PayPal’s stablecoin is a big step forward for crypto’s legitimacy but not much yet for the cause

SEP 25, 2023

For greater crypto adoption to occur, we need traditional finance (TradFi) and decentralized finance (DeFi) to join forces in symbiotic harmony and usher in together a new era of financial evolution. This convergence holds the key to unlocking mass adoption, but it will require more time and greater collaboration.

Against the backdrop of current U.S. hostility toward crypto, a glimmer of optimism has emerged. PayPal has made history by becoming the first major U.S.-based payment service provider to introduce a stablecoin called PayPal USD (PYUSD), which is pegged to the U.S. dollar. The involvement of a major global payment service marks a pivotal moment for the cryptocurrency industry as it instills a newfound level of trust into the often turbulent crypto landscape.

However, it is crucial to exercise caution and acknowledge that the full impact of PayPal’s entry into the crypto sphere will only be realized when several key components fall into place.

In its current form, PYUSD can only be used in PayPal’s own ecosystem, thereby limiting its strength as a stablecoin. For PYUSD to be a well-rounded product, it must be transient between Web2 and Web3 and operate across multiple blockchains. In order to achieve this, PYUSD also needs to be listed on centrally backed exchanges and decentralized exchanges. Doing so will inject PYUSD with the liquidity required for it to support use cases across centralized exchanges, decentralized exchanges, DeFi protocols, and blockchains, thereby unlocking its true potential.

Therefore, while PayPal’s Web3 venture is certainly noteworthy, it represents just a small victory in the grander battle of legitimizing cryptocurrency as a globally recognized and regulated industry. It is another case of isolated progress that spotlights the many bridges that need casting between TradFi and DeFi before the convergence can be complete.

Bringing together TradFi and DeFi

Bridging the gap between TradFi and DeFi will take time and collaboration, utilizing the various strengths that each sector possesses.

TradFi institutions offer more robust risk management strategies than DeFi protocols, and inherently offer a heightened environment of security and credibility, thereby making them attractive options for individuals who remain cautious about embracing digital assets. DeFi’s innovation offers users more transparency and autonomy and can reach audiences who have historically been excluded from financial systems.

As traditional financial companies delve into the crypto world, the difficulty in striking a balance between stability sought by traditional users, and innovation and autonomy of the crypto market is still a major pain point for the crypto ecosystem.

This is where PayPal’s legacy of innovation and steadiness comes into play. PYUSD provides a safer entry point for non-native crypto investors and benefits from PayPal’s reputation for stability, security and regulatory compliance. However, its heavily centralized nature comes with its own roadblocks. The unbanked still cannot access PYUSD or Web3 as PayPal requires users to have a bank account. Additionally, even if PayPal offers this service beyond America, we have to question how effective it will be considering that the developing world does not widely utilize this service.

PYUSD could therefore still benefit from the autonomy of DeFi, while DeFi can also greatly benefit from the existing network of PYUSD. If we can build a complementary relationship between Web2 and Web3, and TradFi and DeFi, that encapsulates credibility, innovation, and accessibility, we hold the potential to supercharge the global economy and push institutional adoption of digital assets.

Traversing from Web2 to Web3

Paypal’s stablecoin launch is one of many noteworthy, yet isolated, developments involving financial companies in 2023. Recently many leaders of the financial world have announced their increasing interest in the crypto industry. Jacobi, for example, was the first to have their spot Bitcoin exchange-traded fund listed in Europe. Visa has been actively testing payment of gas fees in fiat currency with a credit or debit card. Additionally, even institutional participation in liquid staking has increased three-fold since the Shanghai Upgrade.

While these developments help to shift the reputation of crypto assets from merely risky endeavors to credible investment options, they remain siloed developments as they have yet to facilitate a seamless transition between Web2 and Web3. For example, PYUSD can only be accessed by PayPal’s U.S. customer base through Venmo, thus it only provides banked Americans with yet another way to transact using some digital representation of the U.S. dollar.

Why TradFi and DeFi shouldn’t be silos

A major obstacle to mass crypto adoption is that cryptocurrencies can be intimidating for the average individual, laden with complex technical jargon and intricacies. This is where traditional financial institutions and Web2 technology could play a crucial role by simplifying the information and making it more accessible to a broader audience.

However, relying on the traditional finance sector to work in isolation from the DeFi ecosystem to onboard new users has high risks. The potential of traditional finance is limited from reaching all demographics, especially the underbanked, as profit motives can lead to neglecting marginalized communities. Here, the synergy of TradFi and DeFi becomes vital. DeFi offers transparency, autonomy and accessibility against the often opaque and exclusive nature of TradFi.

What it will take for convergence to happen

The convergence currently sits as multiple lines in the sand slowly moving toward each other. Merging these lines will be the key to crypto’s mass adoption, but getting there will take time and collaboration.

Certain factors are required for mass adoption. Continued momentum within the crypto ecosystem is evident, marked by continuous innovation and regulatory advancements. Notably, several countries, including Singapore, Hong Kong and France, have demonstrated commendable commitment to refining regulatory frameworks, thereby creating a more conducive environment for growth.

We have seen progress in the evolving landscape of central bank digital currencies. This trajectory has facilitated collaborations between blockchain entities and central banks, resulting in the exploration of streamlined trade settlements across economies like the use of the digital yuan for direct trade settlements.

In addition, as demonstrated by successful real estate trials in Hong Kong and JPMorgan executing the first DeFi transaction for Singapore’s central bank, the tokenization of tangible assets has the potential to transform market dynamics. Tokenization trends have prominently emerged in Asia, with proactive regulatory frameworks being established in jurisdictions such as Thailand, Hong Kong, Singapore and Japan to foster the expansion and embrace of tokenization.

Nonetheless, more is needed for comprehensive development, and macro conditions play a crucial role in facilitating the market turnaround. For instance, current high interest rates deter institutional investment into crypto as it offers investors lower returns than through bonds. When inflation lowers to more reasonable levels and governments move to decrease interest rates, we would then start to see greater institutional participation in crypto.

The undercurrent of skepticism about blockchain from mainstream audiences also cannot be ignored. While mainstream forays have made progressive strides, their impact remains localized.

DeFi and TradFi have their own advantages, and when fused together, we could see a new chapter of the global economy.

- Danny Chong