How will PayPal’s Adoption of Cryptocurrency Impact the Future of Decentralised Finance?


On April 24, 2018, Bill Harris, the man who had helped found PayPal in 1999, published an attack on cryptocurrency, stating unambiguously that “Bitcoin is a scam.” Two years later, on October 21, 2020, in a remarkable turnaround, PayPal made the official announcement: “The company is introducing the ability to buy, hold and sell select cryptocurrencies.” 


Mainstream media and the cryptocurrency community reacted in a variety of ways. As quoted in a BBC article, David Gerard, author of Attack of the 50 Foot Blockchain stated, “I don’t expect much of a market for this beyond existing crypto holders….I’m baffled that PayPal would offer this, and it’s not clear what they’re trying to do here.” 


Coindesk, a media outlet catering to cryptocurrency aficionados, sought perspective from Charles Hayter, CEO and co-founder of data site CryptoCompare. “Providing the most obvious route for people to have exposure to the asset class without necessarily getting into the more complex issues of running private keys and understanding cryptography and digital signatures is possibly what PayPal is thinking…Yes, if you’re a pure libertarian, it’s not ideal. But being pragmatic about bitcoin’s trajectory and global adoption penetration rate, this certainly brings more options,” Hayter told CoinDesk.


Before coming to a conclusion on PayPal’s motivation and the potential repercussions, it is useful to take a step back and examine PayPal’s growth story, its existing business model, and its relationships with its buyers and sellers. 


With its history dating back to the founding of a predecessor company Confinity in 1998, PayPal had existed for almost a decade before Satoshi Nakamoto published the famous Bitcoin whitepaper. And indeed it sounds quaint to read that PayPal was originally intended to be used on the now defunct Palm Pilot device. Foreshadowing Satoshi’s vision of peer-to-peer funds transfer, in 1999 Confinity CEO Peter Thiel explained that he was “confident PayPal will succeed because the program allows individuals to make payments to each other, not just to retailers or financial institutions.”


In the decades since its founding, PayPal has grown into a global financial giant.  In the second quarter of 2020, the company reported 246 million active accounts and $222 billion in total payment volume. PayPal enjoyed a market cap of $228 billion as of 28 October 2020, roughly in line with Bitcoin’s market cap of $243 billion as of the same date. 


PayPal’s business model involves provision of services to purchasers and merchants.  For individual consumers, PayPal provides the ability to move money both within the US and internationally. Depending on the jurisdiction makes loans, facilitates payments across different devices, and generally creates a variety of ways to send money to merchants on different platforms operating around the globe. Customers can either use the company as simply the means to transfer funds to others, or they can set up “balance accounts” with PayPal itself. To fund the balances that consumers keep within PayPal, consumers can use credit cards, debit cards, gift cards, and electronic transfers from their banking accounts. 


Turning to the merchants the company can power all aspects of the digital checkout, whether online, on a mobile device, or in a store. PayPal also provides credit, helps merchants identify fraud, and offers tools and insights to assist with new customer acquisition and to boost sales. 


While PayPal provides many of these services itself, utilizing a small handful of brands and a variety of legal entities, the company also has created a complex web of partnerships with other financial institutions. PayPal has not obtained a license as a chartered financial institution and is not allowed to provide loans directly. For PayPal-branded loans and credit products, the company relies on partnerships with external institutions. Other firms also manage customers’ loan servicing and statement processing. Additionally, since customers fund their PayPal accounts using cards issued by a variety of financial institutions, PayPal becomes a customer to those institutions as the company pays the required transaction fees. PayPal explains that it has entered into strategic partnerships with major card networks and issuing banks to help manage those fees, since they form a meaningful portion of the company’s expenses. The company also relies on third parties for the connection to payment card and bank clearing networks, which process the transactions that occur on the PayPal platform.


While consumers can open a PayPal account and download the mobile app for free, the company must, of course, charge fees to sustain its business. Consumers pay to move funds internationally, to send personal payments using a debit or credit card, and to transfer money from their PayPal account to a bank account using a debit or prepaid card.  For merchants accepting payments via PayPal, the fees vary depending on the type of merchant and the specific configuration of services, but range from 2.2% plus a $0.30 transaction fee to 4.4% plus a transaction fee for cross-border sales.  For the fiscal year that ended 31 December 2019, PayPal earned income of $2.5 billion as a result of these actives. 


Given Satoshi Nakamoto’s description of Bitcoin as a simple and cheap way for individuals to transfer money to each other without the need to rely on large financial institutions as intermediaries, it is hard to imagine a company more antithetical to that vision than the financial behemoth that PayPal has become. Perhaps it is therefore not surprising that PayPal’s original cryptocurrency offering does not even provide a way for users to transfer value directly to each other using cryptocurrency. Instead, the company merely provides the ability to purchase Bitcoin and a few other currencies and hold it in a PayPal account. Consistent with its other business practices, PayPal has partnered with cryptocurrency exchange Paxos for cryptocurrency trading services. Subsequent to purchasing and holding cryptocurrency on the platform, the only other action a PayPal customer can take is to sell the currency through PayPal. The customer cannot move cryptocurrency directly out of a PayPal account and into a crypto wallet hosted elsewhere. 


While PayPal announced that, as of early 2021, customers will be able to use cryptocurrency to pay merchants, this does not mean that the company will facilitate the transfer of cryptocurrency between consumer and merchant. Instead, consumers can utilise the PayPal platform to sell their cryptocurrency in order to fund their PayPal account, and can then use the resulting fiat account balance to pay the merchant. 


As of 2021, purchasers of cryptocurrency will pay a fee of $0.50 for transactions of less than $25, and then a variable fee ranging from 2.3% to 1.50%, depending on the size of the purchase. PayPal will also add an estimated spread of 0.50% to the exchange rate.  While it is too soon to say how these fees will impact the company’s bottom line, Forbes magazine speculates that profits earned by rivals Square and RobinHood served as motivation for PayPal. “In August, Square reported revenue from bitcoin hit a staggering $875 million in the second quarter, up 600% year-on-year and yielding $17 million profit.”


If the incentives for PayPal seem clear, the reasons why potential cryptocurrency purchasers would utilise the new service seem less obvious. One might think this could be caused by regulatory requirements (for example see FATF requirements concerning so called “travel rule”). Coinbase, one of many existing cryptocurrency exchanges, charges fees similar to those offered by PayPal. Contrary to PayPal, however, once users obtain Bitcoin, Coinbase allows the purchaser to transfer the currency to any other wallet. While PayPal may enjoy more mainstream name recognition, Coinbase boasts 35 million active users, $220 billion traded, and the previous Coinbase General Counsel has since become the head of the US regulatory agency charged with overseeing all federal banks. Given the security, liquidity, and widespread adoption of the Coinbase platform, in addition to vital ability to transfer cryptocurrency out of the exchange, it is not clear why anyone would choose PayPal for their purchase on the basis of either functionality or price. 


Some in the cryptocurrency community have welcomed PayPal’s move as the dawn of the long-awaited mass adoption. Millions of PayPal users might decide to purchase Bitcoin for the first time, deciding that PayPal’s platform offers legitimacy to a transaction that may have previously seemed both complex and perhaps only quasi-legal.  Following PayPal’s announcement, the price of Bitcoin increased by about 8%, from roughly $12,000 to over $13,000. 


Trezor, a maker of devices designed to provide secure cryptocurrency storage, takes a much more negative view. In a blog post entitled, “Why you should not use Paypal for Bitcoin,” Trezor states that “when a household brand like PayPal starts selling Bitcoin, it’s probably not because they want to spur healthy adoption.” Trezor points to PayPal’s stated objective of providing cryptocurrency education. While on the surface this may seem like a good thing for the industry, by not providing their customers with the ability to control their own coins and move them out of the PayPal platform, PayPal is not educating the public about the most fundamental aspect of the technology.  In fact PayPal is completely undermining the disruptive change that Bitcoin had represented by pioneering true peer-to-peer transfer of value. Similarly, while PayPal may appear to provide legitimacy and offer regulatory comfort to first-time buyers, Trezor notes that “The only reasons to own Bitcoin which cannot be used, would be to invest for the long term…or speculate on its price, which again, would be introducing the masses to financial mechanisms they do not understand.” 


It is certainly true that PayPal’s entry into the cryptocurrency market may entice millions of newcomers to purchase Bitcoin for the first time. It certainly might contribute greatly to the long-awaited mass adoption of bitcoin. But coming from the initial purpose of bitcoin which was to make possible a peer-to-peer transfer of value, where no banks were supposed to be needed,  we struggle a bit with the inability of PayPal customers to use Bitcoin for its originally intended purpose — the transfer of value from one person to another without the need to rely on and to sell them trough a central intermediary. Only time will tell whether the passionate defenders of Satoshi’s original vision will find a way to surmount this most recent challenge to their financial revolution.