What is PYUSD Paypal

In the midst of legal uncertainty in the United States, particularly the hostile attitudes of regulatory authorities since the beginning of 2023, the announcement by PayPal that it would launch a stablecoin called PYUSD emerged as a ray of sunshine through the dark clouds hovering over the crypto industry. Let's first understand PayPal's move and then try to predict its potential impact on the industry's future.

What's the story? What is PYUSD?
PayPal, a global giant in the field of money transfers and payment systems based in the United States, announced in the first week of August that it would launch a stablecoin named PYUSD.

PYUSD is a stablecoin issued on the Ethereum blockchain and pegged to the value of the US Dollar. Essentially, it shares similar features with other stablecoins like Tether (USDT) and USDC. These features include the backing of the issued money by a bank (at least theoretically) and the ability to freeze the funds remotely, despite being in a personal wallet, due to programmability.

The infrastructure services for issuing this stablecoin, subject to the strict financial regulations of the state of New York, will be provided by Paxos. Paxos is the institution that also issues another prominent cryptocurrency, BUSD, belonging to Binance. (Recall that earlier this year, the financial regulatory authority of the state of New York, NYDFS, instructed Paxos to stop issuing BUSD, and Paxos complied with this decision).
PayPal's relationship with Paxos goes back further. The company took its first step into the crypto world by offering cryptocurrency custody services through Paxos in 2020. Initially, the service started with cryptocurrency buying and selling within PayPal, but it was later expanded in 2022 to allow the withdrawal of cryptocurrencies to personal wallets, making PayPal more involved in the crypto world.

Comparison with other stablecoin competitors:
While there is fierce competition in the stablecoin market, Tether (USDT) has always been the dominant player.

After the news of PYUSD hit the markets, the crypto community appeared divided. Some speculated, given the recent regulatory developments, whether the U.S. was withdrawing from the crypto market. On the other hand, some embraced the news of PayPal launching a stablecoin as a ray of hope, thinking that if a major fintech institution like PayPal is entering the space, there must still be hope in crypto.

In terms of market value, Tether has always been the leader in the stablecoin market, and it is particularly popular in non-U.S. markets, especially in Asia. Following Tether, the second-largest stablecoin is USDC, issued by Circle, a Boston-based company. USDC is considered relatively secure because the equivalent fiat currency for each USDC is held in U.S. banks. However, USDC faced challenges after it was revealed that a significant portion of the funds were held in the troubled Silicon Valley Bank during the banking crisis in March 2023, and it has not fully recovered since then.

An interesting observation related to the decrease in the amount of USDC in the market is worth noting. Especially, institutional investors transitioning from the crypto side to the traditional side have to pay a 0.1% fee when converting USDT to U.S. Dollars. There is no such deduction for USDC. Therefore, a fund holding USDT converts it to USDC to avoid fees and seamlessly returns to U.S. Dollars. This convenience offered by Circle, the issuer of USDC, ironically hurts them, especially during bear markets!

Returning to our main topic, how will PYUSD differentiate itself in this competitive landscape? The most significant difference between PYUSD and its competitors, USDT and USDC, is that PYUSD does not carry the risk of the institution issuing the money going bankrupt. What does this mean? Let's recall the crisis USDC faced: after Silicon Valley Bank, which held the deposits backing Circle's stablecoin, went bankrupt in the second week of March, the value of USDC dropped to 0.88. USDC only recovered after U.S. authorities announced a guarantee for all deposits just hours before the end of the weekend. What if a similar incident happens again, but the bank is not rescued?

PayPal takes a different approach with PYUSD. For each PYUSD issued, an equivalent amount of U.S. Dollars is held in a trust account, completely separate from the company's accounts. In the event of bankruptcy, the funds are released only in exchange for the redemption of PYUSD. Therefore, it can be said that the fiat backing of PYUSD is safer than USDC (and significantly safer compared to USDT).

Additionally, due to Paxos being subject to the laws of the state of New York, strict customer screening (KYC) and anti-money laundering (AML) measures are expected to be applied.

What does the crypto world think of PYUSD?
When the news of PYUSD hit the markets, the crypto community seemed divided.
In one camp, after a series of consecutive negative news, there were thoughts like "Is the U.S. withdrawing from the crypto market?" This camp saw the announcement of PayPal launching a stablecoin as a positive sign, thinking, "Well, if the largest fintech institution in the U.S. is getting involved, there must still be hope in crypto."

On the other hand, some in the other camp began to lament, saying, "We were supposed to create a whole new world, free from the influence of governments, but with PayPal, the weight of the traditional and centralized side will increase even more. Where are those good old days?"

Personally, I can say that I am closer to the first camp. It has been emphasized multiple times that the development of crypto is contingent upon widespread adoption by the masses. While crypto provides significant financial freedom for those already involved, it is a fact that the risks make a large segment of the population stay away from this field. The entry of PayPal into this space is crucial for these wider segments to step into crypto. After all, we are talking about a giant with approximately 400 million customers and more than 30 million merchant members. People trust PayPal, and it is critical that a trusted entity provides them with this service.

PayPal is a well-established institution with agreements with thousands of banks and a fully prepared legal infrastructure. This makes it a significant on-ramp for millions of people to transition from fiat to crypto (and also an off-ramp for transitioning from crypto to fiat).
How can the masses use PYUSD? Several scenarios can be considered. For example, a customer can use PYUSD through PayPal to make payments in places that accept Ethereum, provided the seller gives them an Ethereum address. While you can make such payments to a bank account, the seller needs to have a bank account, and especially in cross-border transactions, you would enter a waiting period that could take days. At the same time, you would have to bear the transfer and clearing fees payable to intermediary banks. With PYUSD, all these waiting times and costs would disappear.

While skeptics may have reservations about PYUSD, it's worth mentioning that the existing structure of USDT and USDC already contains centralized elements. One might say, "But won't the weight increase even more with the introduction of PYUSD?" That's a valid point. In such a situation, what matters most for decentralization enthusiasts is the emergence of decentralized stablecoins. This is a process that will likely occur only after the industry grows and matures further. So, the reaction here should not be "Let's