PayPal Revisited

PayPal issuing its own stablecoin is big, marking a major milestone in the continuing evolution of crypto. It legitimizes the notion of payments moving on chain more than any blog or book (however well-written) ever could and is another step towards mass adoption.

For years, skeptics of the very idea of tokenized fiat money have homed in on the immaturity of the stablecoin industry to form their critique. Tether — they told us repeatedly — was a fraud that would collapse imminently, and Facebook’s Libra/Diem project was dangerous. Those who couldn’t be bothered to learn the difference between a badly designed Terra UST and a fully reserved USDC told us that dollars on the blockchain were a solution looking for a problem. Just recently, SEC chairman Gary Gensler told us that we don’t need any more digital currencies because the dollar is already digital. Presumably he meant mobile services like Venmo, owned by PayPal.

But now we know: PayPal disagrees.

I first wrote about the collision of PayPal and stablecoins five years ago and got a lot wrong, some of it embarrassingly so. I was too optimistic on the speed of stablecoin adoption, and not optimistic enough about the role non-crypto FinTechs could play. Instead of staying away from crypto rails and protecting their turf, many embraced crypto for trading, and now one is issuing its own coin

The boldness of this decision cannot be understated. PayPal makes a chunk of its revenues from transaction fees charged to merchants, but is now issuing a product that can be used as a cheaper alternative. The downward pressure stablecoins will eventually put on transaction fees was the main reason I originally assumed that companies like PayPal would stay away. Specifically:

How cheap? A $1000 payment to a merchant using PayPal costs over $29. The same payment using a tokenized dollar riding the Ethereum platform today costs less than 20 cents. Not quite free, but a savings of over 99%. How’s that for disruption? Or an existential crisis for the $100b Wall Street darling that makes 90% of its revenues from transaction fees?

Ethereum fees have gone up since I wrote that blog post, but we now have rollups, and cheaper blockchains like Tron have been popular for stablecoins for years. I still believe — now more than ever — that permissionless blockchain networks will eventually make all fiat payments effectively free, in the same way that the internet made communication free.

So what does PayPal see today that even I didn’t four years ago? What is it about crypto in general and stablecoins specifically that is so appealing to an established public company that it would wade into America’s toxic regulatory environment? Here are some ideas:

• If they don’t do it, someone else will: the Innovator’s Dilemma is in play, but PayPal’s leadership is not making the classic mistake of ignoring the threat until it’s too late.
• Volume: Cheaper (and easier) payments will result in higher volumes. Consider how many more emails are sent today vs snail mail 20 years ago. Higher volumes at lower fees will enable new business models. Email might be free, but Gmail and Mailchimp are extremely valuable businesses.
• On and off Ramps: We are still years removed from stablecoins taking over (at which point we’ll just call them dollars). Until then, there will be lots of money made by those who bridge them to legacy payment rails.
• Wallets: Crypto allows users to custody their own assets, but many prefer the aid of a trusted brand, and enterprise users often have no choice. PayPal’s acquisition of Curv, combined with its decades of experience in building digital wallets, will make it a major contender in the coming land grab for both consumer and enterprise wallets.
• Omni-asset custody: Blockchain rails are superior to traditional ones because they can handle an infinite variety of assets using the same network. Your bank account will never store your art collection and Visa will never handle stock trades, but Ethereum can do both, while also handling dollar payments. Having a strong foothold in stablecoin ramps and digital wallets will set PayPal up to become a go-to custodian for all sorts of other things — from bitcoins to CBDCs.
• A hedge against CBDCs: Central bank digital currencies are more threatening to the payments industry than private stablecoins. Issuing their own will allow the company to build the proper muscle, while possibly making a ton of money off the float.
• Float: With overnight interest rates sitting north of 5%, holding money for others is a highly profitable business. Securities laws forbid stablecoin issuers from paying interest to their users, so existing issuers like Tether and Circle are now making over $5B a year. In time, a popular stablecoin could significantly increase PayPal’s interest income.
• Related services: Effectively free payments enable other high-margin products and services. The video game industry has already proven the profitability of free to play, and stablecoins open the door for free to pay. Data & analytics, compliance, rewards programs, streaming money, microlending, and IoT payments are just a few examples of new sources of revenues.
• Expansion: PayPal’s existing P2P and merchant services may be popular, but are limited in scope. Issuing a stablecoin will allow PayPal to enter new payment categories such as:
• B2B payments, where one company pays another
• Correspondent banking, where banks move money for other financial institutions
• Capital markets, where money is moved for trade settlement, dividends or interest
• Remittance corridors, where money is sent cross-border by migrant workers
• Payroll & government disbursement, where one payer pays many recipients periodically
• DeFi: where decentralized protocols slowly replace financial intermediaries

A regulated stablecoin issued by a trusted provider with a recognizable brand will eventually take over all these activities, and PayPal is vying for market share.

Last but certainly not least is the unimaginable. One of the exercises I give my students when teaching them stablecoins is to invent new economic activities that become possible thanks to effectively free micropayments. Think: streaming money to pay for streaming video, paying for electricity by the second, interest that compounds continuously and workers who get paid by the hour, or even the second.

Just as a simple idea like free data exchange (AKA the internet) unleashed new services like Zoom and social media, free money exchange will enable currently unimaginable economic activities. PayPal and other forward companies will benefit from this evolution, while the legacy banks and payment providers who do nothing will fade away.