PayPal’s announcement that it will launch a stablecoin – a crypto token with its value tied to the dollar – shook up the insular world of payments and the Washington regulatory community. This move is important for three reasons.
First, it is a significant test of whether crypto technology can bring benefits to the real economy. Second, it could bring much-needed competition to the payments industry. And third, it could help bring about what Washington has thus far been unable to achieve – a federal regulatory framework for stablecoins. That can help reduce risk and maximise opportunities of this new technology. (Full disclosure: I am a member of PayPal’s advisory council on blockchain, crypto and digital currencies.)
Since its inception, crypto activity has had little connection to the real economy. Bitcoin was meant to be a new type of electronic cash and a peer-to-peer payments system when it was launched in 2009, but it is a speculative asset that is not widely used for payments. To date, when traditional institutions like Fidelity and Blackrock have entered the sector, they have done so to cater to their clients’ desires to invest in crypto tokens, not to change the way business is generally conducted.
But stablecoins could make a difference, and PayPal’s action could be the best test yet. Stablecoins were invented to make it easier to trade crypto because they provide a way to instantly settle a transaction on a blockchain for a fixed dollar value. But they could have broader application to payments.
Our payments system can benefit from that type of disruption. All non-cash payments today are based on an account-to-account model that involves multiple steps with multiple institutions. Separate movements of the information – name and account of payor and payee and amount – and the value are also required.
Most Americans would probably say the payment system works fine – credit cards, mobile banking and payment apps provide convenience, reliability and safety. But our system is relatively slow and expensive compared to what is possible. This is especially a problem with cross-border payments. While we all pay for that, those deficiencies hurt lower-income people the most. They often cannot wait three days for a pay cheque to clear and incur overdraft charges or resort to expensive cheque cashing services to pay their bills. They often can’t obtain credit cards but subsidise them by paying the same prices for goods and services. They also pay a lot to send money
to families abroad.
There are potentially many ways to improve payments, and stablecoins may not be the best one. But stablecoins – and tokenisation generally – could improve payments by combining messaging, reconciliation and transfer of value all at once, instantly. They also offer new opportunities through programmability.
But stablecoins today also have risks, and I have long argued we need a federal regulatory framework because of these risks. Put simply, stablecoins are not inherently ‘stable’. There have been efforts by Congress to pass legislation, but a consensus has not been reached. PayPal obtained the necessary approvals under state law to launch a stablecoin, and its action might encourage Washington to come to an agreement on a federal framework.
PayPal’s action has been compared to Meta’s (then Facebook) attempt to launch a stablecoin, called Libra (and later Diem). But there are big differences. PayPal has always been a payments company, and it is using a new technology that it believes can create significant efficiencies and opportunities in payments.
Meta is a social media platform that wanted to enter financial services to capitalise on its data advantages. It was challenging a traditional principle of financial regulation, which is that commercial companies should not be in banking, where payments have traditionally
Finally, it’s also possible that stablecoins could help maintain the global importance of the dollar. Its primacy in global commerce is based on multiple factors, and there appear to be no immediate threats. But many other countries are moving rapidly to explore digital technology, including through projects to create non-dollar-based systems for international payments. We need to make sure the technology of dollar-based payments is modernised, and regulated stablecoins might be one way to do that.
Timothy Massad, Research Fellow and Director of the Digital Assets Policy Project at the Harvard Kennedy School.
This article was originally published in OMFIF’s ‘Digital assets: building the markets of the future’. Download the report below.