The PayPal StableCoin

PayPal customers can now transact in PayPal USD, a crypto stablecoin tied to the dollar. So which type of PayPal dollar, regular or crypto, is safer to hold? Surprisingly, the crypto dollar is backed by safer assets, gives you better rights in the event of a bankruptcy and is more transparent. The reason is not so much crypto per se as because PayPal USD is regulated differently and the US’s convoluted system of money regulation regulates similar things in different ways. J.P. Koning has the details:

[First] PayPal’s crypto dollars, which are managed by a third-party called Paxos, are 100% backed by the safest sorts of short-term collateral: U.S. Treasury-bills, reverse repo (backed by U.S. government securities), and commercial bank deposits. In finance lingo, these assets are known as cash and cash equivalents. A big reason for this conservative investment approach is that Paxos is subject to a set of strict investment limits as determined by its regulator, the New York State Department of Financial Services (NYDFS). You can read about the NYDFS’s stablecoin regulatory framework here.

By contrast, PayPal’s regular dollars, which are regulated piecemeal under each U.S. states’ own peculiar version of a money transmitter license, can almost always be legally backed by riskier assets.

…The second drawback of PayPal’s regular dollars is that the assets underlying them don’t really “belong” to customers in any strong sense of the word. They belong to PayPal.

To understand what this means, let’s say that PayPal goes bankrupt. You, a long time PayPal customer, hold $1000 worth of PayPal dollars. You might think that you are guaranteed to be made whole because there exists a corresponding set of underlying customer assets that has been specially earmarked for you and other PayPal customers. But that’s not the case. Customers are what is referred to in finance as an unsecured creditor of PayPal, which means you’d be relegated to having to fight with PayPal’s other creditors (banks, bond holders, etc) to get a piece of the pie, and that’s only after PayPal’s secured creditors – those highest in the pecking order – get first dibs. That could potentially mean getting maybe $600 or $700 instead of your original $1000.

…By contrast, the regulator of PayPal’s crypto-based dollars, the NYDFS, specifies that the reserves backing any crypto-based dollar “shall be held at these depository institutions and custodians for the benefit of the holders of the stablecoin, with appropriate titling of accounts.” To translate, the assets underlying your $1000 in PayPal USD cryptodollars are not PayPal’s assets. Nor are they Paxos’s. They are yours. No need to squabble with competing vultures for what’s left.

…The last big difference between the two types of PayPal dollars is that the crypto version offers far more transparency to customers. If you want to get current information about the assets underlying your crypto PayPal dollars, all you need to do is open up one of PayPal USD’s soon-to-be published attestation reports. Published monthly, these reports must include market values of the assets backing PayPal USD’s, both in total and broken down by asset class. These values must be recorded on two separate days each month, or 24 times per year. Furthermore, these attestation reports must be prepared by an independent auditor.

By contrast, the only way to get vetted financial information about the assets backing traditional PayPal dollars is to read its audited financial statements, which come out just once a year. For the rest of the twelve months, customers are left in the dark.


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