NEW YORK – PayPal Holdings is rolling out a stablecoin, the first by a large financial company and a potentially significant boost to the sluggish adoption of digital tokens for payments. 

PayPal USD (PYUSD) is issued by Paxos Trust and fully backed by US dollar deposits, short-term Treasuries and similar cash equivalents, the California-based payments company said on Monday. It is pegged to the dollar and will be gradually available to PayPal’s customers in the United States.

With PYUSD, chief executive Dan Schulman is seeking to cement PayPal’s dominance in digital payments by leaning on technology that enables instant and lower-cost transfers without a central intermediary.

PayPal shares have slumped more than 35 per cent in the past 12 months, the sixth-worst performer on the Nasdaq 100 Index, as the pandemic-era surge in online payments abated.  

“The vision over time is that this becomes a part of the overall payments infrastructure,“ Mr Schulman, who is preparing to step down in coming months, said in an interview. 

Stablecoins – crypto tokens that are pegged to an asset like the dollar – have been around for almost a decade, but they are mostly used by traders to move digital assets between exchanges and have made limited inroads into consumer payments. There is roughly US$126 billion (S$170 billion) worth of stablecoins in circulation, according to CoinGecko, the biggest by far being Tether Holdings’ USDT. 

Some have been controversial: A high-profile attempt by Meta unravelled in 2022 after an intense regulatory backlash. PayPal itself paused work on PYUSD in February as regulators stepped up scrutiny of cryptocurrencies. 

The company now believes the regulatory environment is “progressing toward more clarity” and sees rising demand for an alternative stablecoin because of how concentrated the market is, Mr Jose Fernandez da Ponte, head of PayPal’s blockchain and digital currencies team, said in an interview.

PYUSD is designed to be redeemable for dollars at all times, and can also be exchanged for other cryptocurrencies available on PayPal’s network. It can be used to fund purchases and will soon be available on PayPal’s popular payment app Venmo. Users will eventually be able to send their token holdings between a PayPal and a Venmo wallet. 

The coin can also be moved to compatible third-party wallets outside the PayPal network.  

PayPal, which has more than 431 million active accounts globally, first launched cryptocurrency services in 2020. It allows users to buy, sell and make payments in a handful of tokens like Bitcoin through its platform.

The company last week said it had to set aside more money in the second quarter to cover souring loans it had made to merchants, triggering a 12 per cent one-day rout in its shares. PayPal has expanded the services it offers to the millions of consumers and merchants on its many platforms, including working-capital loans and remittances. 

Initially, PayPal expects PYUSD to be used mainly in the cryptocurrency and Web3 sectors, like for trading in and out of other digital tokens and in-game payments, before gradually gaining adoption in areas like remittances and micropayments. Web3 has become a catch-all term for the vision of a new iteration of the Internet.

Proponents of stablecoins have long argued that they are a superior means of achieving cheap, instant money transfers and payments. But they have also faced opposition from central banks who are busy developing their own digital currencies and, in the case of USDT, speculation about the quality of reserves. 

In perhaps the most high-profile setback for stablecoins, one called TerraUSD imploded in May 2022 when the complex algorithmic system backing it failed, triggering a wider crash in cryptocurrencies. Its inventor, South Korean citizen Do Kwon, has been charged with fraud by US prosecutors, who say the episode cost investors roughly US$40 billion.

Mr Agustin Carstens, the head of the Bank for International Settlements, said in a speech in February: “The past year’s events have cast serious doubts on the ability of stablecoins to function as money. Stablecoins must import their credibility from sovereign fiat currencies.” 

In February, the New York State Department of Financial Services (NYDFS) said it had directed Paxos to stop issuing a stablecoin branded by crypto exchange Binance known as BUSD. The New York regulator said at the time that its decision was the result of “several unresolved issues related to Paxos’s oversight of its relationship with Binance”.

Paxos is subject to regulatory oversight by NYDFS, and PYUSD will be a regulated product in the state of New York. PayPal was granted a local crypto licence by the regulator in June 2022. 

PayPal held extensive discussions with US regulators and policymakers as it prepared to introduce PYUSD, Mr Schulman said. “We are in a place right now in these conversations that people feel comfortable with a respected, well-regulated US financial entity moving into the stablecoin space and think that it’s an important initial move,” he said.

Starting in September, Paxos will publish monthly reports detailing the assets backing PYUSD, PayPal said. Paxos will also publish a third-party attestation by an accounting firm on PYUSD’s reserve assets. BLOOMBERG