PayPal’s small steps in crypto are not dampening the hype for adoption

While crypto companies try to create the decentralized equivalent of PayPal, the company itself will soon enter the industry

For some time now the crypto sector has been in turmoil, and for good reason. Currently, Bitcoin (BTC) is around the $14,000 level, while Ether (ETH) has almost exceeded the $400 threshold despite the KuCoin exchange hack and the unfortunate legal events that have recently affected BitMEX. That said, this latest rise can largely be attributed to the decision taken by online payment company PayPal to finally enter the crypto arena.

Starting in 2021, PayPal will allow its customers to use a range of popular digital currencies such as Bitcoin, Ethereum, Bitcoin Cash (BCH) and Litecoin (LTC) to shop through its giant network of affiliated merchants. Although transactions can be initiated in crypto, payments will be settled in fiat, so merchants will only receive funds in their local currency.

To make this possible, PayPal has entered into a partnership with Paxos for its custody and liquidity needs. In addition, PayPal has managed to obtain a conditional license from the NYDFS through the Paxos Trust charter. Charles Cascarilla, CEO of Paxos, explained to Cointelegraph that working with PayPal to provide customers around the world with simplified access to cryptocurrency will undoubtedly have huge implications for the crypto industry in general. He also said in a post that based solely on PayPal’s reputation in the marketplace, the crypto industry is likely to see unprecedented growth in terms of mainstream awareness.

Along the same lines, Luke Stokes, CEO of the Foundation for Interwallet Operability and Interim Executive Director for the EOS Foundation, told Cointelegraph that PayPal not only legitimized the cryptocurrency industry for retail user adoption, but also highlighted the importance of its timing:

„The time has come and PayPal is trying to come before everyone else with its personalised approach to digital finance. Other financial products and services have the opportunity to cross the boundaries of the walled garden in which PayPal will be imprisoned through integration with open finance’s decentralised usability solutions“.

The arrival of PayPal could be a turning point

Only one day after PayPal announced its decision to enter the crypto world, news spread that the payments giant was exploring various ways to potentially acquire BitGo, a company offering custody services for Crypto Revolt and its future rival. BitGo was the first crypto service provider in the United States to gain broker-dealer approval, register as a transfer agent and be recognized as a trust company.

The move may be relevant to PayPal, as its new crypto trading platform will effectively turn the company into a digital asset custodian, explaining its interest in BitGo. Not only that, the agreement could potentially mark the beginning of a new era for the mainstream legitimacy of cryptos, as both PayPal and BitGo have made compliance a priority from the outset and have managed to obtain all the necessary licenses to facilitate the various crypto-related activities in the United States.

Over the past two years, some critics have pointed out that companies like Square and Revolut are already doing more in terms of providing crypto functionality to their users than PayPal plans to implement. However, the fact remains that there is currently no other digital financial platform with the same kind of influence on the mainstream market as PayPal.

In this regard, Douglas Borthwick, chief marketing officer at the INX Limited crypto currency exchange, explained to Cointelegraph that although PayPal’s initial limitations may be perceived as overly restrictive for many purists in the industry, the platform will allow users to discover and interact with crypto currencies, as well as being involved in crypto outside PayPal:

„We can imagine PayPal’s environment as a protected space with wheels for those who want to learn about cryptos, before escaping to the real world, where they can discover cryptos without limitations“.

Centralisation still remains a key issue

In recent months, several major banking institutions have begun to dabble in crypto technology, while several countries are experimenting with CBDC. This suggests that it was only a matter of time before a financial giant like PayPal entered the crypto world. João Gomes, head of growth and marketing at Utrust, a crypto payments company, explained to Cointelegraph:

„Adoption is gaining momentum around the world. We have always believed it was a question of ‚when,‘ not ‚if,‘ and the arrival of PayPal is just another domino card. This is the money of the future.“

Moving on, Gomes expressed some scepticism about the centralised structure of PayPal’s upcoming digital currency system, as it would completely deprive users of features such as private keys and the ability to withdraw their digital assets. Furthermore, the fact that PayPal’s system is not on-chain makes it extremely limited in terms of its overall scope, especially for crypto veterans.

Another relevant criticism is that when they use the PayPal system, users will not actually be buying digital currencies, but derivatives, a process very similar to Revolut, since they will not have real ownership of the assets.

In addition, for each transaction the relevant crypto currency will be converted into fiat paying a heavy commission of 2.3% (on transactions below $100), since merchants can only receive payments in crypto. This begs the question, why choose to pay with cryptos and incur all these additional costs?

In short, it seems that PayPal is trying its hand at digital currencies superficially, without offering users the independence they should ideally be equipped with, according to Gomes:

„They actually own the currencies, they broker everything and even charge fees based on their payment structure which is far from clear. They have all the cards in their hands.“

PayPal will have to evolve

It’s reasonable to think that when much of the hype around PayPal runs out, people might start looking more closely at some of the company’s rivals in search of possible alternatives. For example, PayPal will charge a processing fee of 2% on crypto-fiat transactions (and vice versa) between $200 and $1,000. In comparison, Coinbase applies only 1.49% on transactions over $200. Square’s Cash App, on the other hand, offers users dynamic conversion fees.

Lior Lamesh, co-founder and CEO of GK8, an Israeli IT security company, explained to Cointelegraph that PayPal must avoid the „not your keys, not your Bitcoins“ trap that has already inflicted serious damage on many crypto exchanges in recent years:

„By relying on third-party providers for custody services, PayPal is exposing its customers‘ digital assets to a serious IT security risk. Therefore, I believe that when this initiative takes off and takes hold, PayPal will eventually move to a model of self-managed services, particularly self-service custody: when it comes to a network with over 340 million users, the stakes are simply too high“.

Finally, PayPal has always been considered a real centralised financial platform. Many hardcore crypto enthusiasts who pay close attention to transparency and financial freedom could therefore stay completely off the platform. However, it seems appropriate to say that even the reach of PayPal in the marketplace will do more good than harm for the mainstream reputation of the crypto industry in the long run.