After the introduction of the PayPal stablecoin in August 2023, the initial market response appeared relatively subdued compared to the enthusiasm surrounding other stablecoins. Despite persistent concerns about the transparency of operations and reserve composition, Tether continues to dominate as the largest stablecoin. Circle, despite facing scrutiny for reserve asset management tactics through Silicon Valley Bank, maintains a reputation for trustworthiness and stability among regulators and institutions. In contrast, Meta (formerly Facebook) faced opposition from U.S. lawmakers in 2019 when attempting to launch a stablecoin, leading the former head of the program to shift focus to bitcoin-based applications.
While the launch of PYUSD initially flew under the radar, recent developments have thrust it into the spotlight as the SEC initiates a legal investigation into both PayPal and the stablecoin itself. Although legal actions against crypto firms are not novel, the repercussions of this investigation, coupled with the FTX criminal trial verdict and overall market uncertainty, are poised to reverberate across various segments of the crypto market in the foreseeable future.
Here are some key considerations for investors as this investigation unfolds:
- Policymakers’ Concerns about Tech in Crypto: U.S. policymakers, beyond the SEC’s anti-crypto sentiment, harbor reservations about major technology firms entering the rapidly growing financial space occupied by stablecoins. Despite the significant transaction volume surpassing Mastercard and PayPal, the apprehension stems from this being the first instance of a major U.S. financial institution issuing a token. The increasing scrutiny and regulation signal a norm rather than an exception for investors and potential users.
- PayPal is Not the Issuer: Although PYUSD is closely associated with PayPal and intended for transactional purposes on its platform, Paxos, a trust, is the actual issuing entity. While operating under the oversight of the NYDFS and holding a BitLicense, the two-party situation poses uncertainties. Paxos faced an SEC Wells Notice over the issuance of BUSD, emphasizing the potential legal challenges despite regulatory compliance.
- Attestation Will Become More Important: The PayPal stablecoin mirrors Tether’s reserve mechanism, but unlike Tether, PYUSD has managed to allay concerns regarding governance, reporting, and reserve management. This is attributed to the trust and reliability associated with PayPal. However, this underscores the importance of attestation and reporting in the stablecoin sector. Regardless of Paxos being the issuer, the coin’s close association with PayPal, a publicly traded company with reporting obligations, highlights the need for real-time reporting and consistent adherence to standards.
Stablecoins, including PYUSD, are anticipated to have a lasting presence, but investors must monitor evolving policy discussions shaping the sector’s future.