PayPal stablecoin threatens basic crypto tenets, but also poses upside

PayPal's new stablecoin was celebrated as a show of crypto might on Monday, with the promise of a large American payments firm entering the space seen as a positive omen in a sector plagued with regulatory uncertainty and ongoing bear market. It's also reigniting the age-old debate over centralization.  

While a well-established fintech with deep web2 roots creating the PYUSD stablecoin could be a long-term, net positive in terms of driving widespread adoption of digital currencies, PayPal's initiative could also simultaneously be a threat to what many crypto evangelists hold dear.

“PayPal will indeed bolster the perception and acceptance of cryptocurrencies,” zkLend co-Founder Jane Ma told The Block, arguing that PayPal’s reputation for transparency and experience navigating the regulatory landscape automatically lends its PYUSD stablecoin a degree of credibility.

But it’s a bit more complicated than that, she also said.

“As part of a prominent U.S. financial organization, PYUSD will inherently operate with centralized administrative functions,” said Ma. “This preference from regulators and institutions for stablecoins designed with regulation in mind could lead to a diminished market share for decentralized stablecoins, threatening the very principles of decentralization that underpin the crypto space.”

Battle of the stablecoins

While decentralized stablecoins have yet to prove as popular as centralized stablecoins like Tether’s USDT or Circle’s USDC — both of which have market caps in the tens of billions of dollars — they are fundamentally more aligned with crypto’s decentralized roots.

Guy Young, CEO and founder of Ethena Labs, expects competition among centralized stablecoins to intensify with PayPal joining the fray, especially with a lack of alternatives.

“We are yet to see any legitimately scalable decentralized alternatives. That is where the real opportunity lies,” he said, adding that PYUSD is a product "built on centralized rails, with code embedded to freeze funds at their discretion."

Added credibility

An initial contributor to the popular Core DAO, Rich Rines, echoed some of Young's skepticism.

"This move doesn't represent true decentralization," he said. "Advocates of decentralization champion a financial ecosystem free from any centralized authority or control."

But Rines doesn't dismiss PYUSD's possible onboarding capabilities, which could have the spillover effect of benefitting crypto on the whole. PayPal has more than 400 million active accounts.

“PayPal brings new web2 credibility to blockchain technology,” he added, suggesting if the company successfully convinces people to purchase PYUSD it might bring many users "face to face with DeFi for the first time.”