PayPal’s Stablecoin Debut Faces Headwinds, Bank of America Says

 

(Bloomberg) -- According to Bank of America Corp., PayPal Holdings Inc.'s launch of a stablecoin will promote payments efficiency and improve customer experience, even if adoption will likely be minimal in the short term. According to the corporation, the main causes for this include a lack of crypto wallet compatibility, exchange trading pairs, or additional features.

"Over the longer term, we expect PYUSD to face additional adoption headwinds as competition from CBDCs and yield-bearing stablecoins grows," Alkesh Shah and Andrew Moss, the firm's analysts, said in a note Thursday. The market sign for the token is PYUSD, while CBDC stands for central bank digital currencies.

"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 with short-term rates above 5%," they noted. Tether and Circle Internet Financial stablecoins are mentioned by the analysts.

PayPal announced the debut of its stablecoin – crypto tokens tied to an asset such as the dollar — on Monday, the first by a significant financial business. Paxos Trust Co. issues PayPal USD, which is completely guaranteed by dollar deposits, short-term Treasuries, and comparable cash equivalents. It is tied to the US dollar and will be made available to PayPal clients in the US gradually.

Following a scandal-plagued 2022 that saw the bankruptcy of a succession of big crypto businesses, some see this as possibly a huge boost to the slow adoption of digital currencies, particularly for payments.

"Investors are likely indifferent to which stablecoins they hold as long as the stablecoins are perceived as safe and accessible on the largest trading platforms," according to Bank of America strategists. "We do not expect PYUSD's launch to result in accelerated regulatory clarity, given that the stablecoin's issuance has no effect on systemic risk for traditional markets; however, the stablecoin may face regulatory headwinds if non-banks are eventually barred from stablecoin issuance."

Stablecoins have been available for almost a decade, but they are largely used by traders to transfer digital assets between exchanges and have made very limited inroads into consumer payments. According to CoinGecko, there are over $126 billion in stablecoins in circulation, with Tether's USDT being the largest by far.

The payments giant is not the first to attempt to build one. Last year, a high-profile attempt by Meta Platforms Inc. failed due to a strong regulatory response. PayPal halted development on PYUSD in February as regulators increased their scrutiny of cryptocurrencies.

Maxine Waters, the senior Democrat on the House Financial Services Committee and one of Meta's most prominent opponents, criticised PayPal's debut in the absence of regulation on Wednesday.

--With assistance from Anna Irrera and Vildana Hajric.