The launch of PayPal’s (PYPL) stablecoin PayPal USD (PYUSD) is expected to improve payment efficiencies and the customer experience, but adoption of the crypto is unlikely to be significant in the near future, Bank of America (BAC) said in a Thursday research report.
Bank of America is not rooting for PayPal’s stablecoin
PayPal, as previously announced, will develop its own stablecoin, PYUSD, which will be backed by the US dollar and run on the Ethereum network. A stablecoin is a crypto that is linked to another asset, such as the US dollar. Bank of America argues that:
Over the longer term, we expect PYUSD to experience additional adoption headwinds as competition from central bank digital currencies (CBDCs) and yield-bearing stablecoins increases.
Alkesh Shah and Andrew Moss
Shah argued that PYUSD offers fewer advantages than stablecoins with larger market shares and network effects, such as USDT and USDC. In addition, he noted that PYUSD may encounter regulatory obstacles if non-banks are ultimately prohibited from issuing stablecoins, as proposed in a bill pending in Congress.
Investors may have been fine holding non-yield bearing stablecoins such as Tether (USDT) and USD Coin (USDC), when rates were close to zero, but yield-bearing stablecoins will likely become increasingly available and attractive with short-terms rates above 5%.
Alkesh Shah and Andrew Moss
Moreover, according to Shah, PYUSD may lose its appeal as interest rates rise and products with higher yields emerge in the crypto market. He stated that investors might favor stablecoins that generate returns from their underlying assets over those that do not, such as PYUSD.
Shah stated that PYUSD will not target the trading market but rather a “largely untapped” market for blockchain-powered asset transfers, payments, and remittances. This market could expand considerably in the future as more people adopt digital currencies and as more nations develop their own digital currencies for central banks.
We expect PayPal’s PYUSD launch to deliver efficiency in payments and a better customer experience over time. However, we do not expect this to be a game changer for PayPal or the cryptocurrency industry in the near term.
Alkesh Shah
PayPal’s Stablecoin
In a first for a major financial institution, the payments behemoth announced earlier this week that it was entering the crypto market with its own dollar-pegged stablecoin, PayPal USD. The Ethereum-based token will be available on PayPal and Venmo first and can be exchanged at any time for dollars.
According to the report, investors may not care which stablecoins they hold so long as they are perceived as “safe and accessible on the largest trading platforms.”
Bank of America does not anticipate that the launch of PYUSD will result in “accelerated regulatory clarity” because the stablecoin’s issuance “does not alter systemic risk for traditional markets,” but it may encounter regulatory obstacles if non-banks are ultimately prohibited from stablecoin issuance.
Why PYUSD makes sense
This is not PayPal’s first venture into crypto. The company began enabling users to transfer, send, and receive a variety of prominent digital tokens, such as Bitcoin and ether, in the past year.
Starting on Monday, customers who purchase PayPal USD in the coming weeks will be able to send it to compatible external crypto wallets, make peer-to-peer payments, make purchases, and convert any of PayPal’s supported cryptocurrencies.
According to Omid Malekan, adjunct professor at Columbia Business School and author of “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms,” the issuance of a stablecoin may be more consistent with PayPal’s core business model than people initially believe.
PayPal’s primary source of revenue is fees charged to merchants for facilitating consumer payments. If these consumers and merchants began transacting with cryptocurrency on the Ethereum blockchain, however, PayPal would no longer be able to charge these fees.
In May of 2022, investors lost tens of billions of dollars after the terraUSD (UST) stablecoin collapsed. However, unlike PayPal’s stablecoin, UST relied on algorithms rather than currency reserves to maintain its peg to the U.S. dollar.
Several fake PYUSD tokens have already appeared on the decentralized exchange Uniswap in an attempt to capitalize on the excitement surrounding PayPal’s new stablecoin.
