Why is PayPal Starting to Accept Cryptocurrency?

November 30, 2020 02:00 PM
PayPal App Photo

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PayPal recently announced that it would start supporting a range of cryptocurrencies, including bitcoin (BTC), Ethereum, BTC Cash, and Litecoin. Anyone with a PayPal address will be allowed to store, buy, or sell these cryptocurrencies in their online wallet. PayPal plans to enable users to utilize crypto to make purchases next year.

The move by PayPal is one of the most impactful corporate announcements in the crypto space in some time. PayPal’s decision highlights the gradual infrastructure developments that will go a long way toward addressing previously identified criticisms of crypto. In other words, the announcement is a welcome sign that the crypto space is maturing.

When we look at this from another perspective though, that of PayPal users, the announcement is a very strange one. After all, who is going to use PayPal to trade crypto? Spoiler alert: almost no one. That said, there’s a compelling case to be made that PayPal may have just positioned itself as the perfect tool for quickly disbursing governmental funds.

PayPal and Bitcoin

Let’s first take a look at PayPal’s purported objective in making this move. In an interview, PayPal CEO Dan Schulman said, “the shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly.”

All of this is undoubtedly true. Digital currencies, as broadly defined by PayPal, promise to extend financial inclusion and access dramatically. Similarly, the ability to improve the speed and resiliency of the payments system used by hundreds of millions of people worldwide could significantly impact international commerce. With this in mind, it’s not hard to see how PayPal’s announcement most likely contributed greatly to the dramatic rise in BTC’s price over the last few weeks.

Look a little closer, however, and you’ll spot something strange. Most notably, it appears that transactions on PayPal’s platform will be settled using traditional fiat currency, so merchants won’t need to transfer digital coins into dollars following a transaction. Also, PayPal isn’t letting users import their existing crypto wallets for use in PayPal. 

The Problem

PayPal’s crypto system is essentially their existing payments system with a veneer of crypto tacked on, and it appears that they’ll be taking no margin at all from these transactions. 

Things get even more peculiar when you consider who is currently using crypto and for what. On the surface, it appears that PayPal is offering crypto as a way to pay for goods and services. However, the vast majority of BTCs aren't used as currency in this type of transaction. 

Using crypto to pay (via PayPal) for something like a new pair of sneakers looks extremely misguided in this context. Ask yourself, why would you generate new BTCs for merchants when their value is rapidly increasing to the point they may be worth $1 million each within five years? 

Instead, BTC is usually used either as an investment instrument or to make purchases that must be kept secret. This is because BTC relies on cryptographic encryption methods that make it very difficult for cybercriminals to get access to transactional data using traditional hacking techniques.

The Future

However, let’s give PayPal the benefit of the doubt and assume that they’ve also taken these ideas into account. This leads us to another question: why offer a payment option that almost no one will use? 

Well, there are at least three reasons, two of which are pretty simple and straightforward. First, PayPal is looking to generate some positive headlines, and the announcement certainly did that. Second, at a time when the popularity of crypto is rising, PayPal is looking to nurture their own talent and capacity when it comes to working in this space.

The third reason is much more interesting and is actually evident in PayPal’s own explanation of their move quoted above, namely that part of the motivation for it is to extend the “ability for governments to disburse funds quickly.”

This last reason is critical. The Chinese government has just begun to distribute digital currency through third-party banks and apps, and much of this currency is transactional in nature. In addition, the U.S. government recently rolled out the most extensive direct support program in history, the CARES Act. It’s not hard to put 2 and 2 together and conclude that PayPal is looking to position itself as the default way for governments to disburse funds directly to their citizens.

Building a system that can do that will be difficult, especially given the rise of crypto mining malware and the high cost of cryptocurrency hacks. However, as CoinShares’ Chief Strategy Officer Meltem Demirors speculates from an insider perspective, it could eventually lead to PayPal developing their own alternative to Facebook’s Libra private currency.

Conclusion

It appears that PayPal’s decision to get into crypto likely has nothing to do with consumer convenience and everything to do with positioning the company for the future of disbursing government payments and subsidies. Following the announcement, the PayPal effect sent bitcoin prices to their highest levels since mid-2019. 

However, careful investors who can get past the hype will see that the value of PayPal’s BTC move is much more long-term than a brief market boost. Ultimately, it promises to turn the company into a central plank of our financial system. 
 

About the Author
Tim Fries is a managing director at Lakeview Capital, advisor to the Founders, and head of US business development. He has an MBA from the University of Chicago Booth School of Business. Tim is also the co-founder of Protective Technologies Capital and financial media publication, The Tokenist.