Hi,
This is Ayaan Shah from Nextrope’s Insights. Today’s newsletter covers a recent, momentous announcement by Paypal: its acceptance of cryptocurrency. We will examine the decision and its significance.
Today we’ll discuss:
❗️ The PayPal announcement
🔺 The backlash against the PayPal announcement
📈 Cryptocurrency Adoption by other mainstream projects
❓ The announcement’s implication on the Cryptocurrency industry
If you have any questions, please don’t hesitate to ask as I am happy to answer them. Also, if you are working on any fintech or blockchain projects and would like to be featured in our newsletter, please reach out to me - a.shah@nextrope.com
Not financial advice
We have done our best to ensure that the information provided in the Newsletter and the resources available for download are accurate. However, the information contained in this Newsletter and the resources available for download are not intended as, and shall not be understood or construed as, financial advice.
The Big Announcement
On October 21st, PayPal, the world’s biggest online payment system, sent tremors down the crypto space with its announcement—PayPal will now allow customers to hold virtual coins in its online wallet and shop using cryptocurrencies. PayPal’s press release indicated that it will initially support Bitcoin, Ethereum, Bitcoin Cash, and Litecoin but will look to expand this selection in the future. Considering the 26 million merchants on Paypal’s network and the fact that cryptocurrencies listed above make up roughly 75% of all crypto transactions, this announcement signals a pivotal moment for cryptocurrency users.
PayPal’s 346 million active user base and the growing volume of payments ($222 billion payments in the second quarter of 2020) shows the significance of this change. I found that 87.5% of online buyers use PayPal, with its market share increasing each quarter. There is no bigger platform to push cryptocurrency into the spotlight than Paypal. As can be seen in the graph below, there has been a 4x growth in the number of active PayPal accounts in the last decade who will now have easy access to cryptocurrency.
Number of Active PayPal Accounts
Source: Statista
Paypal’s acceptance of cryptocurrency effectively means that cryptocurrency will become another funding source inside the PayPal digital wallet, similar to fiat currencies. Account-holders will be able to buy, sell, and hold cryptocurrencies in their PayPal wallets. This facility will also be extended to PayPal owned peer-to-peer app Venmo. PayPal announced that they will not be charging fees on crypto transactions until January 1st, 2021 to allow their users to ease into the system. They also announced that PayPal merchants will continue to get paid in fiat currency, even if the user paid via cryptocurrency, effectively allowing merchants to completely avoid exposure to volatility risk.
Source: Twitter
Promptly following Paypal’s announcement, the prices of the cryptocurrencies that will be processed by PayPal rose by 9% as Bitcoin went from $12,000 to $13,000. The prices have been hovering at those rates ever since.
Source: Coin Desk
PayPal’s shares also rose by 4% but this proved to be temporary as they returned to previous levels. Differing opinions about the announcement’s impact on Paypal persists among the analysts. Some argue that this change will attract crypto enthusiasts and new users and investors to PayPal and also believe that PayPal is laying the groundwork for digital fiat currencies. The other camp of analysts, including firms such as Morgan Stanley, thinks that the crypto market is too small to affect PayPal’s profit, predicting a mere 0.3% growth in PayPal’s $21.3 billion revenue base, even if it is able to scale to Square’s current level (more on Square later).
All is not rosy yet - Backlash against the announcement
Despite the broadly positive responses, Paypal’s announcement met a few voices of concern as well.
Absence of the Private Key
‘Not your key, not your coins’ is a common mantra in the crypto space, which basically means that if a user stores their crypto assets on an exchange or with other third-party custodians, they have no guarantee of ownership. This is because the private keys of the wallet are not with them. While PayPal has announced that all users own the cryptocurrency that they purchase on the platform, the users will not be provided with a private key. This restriction was implemented to prevent users from losing their keys and irrecoverably losing access to their crypto assets. While this concern is valid, keeping the keys away from the customers leaves room for PayPal to exercise a heavy influence on how customers wield their assets.
PayPal is planning on using this influence by preventing users from withdrawing or depositing cryptocurrency into their wallet. Once virtual coins are bought, they are restricted to stay in the account until the users spend them at PayPal merchants. These coins cannot be transferred to other accounts on PayPal and the maximum amount of crypto transactions are capped at $10,000 a week.
These restrictions go against the ethos of cryptocurrency, especially the focus on decentralization. Many crypto enthusiasts have been vocal about their qualms against the restrictions by PayPal.
Constant crypto spending
I predict that increased accessibility of crypto, not the increase in avenues for its spending, will attract new users through Paypal. This is because many people will continue to hold crypto as a store of value rather than a currency. They own these assets hoping to benefit from potential price increases. Thus, I believe that Paypal’s announcement will not lead to a significant increase in crypto spending at merchants but only an increase in its demand, and consequently its price.
Transaction fees
Crypto users are expected to pay a rate of 2.3% for transactions below $100, 2% for transactions between $100 and $200, 1.8% for transactions between $200 and $1,000 and 1.5% for transactions above $1,000 on PayPal. In comparison to Coinbase, a crypto exchange whose charges are 1.49% in conversion fees for any transaction over $200, Paypal’s fees remain uncompetitive. Paypal’s official website further states that they predict some spread between buying and selling prices. These transaction costs will discourage spending and hinder increased usage.
Tax reporting
PayPal announced that individuals are responsible for their own tax calculations. Most countries currently recognize cryptocurrencies as assets (more on this in our previous newsletter) which makes crypto transactions taxable. Since crypto-assets are volatile, users are liable for capital gains tax on the amount the asset has gained between the time it was acquired and spent. Most new users are unlikely to understand the tax requirements thus creating complications for the users.
Cryptocurrency adoption by mainstream projects
While PayPal’s launch is one of the most noteworthy events in fintech, it is certainly not alone in its acceptance of cryptocurrency. Other mainstream fintech companies have recently made a foray into the use of cryptocurrencies, some enabling transfers outside their platforms, while others restricting the transactions to within.
Square
Square is currently the market leader in POS devices with 30 million active subscribers. The company won the patent in January 2020 to debut a new crypto-to-fiat payments network that allows customers to buy and sell bitcoin with cryptocurrency, similar to PayPal. However, unlike Paypal which restricts that merchants be paid in fiat money, Square allows its merchants to accept payments in any currency they choose, including cryptocurrency. Square also allows users to make bitcoin deposits into their accounts, deposit their crypto assets into a third-party wallet, and withdraw into their bank accounts.
Square has grown rapidly as a preferred platform for crypto enthusiasts, thanks to its flexibility and affordability. In the first half of 2020, their bitcoin service generated over $190 million in revenue and amounted to almost USD $3 million in gross profits. The wallet processed USD $125 million in bitcoin sales in the second quarter alone. Square is betting heavily on cryptocurrency adoption as it invested $50 million in October 2020 to buy more than 4,700 bitcoins, roughly 1% of the company’s total assets.
Revolut
UK’s digital challenger bank Revolut, boasting more than 10 million customers worldwide, allows customers to buy, sell, and transact with the five biggest cryptocurrencies. Crypto can be transferred to other Revolut customers in the Revolut app but the transaction is limited within the platform.
In July 2020, Revolut made their clients the legal owners of their crypto, while Revolut acts as a custodial agent that holds and transacts these assets on the client’s behalf. Previously, Revolut was the sole legal owner of all purchased crypto assets, and users only got the “exposure” to the price movements. While Revolut offers a wider variety of functions than PayPal, its restriction on transactions to be within the platform is dragging it behind the race of crypto finance.
Robinhood
No list of mainstream fintech providers offering cryptocurrency services is complete without mentioning the trading app Robinhood. With 13 million active users, Robinhood has allowed cryptocurrency trading since 2018, allowing users to own, buy, and sell 7 crypto assets. Robinhood currently does not provide users access to their private key or support coin withdrawals/deposits claiming that their primary concern is that proceeds from illegal activity might be used for transactions on Robinhood Crypto.
Implications for Mainstream adoption
Understanding the impact that mainstream financial players have on cryptocurrency requires a close examination of the following factors:
Increased utility
PayPal’s acceptance of cryptocurrency addresses the biggest concern surrounding crypto adoption: Utility. Major merchants that accept cryptocurrency as a form of payment are still limited to Wikipedia (donations), Microsoft (top-up Microsoft account), AT&T (payment option), and Gyft. A report by Morgan Stanley stated that crypto acceptance had stalled at 1% of the top 500 internet retailers, fueling the argument against cryptocurrency’s legitimacy and utility. However, Paypal’s addition of 26 million merchants to the list effectively disproved this argument.
Mass Exposure to Cryptocurrency
Although an increasing number of people are learning about cryptocurrencies, many are unable to get involved due to its technically complex nature. Mainstream financial apps help bridge this gap by introducing cryptocurrency through familiar means. Entry to cryptocurrency usage can create a snowball effect as the new user’s further research and become increasingly involved in the crypto industry.
Increased competition
It makes sense for an average user to use apps like PayPal since they would not need to go through another round of procedures like Know Your Customer (KYC) at another broker to start their account. This is a tough value proposition to beat and is predicted to attract many crypto enthusiasts. While most crypto platforms offer wider access to cryptocurrencies in terms of the number of coins, the four virtual coins that PayPal will introduce comprise a major portion of the market. Other platforms will consequently be forced to compete through more diverse features, lower fees, and better customer service, ultimately benefiting the entire crypto space.
Vote of confidence in the future of digital assets
According to a survey by the Bank for International Settlements, one in ten central banks – approximately one-fifth of the world's population – expects to issue their own digital currencies within the next three years. PayPal mentioned that numerous European central bankers have come forth and expressed their support for the creation of a digital Euro. Paypal seems to have laid the groundwork for the development of such digital assets.
Legitimacy & credibility
There has always been a dis-joint between centralized finance (CeFi) and decentralized finance (DeFi) (discussed in our previous newsletter). While not many crypto enthusiasts would agree, validation from CeFi is required to allow mass DeFi adoption. This is because cryptocurrency still has negative connotations in the minds of the public having been linked to scams, money laundering, etc. This move by PayPal may be the biggest validation and endorsement the crypto space could have received, especially since the former PayPal CEO, Bill Harris called Bitcoin a scam back in 2018.
All in all, PayPal’s decision to include cryptocurrency as a form of payment deserves to be called “the biggest news in crypto in 2020.”