Welcome to the latest edition of the FT Cryptofinance newsletter. In this week’s issue, we will be discussing the stablecoin market and the entry of a new player. PayPal’s announcement to launch its own stablecoin has injected new life into the crypto market. Being one of the world’s largest consumer payments brands, PayPal’s involvement could push crypto towards widespread adoption.
However, the timing of this move is peculiar. Other brands like Revolut are stepping back from their crypto plans, while US regulators are cracking down on digital assets. Stablecoins play a crucial role in crypto markets, acting as chips in a casino. They enable traders to move in and out of positions easily by using wallets instead of multiple accounts that can be traced.
Unfortunately, stablecoins have been underperforming this year, with the circulating value of dollar-pegged tokens declining to $125bn from $188bn in March last year. This represents the lowest market cap for the sector since August 2021, and stablecoins are on track to record 17 consecutive months of declines.
Volumes in crypto derivatives, which rely on stablecoins as collateral, have also fallen by almost 50% this year. Weak crypto derivatives trading has contributed to the decline in stablecoin activity. Circle, the operator of USDC, one of the largest stablecoins, suffered a major setback when it disclosed that it had more than $3bn of its reserves in now-collapsed Silicon Valley Bank. This led to a loss of credibility for investors and a temporary depegging of its token from the dollar.
Meanwhile, Tether, the market leader, has strengthened its position by capturing two-thirds of the stablecoin market share. Despite these developments, the question remains: Why is PayPal entering the stablecoin market? PayPal’s stablecoin, named PayPal USD, follows the same pattern as other stablecoins, backing its reserves 1:1 with short-term Treasury bills and other assets.
However, there are caveats to using PayPal USD. Unlike other dollar-pegged tokens that trade on public blockchains, PayPal’s token can only be used within the PayPal ecosystem. This limits its appeal to crypto natives who have a wide range of existing stablecoins to choose from.
The comparison with Meta/Facebook’s failed attempt with Libra is unavoidable. PayPal, like Libra, is a big Silicon Valley name venturing into the crypto market without fully understanding the regulatory challenges. PayPal’s existing consumer base gives it an advantage, but bridging the gap between widespread use and crypto-native products will be a significant challenge.
In other news, the SEC continues its crackdown on crypto, with Bittrex Inc. and its co-founder settling charges of operating an unregistered national securities exchange. Russia’s central bank announced pilot testing for a digital ruble, aiming to introduce it for active use by 2025. Lastly, OKX, an offshore exchange, has seen significant growth in its share of the crypto derivatives market, benefiting from the redirection of trading flows away from US-based platforms.
That wraps up this week’s edition of FT Cryptofinance. We value your feedback, so please send any thoughts or comments to [email protected].
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