Market Commentary

What Does the PayPal Announcement Mean for Bitcoin?

By
Brian Friel
on
October 22, 2020

We review the impact of PayPal adding cryptocurrency to their payment options: Good news, but will investors want a captive wallet?

PayPal ($PYPL) announced plans yesterday to allow its users to buy and sell cryptocurrency from within its own platform. The announcement comes as part of a larger initiative in which PayPal plans to enable its 26 million merchants to accept cryptocurrencies as a form of payment, starting in early 2021.

We believe this is a major event for three main reasons:

1.The number of potential new Bitcoin users cannot be understated.

With 346 million active accounts, PayPal dwarfs existing digital currency onramps. A study conducted in September by the University of Cambridge found a total 101 million unique users across all existing digital currency exchanges and wallet providers. Historically, these onramps such as Coinbase and Square’s Cash App host the majority of Bitcoin activity. Data from Glassnode shows the total number of non-zero Bitcoin addresses to be just over 30 million — about 1/10th of PayPal’s active user base. By enabling Bitcoin purchases from within the same platform that hundreds of millions of people already trust (and which is already trusted by the legacy finance community), PayPal just positioned itself to become Bitcoin’s biggest onramp.

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2. The move dismantles the old and ill-advised “Blockchain, not Bitcoin” narrative.

As a founding member of the Libra Association, PayPal had every opportunity to lead development of private and semi-public blockchains, but has instead shifted its focus to public blockchains such as Bitcoin. After leaving the Libra association in October of last year, PayPal CEO Dan Schulman was quoted as saying he is intrigued by blockchain technology but that he personally owns “only Bitcoin”. By publicly supporting public blockchains such as Bitcoin, PayPal is recentering the narrative around what blockchains are actually being used for.

3. More institutional players will follow.

At just under $250B market capitalization, PayPal is a massive player in the highly regulated world of money transmitters and financial institutions. As noted in our latest articles on the OCC's guidance on custody of digital currency and the CFTC’s crackdown on BitMEX, U.S. regulators have been carefully cleaning up the digital currency ecosystem while creating a clear path for businesses to operate in a safe and compliant manner. Traditional financial institutions will no longer be able to defer support for Bitcoin on grounds of regulatory uncertainty. Now, with the addition of PayPal, they will be forced to innovate and compete for their underlying business.

Conclusion

We believe this is a groundbreaking move, but would be remiss not to mention that this is by no means the most customer-friendly solution for users. As noted on their cryptocurrency FAQ, PayPal will limit who can buy, how much they can buy, and what they can do with their cryptocurrency after the purchase. Customers with PayPal credit held in cryptocurrency will be unable to transfer any cryptocurrency or take possession of it themselves without paying again to convert to their local currency.

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Nevertheless, we remain great supporters of PayPal taking the initiative to build bridges from the legacy banking system towards Bitcoin and other digital currencies. We believe this is a key first step towards building a better, more inclusive financial system, akin to some of the earliest visions that PayPal had back in 1999:

“Everyone in the world needs money — to get paid, to trade, to live. Paper money is an ancient technology and an inconvenient means of payment. …Of course, what we’re calling ‘convenient’ for American users will be revolutionary for the developing world. Many of these countries’ governments play fast and loose with their currencies. … They use inflation and sometimes wholesale currency devaluations … to take wealth away from their citizens. Most of the ordinary people there never have an opportunity to open an offshore account or to get their hands on more than a few bills of a stable currency like U.S. dollars.
Eventually PayPal will be able to change this. … PayPal will give citizens worldwide more direct control over their currencies than they ever had before. It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

Peter Thiel, PayPal Co-Founder, 1999