The Deeper Meaning Beyond PayPal’s Aggressive Move Into Crypto

Crypto markets have reacted favorably to news that PayPal will make an aggressive entrance, and rightly so. To the extent that one views crypto as an emerging asset class, then the fact that one of the world’s biggest financial companies will now provide one-click access to its 300 million users and 25 million merchants is a big deal.

But that announcement (and the hefty fees the company plans to charge) are arguably not as revealing as two other developments involving PayPal, the combination of which hints at the coming transformation of the financial system. The first one is a statistic: We won’t know for certain until PayPal reports Q3 earnings, but it’s likely that stablecoin payment volume surpassed its “Total Payments Volume” in Q3.


If this news doesn’t shock you, then you haven’t been paying attention. PayPal is a corporate behemoth, with a market cap that exceeds every American bank except J.P Morgan. It makes 90% of its profits from digital payments and is so proud of its “total payments volume” (TPV) that it lists that metric ahead of profits in its earnings reports. And yet, some obscure and weirdly named payment solution that few people like and fewer still understand just surpassed it.

To be fair, these numbers aren’t identical. PayPal runs a closed-loop network that only accepts peer to peer and merchant payments. Stablecoins on the other hand are used for everything, and the recent surge in volume was driven by trading, not people buying stuff. But the ability to use these blockchain-based assets to do a lot more than a PayPal account is a feature, not a bug. Universality is one reason why some of us believe that stablecoins will eventually dominate payments and pose an existential threat to traditional rails if they don’t evolve. A coin like USDC is only a few years old, but can already be used for peer to peer payments, e-commerce, day trading, B2B transfers, remittances and direct interoperability into countless other services. PayPal is over twenty years old, but still doesn’t interoperate with Venmo, which it owns.

Then there are the economics. A $1000 purchase via PayPal costs the merchant $29. The same purchase with a stablecoin costs the sender 29 cents. A merchant doing a million dollars in annual revenues could end up paying PayPal and it’s competitors 30 grand in fees. That whopping figure may have been acceptable twenty years ago when online shopping was niche and digital payments were a luxury, but is absurd today. Small-business owners shouldn’t have to drop their kids’ college tuition to a corporation with 50% gross margins just to accept dollars. Thanks to stablecoins, or maybe even CBDCs, soon they won’t have to.

This transformation mirrors what happened to the communication industry twenty years ago.

Before the internet, different types of communication happened across siloed networks owned by high-margin incumbents. Voice chat moved through copper lines, streaming video came via radio waves or coax cable and written text was delivered by the postal service. Companies like AT&T, NBC and Conde Nast were king. Consumers never questioned how disparate or expensive these “information delivery” systems were because there was no other way. Then came a decentralized network for “data transfers” and everything changed. Skyped broke the restrictions of copper, YouTube and Netflix broke the TV network oligopoly and websites transformed the content business. Consumers could now access any kind of information on a single network.

Blockchain is a decentralized network for “value delivery” and on its way to having a similar effect. Stablecoins will eventually do to per-dollar- payment fees what Skype and VoIP did to per-minute phone chargers.

But that’s only the beginning. An even greater benefit of blockchain-based value transfers is the fact that an infinite variety of value stores — be they dollars, euros, airline miles, cryptocurrencies, tokenized real estate or digital cats — can ride the same network. Asset interoperability is native to a platform like Ethereum and why it was invented in the first place. PayPal will never offer this much flexibility, for the same reason that fax machines couldn’t stream video. But on the blockchain, a single wallet will eventually store all value.

Which brings us to the other important news of last week, that PayPal was in talks to buy the leading crypto custody provider. Digital asset custody is not a very good business. It’s expensive to run due to the security requirements yet difficult to charge for. But custody is the perfect loss leader for high margin services such as lending, market making, issuance, data collection and compliance. It’s also one way of establishing a beachhead in the race for the most important real estate of tomorrow: the secure digital asset wallet. A single, private, user-controlled but vendor-assisted solution that touches almost everything, from Bitcoins to baseball cards and dollars to domain names.

PayPal is not the only payments company that sees this transformation coming. On the FinTech side, Square and Revolut are also making aggressive moves into crypto. Visa and Mastercard are trying to sort out their own strategy, and crypto natives like Coinbase are approaching the problem from the opposite side, by building up their stablecoin offerings. Not to be overlooked is the looming threat of Libra.

All of these companies will have to juggle protecting their legacy transactional businesses while investing in the technology that will ultimately render it obsolete. They will offer bastardized versions of the true crypto vision — PayPal users will not be able to withdraw their coins — under the guise of an easier user experience. But trying to hold back your own users is only effective for so long.

The smart move then is for every legacy payment provider to use its bloated stock price to go on a shopping spree, buying all of the crypto infrastructure and know-how they can get their hands on. PayPal is well on its way, and its competitors may soon joint in. I’m not sure how that will impact their stock prices, but I do know this: compared to the $1.5 trillion in market cap ascribed to the old way of doing things, the $45b ascribed to the new way looks awfully cheap.

The opinions expressed here are strictly my own and not that of any employer, client or associate.