PayPal’s stablecoin may be a payments catalyst, but it will face these near-term hurdles, BofA says

Published Thu, Aug 10 20232:34 PM EDTUpdated Thu, Aug 10 20233:31 PM EDT

PayPal 's new stablecoin — known as PYUSD — has the potential to facilitate payments , but it must overcome several headwinds before it takes off, Bank of America said. "We expect PYPL's PYUSD launch to drive payments efficiencies and an improved customer experience over time, but PYUSD adoption is unlikely to be significant in the near term, given lack of wallet compatibility, exchange trading pairs or new functionality," Alkesh Shah, global digital assets analyst at Bank of America, said in a note Thursday. "Over the longer term, we expect PYUSD to experience additional adoption headwinds as competition from [central bank digital currencies] and yield-bearing stablecoins increases," the analyst added. Stablecoins are cryptocurrencies whose prices are pegged to an underlying asset, typically a fiat currency. Earlier this week, PayPal launched the first dollar-backed digital currency from a major U.S. financial institution, whose transactions and ownership will be recorded on the ethereum blockchain. The move came as the crypto market awaits a vote in Congress on a key stablecoin bill , which has just advanced to the House with three other crypto-related measures. Approaching headwinds Shah said not to expect the PYUSD launch to accelerate regulatory clarity, the lack of which has caused a sharp decline in the market cap for stablecoins this year. "The stablecoin's issuance does not alter systemic risk for traditional markets," he said, adding that it may face regulatory headwinds if nonbanks are ultimately barred from issuance. Further, PYUSD is likely to face more competition from yield-generating products, especially now that short-term rates are above 5%, Shah said. "Over the longer term, we expect PYUSD to experience additional adoption headwinds as competition from CBDCs and yield-bearing stablecoins increases," he said. "Investors may have been fine holding non-yield bearing stablecoins, such as USDT and USDC, when rates were close to zero, but yield-bearing stablecoins will likely become increasingly available and attractive." Stablecoins are often used to trade in and out of other crypto assets such as bitcoin and ether . Since they don't enter the traditional financial system, they allow traders to enter and exit positions faster and more cheaply compared with dealing with fiat currencies such as the dollar. However, PayPal users and merchants may not be as interested in using them for trading. Instead, Bank of America expects PYUSD to target the "largely untapped" market for blockchain-enabled asset transfers, payments and remittances. — CNBC's Michael Bloom contributed reporting.