PayPal boosts its stablecoin as banks prepare to launch a shared one

• Key insight: PayPal has added its PYUSD stablecoin to blockchain technology firm Polygon's payment rail. 
• What's at stake: An increasing number of banks and fintechs are expressing interest in stablecoins.
• Forward look: OpenUSD, a potentially large stablecoin with lots of bank support, is scheduled to launch later this year. 

As banks plot their stablecoin strategies, PayPal is looking for additional ways to make its existing PYUSD stablecoin available to more users. 

PayPal on Thursday launched on Polygon, a blockchain technology company that has developed Open Money Stack, a rail to move money across borders while managing compliance and access to traditional currency. PYUSD has a market cap of about $2.8 billion, lagging Tether's USDT at $184 billion and Circle's USDC at $73 billion. The entire stablecoin market is bracing for the impact of potential bank stablecoins. A likely contender is OpenUSD, a stablecoin from Open Standard slated to launch later this year with backers including several major banks, fintechs and payment companies.

"Every stablecoin issuer is going to face more pressure as banks, fintechs and other regulated issuers enter the market," James Wester, research director for digital assets and crypto at Javelin Strategy & Research, told American Banker.

What PayPal and Polygon are looking for

The Polygon PYUSD integration enables companies to accept funds from a card, bank account or exchange balance, move PYUSD across borders and cash out into local currency.  

Polygon says it settles more than $2.5 billion in stablecoin volume each day and has processed more than $2.6 trillion in total stablecoin volume. Polygon says PayPal can help boost that volume, while PayPal gains another distribution method for its stablecoin, which PayPal has expanded to 70 countries beyond the U.S. earlier this year. That increases PYUSD's ability to support cross-border payments — a key use for stablecoins and related technology.

PayPal did not comment. In a release, Peter Jonas, chief revenue officer at PYUSD issuer Paxos, said adding the stablecoin to Polygon places a federally regulated dollar token on one of the most active networks for stablecoin payments.

Polygon earlier this year acquired cryptocurrency technology firms CoinMe and Sequence in two deals totaling $250 million, using the acquired assets to support global stablecoin payments. Polygon's strategy post-acquisition is to spot payments that are difficult to figure out or are financially challenging, and to make them simpler to execute by using stablecoins or the underlying technology."PayPal is a well-known brand, it's GENIUS Act compliant, and the desire for enterprises and businesses to use PYUSD is higher than most stablecoins," Marc Boiron, CEO of Polygon Labs, told American Banker. "It gives us another option." 

A growing market

Payment experts say the introduction of OpenUSD will challenge the issuers of existing, mostly fintech-affiliated stablecoins, as well as any future bank stablecoin, to sell users on the utility of stablecoins and why they're necessary. 

The big bank and payment companies supporting OpenUSD include BNY, Huntington Bank, U.S. Bank, American Express, Visa, Mastercard, Stripe and Coinbase. Adyen, Affirm, Klarna, Chime, Google, Capital One's Brex, Standard Chartered, Nuvei, Ramp, Marqeta, Shopify and Remitly are also supporters. OpenUSD's supporters' list does not include Paxos and PayPal. 

The expansion of banks in the stablecoin market is not an automatic win for banks and a loss for nonbanks, Wester said. 

"We are still in the early infrastructure-buildout stage," Wester said. "The market is figuring out what stablecoins are best used for and which are the ecosystems that developers and businesses will actually build around."

The pressure on coins like PYUSD is that they will need a clear reason to exist beyond simply being a branded digital dollar, according to Wester. 

"The winners will be the coins with distribution, liquidity, developer adoption, merchant acceptance and real payment or settlement use cases," Wester said. "The banks will offer trust, regulatory familiarity and institutional relationships, but nonbanks can still win where they have strong ecosystems and customer access."

Some nonbank issuers, including PayPal, already have those advantages, according to Wester. "The challenge is turning that distribution into actual stablecoin usage," he said. "So I expect we will see more consolidation and pressure, but not a simple bank-versus-nonbank outcome."

The recently announced Open Standard coin has potential to disrupt both bank-issued and nonbank coins, but it's too early to say if its coalition and governance model can be sustained, according to Aaron Press, research director of Worldwide Payment Strategies at IDC.

"The biggest source of uncertainty around any of these coins is the fragmented regulatory environment," Press told American Banker. "Cross border payments are the most promising use case, but there will need to be significant changes to, and additional clarity around, regulations and controls before stablecoins can scale to a meaningful share of volume."