Why PayPal's stablecoin whiffed out of the gate

Gabby Jones/Bloomberg

PayPal's stablecoin launched to a lot of fanfare, but thus far it has had tepid adoption from both traders and shoppers. 

Called PYUSD, the stablecoin has a market capitalization of about $44 million, according to the first transparency report from Paxos, which is issuing PYUSD. That compares to Tether's USDT, which has a market capitalization of $83 billion, and Circle's USDC at $26 billion, according to Coinmarketcap. Put another way, PYUSD's market cap is 0.5% of that of the top stablecoin. 

The low adoption of PYUSD shows that stablecoins are still far from the mainstream as a payment method, and that crypto traders aren't immediately attracted to a digital asset from a payments company. 

PYUSD does not yet have a unique value proposition for crypto traders, who are the dominant stablecoin users, according to Alenka Grealish, principal analyst for financial services at Celent. 

"Based on the traders' holdings, they have been satisfied with the top two stablecoins," Grealish said, referring to Tether's USDT and Circle's USDC. 

Other uses for PYUSD, like P2P and cross-border payments, remain nascent, Grealish said, noting that there is a possible market for B2B payments. The B2B market is attracting dozens of payment companies and fintechs that are promising to cut costs with a variety of technology options, including blockchain. That could create an opening for stablecoins as a way to enable cross-border B2B payments while avoiding intermediaries such as correspondent banks. 

"PayPal could potentially benefit from using PYUSD for internal cross-currency treasury operations," Grealish said. 

A slow start for all stablecoins

Stablecoins are backed by traditional currency such as dollars or pounds, or U.S. Treasuries, as a hedge against the volatility of other cryptocurrencies. That has long made stablecoins a more likely cryptocurrency option for payments than bitcoin or ether. Mastercard and Visa's strategy to build a brand in cryptocurrency payments usually includes language that leans toward stablecoins. 

But thus far, stablecoins and other digital assets such as NFTs and other cryptocurrencies are not widely used for payments outside of digital environments designed specifically for crypto, such as the metaverse or gaming platforms.

Stablecoins have struggled, particularly when the brand behind the stablecoin isn't a crypto company. Diem, the stablecoin project initially linked to Facebook/Meta and later sold to the crypto-focused Silvergate Bank, faced severe regulatory and market pressure. Eventually the Diem project died, shortly before Silvergate folded. 

"PayPal's biggest challenge is: What are the compelling use cases?" said Eric Grover, a principal at Intrepid Ventures. "Where and why are existing digital payment systems woefully inadequate? Existing payment networks work well, have critical mass and are habit."

Even though PayPal is one of the world's largest and best-known payment companies, it's part of a crowded field in the stablecoin market. Coinmarketcap's trading board on Thursday included more than 100 stablecoins. 

Tether, the largest stablecoin, reported an $850 million profit in the most recent quarter. And Circle, a cryptocurrency company, has added an expanding range of financial services to accompany its well-known USDC stablecoin.  

"So even though PayPal is a payment juggernaut, it doesn't have a Web3 reputation yet," said Brandon Zemp, a blockchain consultant and author. "So it will take some time to convince people that they have a 'better' stablecoin alternative."

PayPal's stablecoin adoption should pick up pace in the coming months and years. In the long run, PayPal will be able to onboard more people to its stablecoin simply because of its network and established payment rails, Zemp said. 

"It'll be easier for people and will make more sense. But again, it takes time," Zemp said. 

Scale with merchants and consumers

PayPal began work on a stablecoin about two years ago, partly as a competitive response to the Diem stablecoin that never launched. PayPal's potential strength is its size. PayPal has more than 400 million consumer users and 33 million merchant accounts. PayPal's Venmo P2P app has more than 88 million users, and both PayPal and Venmo support buying, selling and trading cryptocurrencies. 

PYUSD launched in early August, and PayPal added PYUSD to Venmo this week. 

"With Paxos' regulated infrastructure and PayPal's universal network of customers, merchants and partners, PYUSD has the opportunity to become the primary stablecoin for payments and trading globally," said Walter Hessert, head of strategy at Paxos, in an email. "The launch on Venmo makes the stablecoin seamlessly and freely available to tens of millions new customers, reinforcing the strength of the PYUSD ecosystem." 

Investors' tepid embrace of PYUSD in its first month is in contrast to the much louder response from politicians. U.S. regulators are expected to ramp up work on stablecoin regulation due to PYUSD's launch, out of concern that a growth in stablecoins could create systemic risk to the financial system.  And European Central Bank board member Fabio Panetta said PayPal's stablecoin could adversely impact competition in the European Union. Panetta referenced PYUSD when urging for a central bank digital currency in Europe. 

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Given that PayPal's stablecoin represents the beginning of an entirely new approach to retail payments, characterizing the growth and acceptance of it as "fast" or "slow" is premature at this point, said James Wester, director of cryptocurrency and co-head of payments and blockchain at Javelin Strategy & Research. 

"PayPal will face some hurdles in acceptance and adoption of their stablecoin," Wester said. "That's to be expected given that most of PayPal's retail payment customers still need to learn what stablecoins are. It will take a while to get a better sense of how well that is working."

Paxos' transparency report said PYUSD was backed by $1.5 million in cash deposits and about $43 million in U.S. Treasuries, at the end of August. PYUSD's structure could help it, since stablecoins have run into trouble with regulators and politicians over the reserves backing the coins. Tether, for example, was fined in 2021 for misrepresenting its reserves.  

"If nothing else, this early PYUSD report is an important step in setting expectations for transparency," Wester said.