it is worth noting that a segment of policymakers harbors apprehensions. Maxine Waters, a prominent Democrat and the ranking member of the House Financial Services Committee, has conveyed her unease regarding PayPal’s stablecoin launch occurring without comprehensive federal oversight in place to safeguard both consumers and overall financial stability. However, it is noteworthy that the prevailing sentiment in Washington has predominantly been subdued in response to this development.
During the unveiling of Libra by Facebook, the stablecoin project that operated out of Switzerland and was anchored to a diversified basket of currencies, the company’s executives were forthright about their ambitious intentions. Their pronouncements were clear in their desire to initiate a transformative shift within the global financial landscape.
The endeavor encountered formidable resistance from policymakers who expressed grave concerns over the prospect that Libra could potentially grant Facebook an excessive degree of influence over the monetary system, potentially impinging upon user privacy. Regulatory apprehensions were further intensified by the unexpected nature of the project’s introduction, leaving regulators grappling with uncertainty over the appropriate entity responsible for overseeing stablecoins.
In response to the regulatory challenges, Facebook opted to rebrand its Libra initiative, subsequently curbing its scope, and shifting the project’s operations to the United States. This strategic maneuver was undertaken with the aim of securing regulatory endorsement from US authorities.
As per a former official privy to the details, the determination regarding the approval of Libra coincided with the transition to President Joe Biden’s administration in January 2021. Although the Federal Reserve had been actively engaged in deliberations concerning this matter over a considerable period, the final verdict rested with the newly appointed Treasury Secretary, Janet Yellen. It was conveyed that Secretary Yellen sought an extended period to meticulously scrutinize the complex array of concerns before rendering a decision.
Growing impatient with the prolonged waiting period, Facebook made the decision to divest from the venture in January 2022.
While both the White House and the Federal Reserve declined to provide comments, a spokesperson from the Treasury acknowledged that Secretary Yellen has consistently advocated for Congress to formulate an encompassing regulatory framework tailored to address the complexities associated with stablecoins.
Over the course of the last two years, the Treasury has diligently conducted an examination of stablecoins. Following the tumultuous incident involving the collapse of TerraUSD last year, Secretary Yellen conveyed her assessment that stablecoins did not present significant systemic risks. Subsequently, concerns regarding the potential displacement of traditional currency by stablecoins have waned. This shift in perspective has led to a broad consensus between the Treasury and Congress, converging on the notion that prudential regulators should assume oversight responsibilities for stablecoins.
Jack Fletcher, the Head of Policy and Government Relations at blockchain firm R3, underscores the considerable efforts that have been expended to comprehensively assess the proportional risk inherent in stablecoins. These efforts signify a dedicated endeavor to attain an in-depth understanding of the risk landscape associated with stablecoins.
In the present month, the Federal Reserve delineated the procedural guidelines enabling state banks to engage in transactions involving stablecoins. Concurrently, the House Financial Services Committee, in the preceding month, propelled a bill forward that empowers the Federal Reserve with augmented regulatory authority over stablecoins. This proposed legislation concurrently upholds the prerogatives of state regulators to exercise their regulatory jurisdiction.
The Republican chair of the committee, Patrick McHenry, expressed his view through a statement regarding PayPal USD. He advocated for swift action on the part of Congress to pass the aforementioned bill, emphasizing that doing so would facilitate stablecoins in attaining their complete range of capabilities and potentials.