WASHINGTON — Digital tokens are once again in the policy spotlight after PayPal became the first payments company of its caliber to issue a dollar-backed stablecoin.
PayPal is already a prominent payments provider, unlike tech companies like Meta, which was known as Facebook when it announced its ill-fated stablecoin initiative in 2019.
The latest stablecoin rollout could capture lawmakers' attention and prompt discussions about the appropriate regulatory framework for stablecoin issuance, said Ian Katz, managing director at Capital Alpha Partners.
"PayPal isn't quite as polarizing as Facebook, but it's a high-profile name that will surely get attention on Capitol Hill," as well as from the Federal Reserve and the Securities and Exchange Commission, Katz wrote in an email. "Democrats generally have been concerned that the Republicans are giving the states too much authority."
He added that Democrats want the Fed to play a bigger role in oversight of stablecoins.
Jaret Seiberg, a policy analyst at TD Cowen, said the divide between Democrats and Republicans is not unbridgeable, since both parties appear to agree on the bulk of the regulatory regime.
The question of whether to regulate stablecoins at the state or federal level, he said, is the major unresolved disagreement between the Biden administration and congressional Republicans, whose efforts have been led by House Financial Services Committee Chairman Patrick McHenry, R-N.C.
"The sticking point centers on how much federal oversight there will be of state-regulated stablecoin issuers," Seiberg wrote in an email. "Team Biden wants to copy the banking regime, which effectively would make the federal authority the primary regulator. It is hard for us to see McHenry accepting that condition, [so] we are skeptical stable coin legislation will become law in this Congress."
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While the House legislation may be dead on arrival in the Senate, PayPal's announcement on Monday could prompt the Democratic-controlled chamber to start developing its own stablecoin regulation bill. Such a proposal would likely give the Fed a more substantial oversight role.
"This could spur Senate Democrats to get more engaged on stablecoin legislation," said Katz.
Meanwhile, certain stablecoin experts expressed concern that PayPal's issuance and distribution of stablecoins will potentially introduce novel systemic risks.
Some regulators' skepticism towards stablecoins stems from the momentous
Terra USD was an algorithmic stablecoin, which relied on users' trading activity, rather than 1-to-1 cash-equivalent reserves to maintain its dollar peg. Still, its demise shook confidence in stablecoins — shattering the eponymous assumption that stablecoins always held their pegged value.
Paxos Trust Company — the firm with which PayPal is partnering with to launch PYUSD — specializes in blockchain technology and was the first bitcoin exchange
In February, financial regulators in New York state directed Paxos to pause issuing a stablecoin on behalf of the crypto firm Binance, which led
Katz said that central banks like the Fed, which is also a bank regulator, remain concerned about the impact stablecoins could have on financial stability.
"A key issue here will be PayPal's plan to make its stablecoin available on Venmo, the popular digital wallet that PayPal owns," said Katz. "Anything stablecoin- or crypto-related that breaks through into a platform as mainstream as Venmo will cause concern at the Fed."
Art Wilmarth, a George Washington University law professor and longtime financial regulatory expert, said regulators' recent
Wilmarth said that the decision by federal banking regulators to bail out uninsured depositors at Silicon Valley Bank and Signature Bank, another bank that failed last spring, averted a potential panic in the stablecoin market and a more general meltdown in crypto markets.
"The Circle-SVB episode provides a preview of the type of systemic crises that are likely to occur if large nonbanks issue and distribute stablecoins and develop significant connections with banks through the maintenance of reserves at banks, as PayPal intends to do with its stablecoin," Wilmarth said.
Wilmarth also argued that if federal regulators do permit PayPal and Paxos Trust to proceed with their announced stablecoin plans, other Big Tech firms will likely move to unveil their own stablecoins.
Crypto expert Brandon Zemp argued that PayPal's high profile and its confidence in pushing forward with PYUSD suggests the company has obtained some level of regulatory approval.
"My guess is that PayPal just flexed their financial might and decided to risk the biscuit," said Zemp, host of the BlockHash Podcast. "They made a chess move that they are confident with."
Seiberg argued that PayPal's introduction of a stablecoin-based payment platform could appear threatening to the market dominance of traditional banks.
"What PayPal is saying is that if the banks don't push instant payments, then it is going to try to disintermediate them with a stable coin-based system that does not rely on the banks or bank accounts," Seiberg said in an email.
"It is why we believe this could build bank support for FedNow. And if FedNow takes off, then we question the need for a payment stable coin."
