The Launch of Stablecoin By PayPal Can Be A Spark For CBDCs

• PayPal recently announced the launch of its stablecoin, PYUSD, issued by Paxos.
• The move can prove promising for the effort of central banks to launch CBDCs in the market and have control in this unregulated space.

The crypto space has continuously generated interest from established companies, with some fearing its future potential and moving them out of the game while others follow the pursuit. The past few years have indeed proved promising for cryptocurrencies and blockchain ecosystems, although some regulatory hiccups could not be avoided. 

Stablecoins are a class of cryptocurrencies that maintain a constant price ($1) and are backed by fiat currencies, commodities, or work by using algorithms. They are designed to be less volatile than the present crypto coins and allow easy inclusion of the audience, which until now has been set aside due to the risks involved, 

Although the space is quite competitive, with Tether (USDT) and USDC being the two prominent players, it has seen the entry of several players, all wanting a share of profits. We have Dai, True USD (TUSD), and Binance USD (BUSD), and all have witnessed the death spiral of Terra (UST). PayPal, a major fintech company, is also all set to enter this market. 

PYUSD (PayPal’s stablecoin)

PayPal is a major fintech company in the US and already boasts more than 435 million users availing of its products and services. In early December 2022, the company rolled out the feature to enable all PayPal users to send, receive, and transfer cryptocurrencies from their accounts. It realized the potential of cryptocurrencies and has started its journey in the lucrative crypto space. 

Recently, adding another gem to its crypto suite, PayPal announced on August 7th the launch of its stablecoin called the PayPal USD (PYUSD), which is pegged to the price of the dollar. PYUSD is backed by deposits of dollars, US treasuries, and other deposits to ensure price stability. Users can redeem dollars at any time using their PYUSD tokens. 

The stablecoin is issued by Paxos, which also serves as the brokerage partner for PayPal. The same network also issues the Binance USD (BUSD), another stablecoin issued by the Binance network that was earlier under legal scrutiny because of a violation of securities law. 

A Form of CBDCs?

For a long time, Central Bank Digital Currencies (CBDCs) have been a hot topic both in the crypto space and in the traditional financial system. The CBDCs are a move by the central bank to stay updated with technology and not be left behind. They can be called the digital twin of the dollar, which, in contrast to cryptocurrencies, is centralized, regulated, and has the faith and backing of the central bank of the country. 

The move by PayPal is a major step for any FinTech company in the space and many have even called PYUSD the beginning of CBDCs. The stablecoin has a feature that gives the company the right to freeze and remove funds from the accounts of users. Although this raises doubts about the authority of users over their funds, this was done to prevent money laundering and fraud. 

Moreover, this makes PayPal run in the shoes of the Federal Reserve by giving it a hand over the funds. The vision of PayPal for this stablecoin is in line with that of the Federal Reserve, namely to control inflation, ensure financial stability, and maintain economic growth. 

Conclusion

Although users may be in doubt and the stablecoin is not truly decentralized, which people expect from cryptocurrencies, the PYUSD can be seen as the first reflection of the much-awaited CBDC in the market. Backed by reserves and following all the legal obligations, PayPal has truly set the stage for its stablecoin to become a major player in the near future.