The subsidiary, called Braintree, currently has clients like Uber, Stubhub and Airbnb and the move will allow these startups to start offering the virtual currency as a payment option on any mobile device.
Officially launched at the TechCrunch Disrupt event in San Francisco, Braintree CEO Bill Ready wrote on the company website Monday that he was focused on giving merchants flexibility and freedom of choice.
"We'll enable our customers to easily accept bitcoin in the coming months," he said. "(We'll) provide an elegant, adaptive user interface for consumers to pay in bitcoin."
The company is teaming up with bitcoin payment processor Coinbase to provide the service. Braintree merchants will need to open a merchant account with Coinbase which can be then linked to their Braintree account.
Speculation regarding the tie-up began in mid-August when the Wall Street Journal reported that PayPal was in talks with Coinbase and other bitcoin transaction providers to integrate the virtual currency with Braintree. Tongues were set wagging again on Monday when a new video was uploaded to Paypal's official account which mentions the digital currency. Ready's comments later in the day then effectively confirmed these rumors.
Even back in January there were reports that parent company eBay was looking at the new technology. Sources inside the company told CNBC at the time that it was waiting for the regulatory framework to become clearer before it made a final decision. Monday's announcement will surely add to speculation that bitcoin integration will soon be rolled out for PayPal's desktop site and eBay itself.
EBay chief John Donahoe told CNBC in June that he saw bitcoin and other digital currencies playing an "important role" for PayPal and stated that it would have to integrate digital currencies into its wallet software. The company originally bought Braintree for $800 million in cash last September and was seen as an addition to its PayPal business, although the two had been rivals before the deal.
Bitcoin currently has a daily transaction volume of $44 million, according to coinometrics.com, a digital currency research firm. This compares to $397 million for PayPal and $16.5 billion for Visa. Bitcoin is a "virtual" currency that allows users to exchange online credits for goods and services. While there is no central bank that issues them, bitcoins can be created online by using a computer to complete difficult tasks, a process known as mining. The digital currency has sparked interest among venture capitalists on both sides of the Atlantic but has also run into regulatory issues in many countries.