Well the news is out. In the coming weeks, all of PayPal’s U.S.-based users will be able to buy, sell, and HODL four coins (Bitcoin, Ether, Litecoin, and Bitcoin Cash) on PayPal’s platform.
Over the course of H1 2021, PayPal eyes on expanding its crypto offering: to new geographies overseas, to include new features like payments to its 26+ million merchants, and to its 50+ million users on Venmo.
And after that? Support for the “next wave” of digital currencies: central bank digital currencies (CBDCs) where sovereign nations like China can issue their local currencies onto the PayPal platform.
In the press release, PayPal CEO Dan Schulman stated that they were preparing the “network [to support] new digital currencies that central banks and companies may develop”.
But it wasn’t all smooth sailing for PayPal. The company had difficulty navigating licensing and regulations, ultimately landing on a compromise with the New York State Department of Financial Service (NYDFS) to be granted a “conditional BitLicense” — the first license of its kind.
This conditional license allows PayPal to launch its crypto service in partnership with Paxos — a N.Y.-based company with from a full Bitlicense from NYDFS.
In this partnership, PayPal will offer the front-end UI/UX and user reach, while behind the scenes, Paxos takes care of the trading mechanisms and crypto custody, providing PayPal with trade, send, receive APIs to hook up to.
PayPal plans to leverage this conditional license and partnership in the interim, as it applies for its own standalone BitLicense.
Why is PayPal interested in crypto?
There’s three major reasons for PayPal’s entrance into the crypto industry: making money (obviously), boosting user engagement, and future-proofing its business.
There’s tons of money to be made.
You don’t need to look further than Square’s Cash App to see a successful case study on offering a crypto product.
Cash App has made billions of dollars by offering a simple way to buy and sell Bitcoin.
That’s literally it.
No other coins listed. No fancy features like limit orders or stop losses.
Just buying, holding, and selling Bitcoin for a modest fee.
The numbers speak for themselves:
In Q2 2020, Square’s Bitcoin product accounted for an obscene 46% of company net revenue and 73% of Cash App’s net revenue (including Bitcoin), with an absurd year-over-year growth rate.
Let’s do the cursory math. If PayPal ran the same playbook, by launching a crypto product at the same time as Square and achieving the same level of adoption, it would have raked in $2.42 billion in additional net revenue in Q2 2020 (46% of PayPal’s $5.26 billion Q2 2020 net revenue).
And that’s for just offering Bitcoin.
PayPal wants to offer even more coins and plans to charge an even higher fees to buy and sell crypto on its platform.
You can expect to pay ~2.3% for your coins — the highest in the industry, higher than Coinbase’s ~1.5% and Cash App’s ~1.75% fee.
Dan Schulman is salivating at the thought of future ARR for this product.
Crypto increases engagement amongst PayPal’s users
Every company — from Facebook to Proctor & Gamble — wants to increase the number of times a customer interacts with its products.
Capturing the attention of a customer is hard enough, and there’s the never-ending battle with attrition.
The golden ticket is to squeeze out as much value from an individual customer — by increasing engagement and cross-selling products.
Robinhood co-founder Vlad Tenev has been vocal that his company’s crypto offering is a customer adoption play. He wants more users on the platform, and he wants the existing users to use the platform even more.
PayPal’s move into crypto is no different. It’s constantly offering new products and services to its customers with the intent to attract and retain them.
Stay longer on PayPal. Use it more. Move more money on its platform.
Crypto will position PayPal well against industry macrotrends
Bitcoin was created with the vision of open peer-to-peer payments between any store and any person. And crypto broadly has had the vision of an open financial system — similar to how the Internet was created for open access to information and communication.
Internet disrupted large, closed computer networks like CompuServe and made them irrelevant in several years’ time.
And PayPal looks a lot like CompuServe right now.
PayPal has spent billions of dollars to acquire customers and keep them in its closed, walled garden.
For a long time, you could only pay at PayPal merchants, and PayPal heavily insisted that you used your preloaded funds on its wallet for purchases.
PayPal’s strategy has been the absolute antithesis of crypto’s vision of financial freedom and access.
So, at the risk of being the next CompuServe, PayPal disrupts itself with its first foray in cryptocurrency — fulling knowing that this is a small step toward opening up its long-held walled garden.
In addition, PayPal is positioning itself to take advantage of regulatory headwinds.
With the rise of digital coins and CBDCs, PayPal — with its brand known for trust and security and its deep relationships with regulatory bodies around the world — can be in the shortlist of companies that central banks will want to work with to list their currencies.
“I think this is more about PayPal being smart and looking to the future when fiat currencies will go digital,” said David Birch, director at payments consultancy Consult Hyperion.
How will this affect the crypto industry?
The first and most immediate impact will be on the price and market cap of cryptocurrencies.
Since PayPal’s announcement on Wednesday, the price of Bitcoin has spiked nearly 15% and is posed to break through the $13,000 resistance level.
Secondly, in the medium term, PayPal’s entrance will improve the trust and name recognition for crypto.
Wednesday’s announcement makes PayPal the most significant company in financial services (sorry JPM) to support crypto.
Crypto has been plagued with associations with dark-web illicit activities like drug dealing and prostitution.
The early Internet looked really similar — many dismissed it as a lawless land for shady activity.
Back then, PayPal entered the scene and offered a secure, trusted payment method between online shoppers and merchants, starting with eBay bidders and sellers.
Thus, showing the world that eCommerce could be trusted and opened the door for mass adoption.
PayPal can do the same thing for crypto, as well as drive awareness with its world-renowned brand name.
“For regular people that have never heard of Bitcoin, the association between PayPal and Bitcoin, those are all signals for Bitcoin being recognised [sic] as a digital asset that works,” said Lex Sokolin, global fintech co-head at ConsenSys.
In addition, it seems like PayPal wants to be a great partner to the industry. PayPal stated that it hopes “to increase consumer understanding and adoption of cryptocurrency… [by providing] account holders with educational content to help them understand the cryptocurrency ecosystem”.
This mirrors the efforts of Coinbase with its Earn product and other crypto community members to easily educate people about crypto and its benefits.
Thirdly, PayPal will be the champion for the adoption of crypto’s payments use case.
While PayPal is starting off with a simple investing use case, it eventually plans to allow its users to pay for goods and services with crypto from its wallet.
PayPal has 346 million active accounts around the world and processed $222 billion in payments in Q2 2020 alone.
In comparison, $4 billion in payments were processed using crypto in all of 2019 — across an estimated few thousand merchants.
Even if only 1% of PayPal’s users and merchants used crypto for payments, it would dwarf the current numbers.
And PayPal is leading the way for merchant adoption by making it risk-free for its merchants to accept crypto.
In its press release, PayPal stated that it will still make “settlement happen through traditional currencies”. In layperson terms, this means that merchants will still receive their local currency for purchases made with cryptocurrencies.
So merchants will avoid any price volatility risk and security complications that come with holding crypto and accepting crypto payments.
Meaning that PayPal will be managing exchange rates, liquidity, and price volatility on the behalf of merchants, only exposing them to the “last mile” settlement in their local payment rail.
Crypto payments, as a use case, has been plagued by issues like slow merchant adoption and arduous on- and off-ramps.
PayPal seeks to remediate those pain points, which is amazing news for a use case that has seen slow adoption and growth compared to those of DeFi and trading (single digit growth for payments vs. the 10x growth of DeFi).
But it’s not all good news
PayPal’s entrance is a huge milestone for crypto in its pursuit of mainstream adoption, but it doesn’t move the needle on the overall vision of crypto: open financial access and freedom for all.
PayPal still has a walled garden and, for now, is intent on keeping their garden of users closed.
For starters, users can’t move out of or into PayPal’s wallet.
Instead, users can only buy, hold, sell their crypto inside PayPal’s four proverbial walls — similar to Robinhood.
The kids can play with their shiny new toy, but they can only do it in the backyard.
Thus, ensuring that PayPal is the only company that can profit off its users’ crypto purchases (unlike Cash App which allows users to move their Bitcoin out of its servers).
There’s likely some regulatory hurdles like Anti-Money Laundering (AML) and Anti-Terrorist Financing provisions, as well as operational hurdles like transaction monitoring teams and licensing, that prevent PayPal from allowing crypto to move in and out of its wallet.
But it’s still antithetical to crypto’s mission.
Secondly (but is more of an extension of the first point), PayPal doesn’t allow its users to own or manage their own private keys.
It’s an old adage from the crypto community that if it’s “not your keys, it’s not your crypto”.
Owning private keys, in a simplistic sense, means that users will actually own their crypto — it can’t be taken away from PayPal, a bank, a government body, or anyone really.
They’re kind of like a super password.
However, losing private keys means losing the crypto forever.
We’re all familiar with stories of early Bitcoin adopters who forgot the private keys to their crypto wallets, unable to access millions of dollars worth of Bitcoin.
PayPal doesn’t seem interested navigating the negative PR of users losing their crypto if they were to offer that capability on its wallet.
Also, holding the private keys of their users’ crypto means that PayPal essentially controls its users hold their coins.
Since PayPal won’t allow crypto to move off of its platform, PayPal is essentially just holding a bunch of crypto — in partnership with Paxos — and moving it around its internal books.
PayPal “sells” crypto to its users and “buys” it back when users want to either sell their crypto or use it to purchase items on PayPal.
I expect that PayPal pays a hefty fee to Paxos to store and move around its crypto, so it makes sense that PayPal is in talks to buy BitGo, the leading crypto custody solution in the industry.
Thirdly, merchants will not hold or receive crypto — meaning that, while there’s technically more merchant acceptance of crypto, none of PayPal’s merchants are bought into the value prop and mission of crypto.
Thus, we’re seeing a clear delineation between companies like PayPal and Robinhood, who are finance companies that seek to use crypto for their own monetary gain, and companies like Square and Coinbase, who are actual crypto companies that believe in Satoshi’s vision of open finance for the world.
If Dan Schulman really wants to achieve “financial inclusion and access” like he notes in the PayPal press release, then PayPal should work on their internal capabilities to be able to:
- Have consumers move crypto out of their platform so they can own their own crypto and not be dependent on PayPal
- Work to get their 26 million merchants comfortable with crypto, so they can actually accept and hold crypto
- Leverage its best-in-class security, fraud, and dispute management capabilities (what made PayPal successful to begin with) and bring it to crypto
Until then, this move looks less like PayPal embracing crypto, and more like PayPal exploiting it.