Business stagnation and regulatory relaxation, is this the reason for Paypal to enter the stable currency?

Last week, Paypal, known as Alipay in the United States, announced the issuance of the stable currency PaypalUSD ("PYUSD" for short), and the encryption field was stirred up again.

Paypal, as the largest third-party payment institution in the United States, released stablecoins at the threshold of intensified SEC supervision. An urgently delisted the stablecoin BUSD in cooperation with Paxos.

From the perspective of the industry, many people have high hopes for Paypal, and believe that the entry of large institutions may lay the foundation for the relaxation of supervision. But behind the release, centralization myths and limited scenarios are also lingering.

**The speculation caused by Paypal is constantly fermenting. **

01. Sending charcoal in the snow: the past and present of PYUSD

On August 8, 2023, the American payment giant Paypal officially announced the launch of its stable currency PYUSD, becoming the first company to issue a stable currency from a traditional large financial institution in the United States.

According to the description on the official website, PYUSD is jointly issued by Paxos Trust Company and Paypal, which can achieve 1:1 anchoring of the US dollar. In order to protect its solvency, similar to Tether, PYUSD is fully collateralized by U.S. dollars, short-term U.S. Treasury bonds, cash and equivalents, and Paxos will start publishing Paypal’s U.S. dollar public monthly reserve report from September 2023, detailing its reserve details. Paxos will also entrust an independent third-party accounting firm to conduct public verification of the value of PYUSD reserve assets, and perform regular inspections in accordance with the verification standards established by the American Institute of Certified Public Accountants (AICPA) to ensure the security and integrity of its assets.

PYUSD introduction, image source: official website

Starting from practical application scenarios, PYUSD can support the conversion of US dollars and other cryptocurrencies, including but not limited to transfers in compatible wallets, peer-to-peer stable currency payments, and PYUSD payments. The stablecoin will first be used by Paypal, and then expanded to micropayment program Venmo and gradually rolled out to other applications. Currently, the currency is only available to users in the US, but since it is issued on the Ethereum blockchain, it is open to developers, wallets and the Web3-related community.

**It is worth noting that in order to avoid the risk of unregistered securities issuance that Paxos was previously accused of, Paypal publicly stated that it will not provide benefits to users of the PYUSD stable currency, and usually, the annual interest rate of Paypal deposits is up to about 4.3%. **

For those who are not familiar with Paypal, they may be surprised at the reality of its sudden entry. But as early as 10 years ago, Paypal had its eyes on cryptocurrencies.

As early as 2013, when cryptocurrencies first emerged, David Marcus, then president of Paypal, expressed his consideration of adding cryptocurrencies to financing tools. In 2014, Paypal established cooperation with crypto companies such as Coinbase, BitPay and GoCoin for the first time.

In 2018, Paypal submitted a patent application for an "accelerated virtual currency transaction system" to the United States Patent and Trademark Office (USPTO). In the same year, Coinbase allowed American users to withdraw legal currency directly from Coinbase to their Paypal account for free.

In October 2020, Paypal officially entered the encryption market, supporting US users to trade in cryptocurrencies such as Bitcoin, Ethereum, BCH and Litecoin. At that time, the platform only allowed customers to purchase through internal IOU certificates, but did not allow cash withdrawals and transfers between wallets, more like internal payment certificates.

By this year, PYUSD was officially released. Looking at the timeline, Paypal's entry is far from being achieved overnight, but the result of a long-standing preparation. As the largest payment institution in the United States with 431 million active users, Paypal's entry at this time is undoubtedly a timely help for the encryption field that is deeply involved in the regulatory whirlpool, and it also makes people in the industry feel a rare positive signal in the near future.

**After all, it is rare for traditional institutions to enter the market at present, and Paypal's huge payment channels, potential audience groups, and perfect infrastructure play a positive role in the expansion of cryptocurrencies. In terms of compliance, A strong Paypal will also be closer to regulators than other companies. **

The consensus view in the industry is that at the current stage when Coinbase and bianance have been sued one after another, and Paxos is forced to stop issuing BUSD, it is quite delicate for traditional institutions to issue stablecoins.

In June last year, Paypal successfully obtained a local cryptocurrency license. Paxos, which cooperates with it, is a legal trust institution under the jurisdiction of the New York State Department of Financial Services. Whether it is in terms of market size or qualification review, supervision can only be cautious about it . Paypal also disclosed that it had conducted extensive discussions with U.S. regulators and policy makers before the launch of PYUSD.

Unsurprisingly, after the release, Maxine Waters, the Democratic leader of the House of Representatives Financial Services Committee, publicly criticized that the anchor assets were not under supervision. Ironically, Republican Patrick McHenry's description is quite different from that of the Democrats, believing that Paypal's stable currency shows promise as a payment system. The political inclination of stablecoins and encryption between parties fluctuates, which means that the competition between the two parties will also directly determine the direction of encryption. Among them, Paypal's political attributes are more obvious.

**But in any case, Paypal's entry is still positive and positive, but it also raises a question, why should stablecoins be issued at this time? **

02. Paypal Strategy: Profit Rate Crisis and Stablecoin Survival

From the perspective of time, Paypal's stable currency strategy can be described as twists and turns. The earliest dates back to last year, in January 2022, because developers found "PayPal Coin" in the source code of the iPhone application, Paypal reluctantly revealed to the media that it was exploring stable coins. Subsequently, according to Wu said, Paypal tried to cooperate with FTX last year, but it was suspended due to the occurrence of subsequent thunderstorms. The same scene also happened this year. PYUSD, which was originally planned to be released in February, was once again suspended due to the review of Paxos.

The data on the chain also fully shows this point. On November 8, 2022, Paypal completed the initial issuance of a total of 1.1 million PYUSD. On February 1 this year, 26.4 million PYUSD were minted here, but the existing 25.5 million PYUSD were destroyed on the 23rd. On August 3, 24.9 million pieces will be recast.

It can be seen that **Paypal is actually eager to issue the currency, but due to the slowdown of supervision, it is considered that the current release is most likely due to the loosening of supervision. Although there is no absolute indication of this point, judging from the performance of the incident, Ripple's victory in the lawsuit and the US Republican Party's successive proposals of two key bills to support the encryption field can all be confirmed from the side. **

From the perspective of the purpose of the issuance, in the description of Paypal President and CEO Dan Schulman, the move is to consolidate its leading position in digital payments with stablecoins. The expression is quite euphemistic, but the fact that can be glimpsed from the stock price is that Paypal, which is experiencing sluggish growth in the world, urgently needs cryptocurrency, a new economic growth point. **

In terms of business structure, Paypal is no different from other payment institutions. As an integrated payment service provider covering consumers and merchants, its core products include Paypal, Venmo, Xoom, Braintree, Zettle and Hyperwallet, among which Venmo has social Xoom provides cross-border payments, Braintree provides acquiring services, Zettle provides offline payment devices, and Hyperwallet provides institutional payment services.

It can be seen that Paypal is very similar to my country's Alipay, but unlike Alipay's absolute leading position, Paypal's market competition is more intense. The payment landscape in the United States is particularly complex. The competition among Paypal, Square, and Stripe is fierce. Amazon, Google and other traffic giants are not far behind, and they are greedy for market share through self-built payment networks. Therefore, for Paypal, which is positioned as a third party, the upstream needs to give a commission to the network, and the downstream needs to seize the merchants, institutions, and consumer markets. The control of marketing, R&D, and management expenses is particularly passive. Under this premise, the disadvantage of corporate profit margins is highlighted. .

Paypal's handling fee is high, and the regular handling fee is as high as 4.4%, which is almost the highest among competitors of the same type. However, due to the extremely high operating costs, the profit margin continues to decline. For the whole year of 2022, Paypal's net profit margin is 8.79%, which is lower than 16.43% in 2021, of which the total operating cost is 21.151 billion, accounting for 76% of the total revenue. Comparing VISA with similar total revenue horizontally, the operating cost is only 2.7 billion US dollars, and the net profit is as high as 50%. From the perspective of TPV, the total payment amount of Paypal is 1.36 trillion, compared with the net income of 27.056 billion US dollars, the commission rate is about 1.98%, and the commission rate of the same type of Alipay in my country is as low as 0.11%.

Since the beginning of this year, Paypal's transaction margins have continued to decline, source: Deep Value Ideas

**In short, Paypal is expensive because of the high cost, but earns very little. The dilemma this brings is that the business is highly vulnerable, and it needs to cost more to maintain such an expensive rate, otherwise it will fall into a negative cycle. **

The data is consistent with the actual performance. Although Paypal's second-quarter business performance is acceptable, the reduced profit has attracted investors' attention. The report shows that in the second quarter of 2023, Paypal's net revenue was US$7.3 billion, an increase of 7% compared with US$6.8 billion in the same period last year. But transaction margins continued to decline to 45.9 percent, from 47.1 percent in the previous quarter and 49.7 percent in the previous year. The lower moat can also be seen from the number of users. As of June 30, 2023, the total number of Paypal active accounts was 431 million, which was lower than the 433 million on March 31, which was the second consecutive quarterly decline.

Affected by the lower-than-expected profit margin in Q2, Paypal plunged more than 9.2% that day, and is now reported at US$6.327 billion, a year-on-year decrease of 37.67%. Susquehanna, RaymondJames and other rating agencies downgraded Paypal's rating. In this context, Paypal, whose revenue is highly dependent on Venmo, has shifted its target to other directions. In recent years, loans, cross-border payments, and buy-now-pay-later (similar to Huabei) all originated from this, and the lucrative and already deployed encryption field , naturally appearing in the field of view.

Paypal's stock price trend over the past year, source: Google Finance

As we all know, stable currency is the most profitable industry in the field of encryption, because under the scale effect, the marginal issuance cost of stable currency is infinitely close to 0, and its 1:1 fiat currency exchange business model can be described as a huge profit.

**In layman's terms, during the exchange process, users exchange real gold and silver dollars for cost-free U.S. dollar stablecoins. After the issuer obtains cost-free U.S. dollars, it can add value by purchasing government bonds, cash equivalents, etc., and at least get free The risk rate is almost equivalent to lying down to make money. It does not involve handling fees and service fees, not to mention the stablecoin repurchase brought about by market fluctuations, which is one of the contribution components of its income. **

Take Tether, the issuer of USDT, as an example. In its 2023Q2 certification opinion, from April 2023 to June 2023, Tether’s operating profit exceeded US$1 billion, a quarter-on-quarter increase of 30%. Not too much. Compared with Q1 data, Tether’s net profit in the first quarter of this year was 400 million US dollars, and even beat China Unicom, one of my country’s three major operators, by a difference of about 600 million yuan.

From this point of view, it is understandable that Paypal is targeting the stablecoin field, and from the perspective of unbinding other cryptocurrency exchanges this time, the follow-up Swap function is also just around the corner. Swap has high-frequency transaction scenarios and a fairly stable commission rate, sustainable Contribution to income, taking MetaMask as an example, the fee rate is 0.875%, and its income in 2021 will be as high as 250 million yuan.

03. Subsequent impact: Stablecoin pattern and regulatory swings

After discussing the reasons, let's look at the effects. The general opinion is that PYUSD will directly impact the current stablecoin landscape.

According to Coinmarketcap statistics, the current total market value of stablecoins is about 125.2 billion U.S. dollars. Among them, USDT issued by Tether accounts for the highest market share, accounting for 66.53%, about 83.3 billion U.S. dollars; USDC issued by Circle accounts for 20.77%, about 41.5 billion U.S. dollars; BUSD fell to fourth place after the suspension of issuance, and the third place was won by the decentralized stable currency DAI, accounting for 4.28% with 5.36 billion US dollars. It can be seen that the top three stablecoins basically account for 90%, and the concentration of the top is prominent.

Stablecoin market value ranking, source: Coinmarketcap

**Compared with other centralized institutions, Paypal is quite strong, and the service institutions have a wide global distribution. More importantly, due to the issuer's compliance trust nature, customer assets do not depend on the issuer's survival, and the endorsement advantage is even greater. as obvious. Judging from the current situation, the market value of stablecoins has continued to decline. Not only has the total market value been at a historical low, but in the past week, the market value of the top four stablecoins has dropped by US$419 million, of which USDT has fallen due to the negative impact of the lawsuit. $325 million. **

For the emergence of PYUSD, mainstream institutions have already been undercurrents. Ardoino, Tether's chief technology officer, said that since PYUSD is launched in the United States, and Tether is mainly focused on emerging markets, the two have no interference, but other competitors are not, implying that the US-based stablecoin USDC is more susceptible.

USDC is not to be outdone. Circle CEO Jeremy Allaire tweeted back, saying that about 70% of USDC is expected to be used outside the United States, and the fastest growing markets are emerging and developing markets.

**In addition to the stablecoin institutions with relevant interests, the industry also has mixed opinions on PYUSD. **

Since PYUSD is currently only used in Paypal and Venmo, it is not enough to combine with the Defi ecology, so some people in the industry think that it is more similar to a kind of virtual points, a derivative of traditional finance, not a real cryptocurrency, even if It is recognized that it is a cryptocurrency. Apart from the strong BUSD, the stablecoins issued on Paxos are also tepid, and PYUSD is more likely to repeat the same mistakes.

In addition, because the code version used by PYUSD is too low and expensive, and all variables about the currency can be controlled and changed by Paypal, the encryption community also believes that it has a high degree of centralization.

However, the industry generally believes that the launch of the currency will promote the relaxation of supervision. Patrick McHenry, chairman of the House Financial Services Committee of the above-mentioned Republican faction, has proposed more than once that Paypal has a positive effect on the "Payment Stablecoin Transparency Act" that has passed the House of Representatives.

McHenry issued a statement on PayPal’s announcement of the launch of a payment stablecoin, sourced from the official website of the House Financial Services Committee

For now, when PYUSD has not yet been listed on the exchange, it is still too early to discuss the industry and regulatory impact. But unlike the relaxed rhetoric, mainstream institutions have taken defensive action. Circle said it has prepared a cash buffer of more than $1 billion to cope with Paypal's competition, and MakerDAO also adjusted Spark Protocol's DAI deposit rate to 8% to reduce the risk of capital outflows. On the other hand, Paypal has been aggressive. It has made it clear that launching CEX as soon as possible is a priority and will integrate with the DeFi ecosystem.

**It can be seen that the offensive and defensive battle of stablecoins is about to begin, and the partisan struggle of regulators will also enter the deep water area again. The stagnant pool of encryption will finally be stirred up by Paypal. **