Next Gen Investing

PayPal is diving deeper into crypto by launching its own stablecoin—what investors should know

PayPal on App Store displayed on a phone screen and PayPal logo displayed on a screen in the background are seen in this illustration photo taken in Krakow, Poland on January 2, 2023.
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PayPal has added a new cryptocurrency to its roster: PayPal USD (PYUSD).

On Monday, the online payments service became the first major U.S. financial company to launch its own U.S. dollar-backed stablecoin.

Unlike other cryptocurrencies, which derive their value based on how much crypto traders are willing to pay for them at the moment, stablecoins are typically backed by a physical asset, such as commodities like gold or fiat currencies like the U.S. dollar, which help the stablecoin maintain a relatively consistent price.

PayPal USD is "100% backed by U.S. dollar deposits, short-term U.S. Treasuries and similar cash equivalents," according to a Monday press release. Additionally, PayPal's stablecoin is redeemable 1:1 for U.S. dollars, which means one PayPal USD can be redeemed for one U.S. dollar and vice versa.

PYUSD lives on the Ethereum blockchain and is issued by Paxos Trust Company, a financial tech company that specializes in blockchain and offers crypto brokerage services. Notably, Paxos was ordered to stop issuing Binance's dollar-pegged stablecoin, BUSD, by the New York State Department of Financial Services in February.

This isn't PayPal's first foray into crypto. Last year, the company began allowing users to transfer, send and receive a number of popular digital tokens, including bitcoin and ether.

Starting Monday and over the coming weeks, PayPal customers who buy PayPal USD will be able to transfer it to compatible external crypto wallets, make peer-to peer payments, pay for purchases and use it to convert any of PayPal's supported cryptocurrencies.

"The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar," Dan Schulman, CEO of PayPal, said in the press release.

Why PayPal's stablecoin move makes sense

Issuing a stablecoin may be more in line with PayPal's core business model than people initially think, says Omid Malekan, an adjunct professor at Columbia Business School and author of "Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms."

PayPal primarily earns revenue by charging merchants a fee for facilitating customers' payments. However, if those customers and merchants began transacting with crypto on the Ethereum blockchain, PayPal wouldn't be able to charge those fees, Malekan tells CNBC Make It.

"One way to look at all of this is that PayPal believes, in the future, public blockchains will play a big role in its traditional business of payments. It's just trying to evolve and keep up with cutting edge technology," he says.

What crypto investors need to know about stablecoins

From a financial standpoint, using stablecoins isn't much different than using a gift card, Malekan says. You can use your dollars to purchase stablecoins and then use those stablecoins to buy different cryptocurrencies or make other online purchases.

But despite their name, stablecoins aren't always a sure thing.

Last May, investors lost tens of billions of dollars following the collapse of the terraUSD (UST) stablecoin. However, unlike PayPal's stablecoin, UST relied on algorithms to maintain its peg to the U.S. dollar, rather than cash reserves.

If you're interested in using stablecoins, be sure to only buy them from a trustworthy and regulated issuer, says Malekan.

Several fake crypto tokens using the PYUSD name have already popped up on Uniswap, a decentralized exchange, in an effort to cash in on the hype surrounding PayPal's new stablecoin, according to Decrypt.

So far, PayPal says the only way to buy its stablecoin is through the company itself. It hasn't indicated any plans to make it available on third-party crypto exchanges.

And as with all things crypto, be careful when it comes to how much money you put toward it, Malekan says. Only play with an amount of money you don't mind potentially losing if something goes wrong.

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