OBSERVATIONS FROM THE FINTECH SNARK TANK
PayPal announced that it has been granted a conditional Bitlicense by the New York State Department of Financial Services (NYDFS). The license will enable PayPal to launch a new service that will enable its customers to:
- Buy, hold, and sell cryptocurrency (initially Bitcoin, Ethereum, Bitcoin Cash, and Litecoin) directly within the PayPal digital wallet.
- Use the cryptocurrencies as a funding source for purchases at its 26 million merchants.
PayPal said there would be no service fees for buying or selling cryptocurrency through December 31, 2020, and no fees for holding cryptocurrency in a PayPal account.
According to the firm’s press release:
“Consumers will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees. PayPal merchants will have no additional integrations or fees, as all transactions will be settled with fiat currency at their current PayPal rates.”
PayPal will require users to hold purchased cryptocurrencies in their PayPal wallet without an ability to transfer it to other accounts.
The Argument Against PayPal
PayPal’s news was met with some criticism from some parts of the cryptosphere. A blog post from Satoshi Labs said:
“Until very recently, PayPal was anti-crypto. Writing in 2018, ex-CEO Bill Harris called Bitcoin ‘the greatest scam ever’, so what’s changed? When a household brand like PayPal starts selling Bitcoin, it’s probably not because they want to spur healthy adoption. If millions of newcomers are onboarded to Bitcoin by PayPal, there could be a very serious information gap that jeopardizes their experience and undermines key principles of cryptocurrency. Time after time, exchanges have lost user funds, often leaving them with no recourse.”
Blockchain.com CEO Peter Smith called PayPal’s plans “highly centralized and inflexible” and commented:
”Crypto is about financial freedom. It’s modern money that anyone anywhere can truly control. While we’re excited to see a new audience gain access, a non-custodial approach limits opportunity to self-custody your crypto or transact freely.”
The Counter Argument
Satoshi Labs’ arguments are hollow and without merit:
- What’s changed, Satoshi? CEOs. Dan Schulman was named PayPal CEO in September 2014, four years before Harris made his anti-Bitcoin comment.
- What is “healthy” adoption (and who made Satoshi Labs the arbiter of how consumers should adopt cryptocurrencies)?
- Satoshi Labs’ last point sinks its argument altogether. It’s exactly because exchanges have lost users’ funds that PayPal has an opportunity to provide these services (and provide them as it sees fit). The number of consumers that trust PayPal to hold their money far exceeds the number that trusts the crypto exchanges.
In addition, Smith’s statement is a contradiction. If PayPal users want to use the service as PayPal intends to offer it, shouldn’t they have the freedom to make that decision for themselves?
PayPal’s Service is Going to Be a Big Hit
A new survey of 3,000 US consumers conducted by Cornerstone Advisors and FICO found that:
- 60% of smartphone owners have the PayPal app installed on their smartphone.
- 14% of PayPal users already own some form of cryptocurrency (in contrast to 8% of non-PayPal users). Of those PayPal users, 53% of them used Bitcoin to buy products or services in the past year, and two-thirds plan to in the next year or two.
- Another 15% of PayPal users intend to purchase or invest in cryptocurrency in the next 12 months—and half of them expect to make retail purchases with Bitcoin in the next year or two.
- $31.2 billion worth of retail products and services were purchased in the past year using cryptocurrencies by all Americans. PayPal users accounted for 74%—$23.1 billion—of that amount.
PayPal’s new service eliminates two hurdles regarding the use of cryptocurrencies for retail purchases: 1) Getting cryptocurrency into a form that’s usable for retail purchases, and 2) Merchant acceptance of cryptocurrency as a form of payment.
As a result, retail payments made with Bitcoin, Ethereum, and Litecoin by PayPal users could easily double and reach $50 billion by the end of 2021.
Will Square Counter?
PayPal’s new service is not a surprise.
Coindesk reported on PayPal’s plan to roll out a cryptocurrency buying service on the heels of Square’s announcement that it generated $306 million in Bitcoin-related revenue in Q1 2020, up from $65 million in Q1 2019.
The surprise is in the details—particularly, enabling purchases to be made with crypto and paying merchants in dollars. Will Square do the same?
Square wrapped its recent purchase of $50 million of Bitcoin in flowery terms of “economic empowerment” and “financial inclusion,” but the real reason may be its intentions to enable its Cash App users to make retail transactions in Bitcoin and pay merchants in the currency of their choice.