Hello. Welcome to the latest edition of the FT Crypto Finance Newsletter. This week we look at the stablecoin market, which welcomed a new player on Monday.
This week, the crypto market appeared to receive a much-needed blow as PayPal announced it would launch its own stablecoin. If cryptocurrencies become widely used as a store of value, who better to back them than one of the world’s largest consumer payments brands?
What’s strange is the timing. Other big-name brands, such as Revolut, are also pulling back on plans as U.S. regulators grapple with a long-running crackdown on digital assets.
But the mystery goes beyond that. Stablecoins are essential to the cryptocurrency market and are similar to casino chips. Stablecoins allow traders to easily move in and out of wallets instead of having to track a large number of accounts.
Unfortunately, they are also fundamentally tied to sectors of the crypto market that underperformed throughout the year. The circulating value of dollar-pegged crypto tokens has fallen to $125 billion from $188 billion in March last year, according to research provider CCData.
This decline not only marks the sector’s lowest market capitalization since August 2021, but also puts the stablecoin on track for its 17th consecutive month of declines.
Trading volume in crypto derivatives, in which investors bet on the future price of “traditional” cryptocurrencies such as Bitcoin, has fallen by almost 50 percent since the beginning of this year, according to CCData.
“Cryptocurrency derivatives trading tends to induce stablecoin activity as stablecoins act as collateral.Cryptocurrency derivatives trading volumes have been low over the past year,” JPMorgan’s Nikolaos said.・Mr. Panigirtzoglou said.
Still, the numbers don’t tell the whole story. Most of the funds leaving the system are flowing into Circle, which operates USDC, one of the world’s largest stablecoins.
The group admitted in March that it held more than $3 billion in reserves in failed Silicon Valley banks. This confession temporarily unpegged the company’s token from the dollar, and the company began losing roughly 40 percent of its pre-SVB share of the stablecoin market. Currently, there are $26 billion worth of tokens in circulation.
During the same period, market leader Tether consolidated its position in the space, capturing approximately two-thirds of the stablecoin market share. The BVI-registered operator currently has about $83 billion of tokens in circulation, up from about $70 billion in March.
“USDC’s temporary depegging event due to the Silicon Valley Bank bankruptcy led to a loss of investor confidence,” said Rajeev Bumrah, Head of DeFi and Digital Asset Strategy at Moody’s.
The question arises as to why PayPal would do something like this. There are some similarities with other stablecoins on the market.
Coin operators typically park the reserves backing their stablecoins in liquid assets such as U.S. Treasury bills. Not only is it easy to take advantage of, it now earns up to 4% interest per year. Interest accrues to the carrier, not the customer.
PayPal’s initiative, known as PayPal USD, follows the same pattern, backing its reserves one-for-one with Treasury bills and other assets.
Heavy users of stablecoins are sensitive to interest rates and returns available elsewhere. This is especially likely if the market and coin prices are flat, as they are now.
“In an environment of rising interest rates,[PayPal’s stablecoin]should be able to earn a yield of about 5% because it is backed by U.S. Treasury bills, but it is unlikely to be shared with customers.” said Sankar Krishnan, head of digital assets and fintech. An employee of consulting firm Capgemini told me.
However, there are some caveats to PayPal USD. Most notably, the token can only be used within the PayPal ecosystem, unlike other dollar-pegged tokens that trade on public blockchains.
“They’re not trying to compete with Tether. I think they’re trying to be a stablecoin with real-world use cases… They want to use blockchain technology to provide a payment mechanism. This is not designed for people to use to get in and out of cryptocurrencies,” said Ilan Solot, co-head of digital assets at London-based brokerage Marex.
“Why would a crypto native use it instead of another existing stablecoin? I don’t think it competes with established stablecoins at all,” he added.
The most obvious comparison to PayPal that comes to mind is Meta/Facebook’s failed attempt with the Libra stablecoin. This is another major Silicon Valley company that misjudged what they were stepping into.
Meta didn’t expect the regulatory backlash. PayPal must show who its products are for.
“At the time, everyone was starting Internet banking companies, and even if they didn’t really know why they were doing it, they didn’t want to be left behind,” says Tom Keachinge, founding director of the Financial Crime Center. Luci, from the British think tank Security Studies, told me.
“PayPal has an existing consumer base and is looking to flip the crypto market by monetizing that user base,” Keatinge added.
Whether that is possible is another matter. Four years after Libra, PayPal USD has to bridge a huge gap between cryptocurrencies designed for widespread use and the products cryptocurrencies develop for the crypto market.
weekly highlights
The SEC’s crackdown on cryptocurrencies continues, with the regulator late Thursday night claiming that Bittrex and the platform’s co-founder and former chief executive officer, William Shihara, The broker announced that it has agreed to settle charges of operating a clearinghouse. The company’s foreign affiliate, Bittrex Global GmbH, also agreed to settle charges that it failed to register as a domestic stock exchange.
Last month, the Securities and Exchange Commission suffered a setback when a New York judge ruled that Ripple Labs’ sale of digital tokens to the public did not violate securities laws. This week, regulators led by Gary Gensler said they intend to appeal the decision. You can read the submission here.
Russia’s central bank announced on Wednesday that it will begin a pilot test of the digital ruble with the participation of 13 banks. Olga Slobogatova, first deputy governor of the Bank of Russia, said that by the beginning of 2025, “individuals and businesses will be able to actively use the national digital currency, if they wish, of course.”
This week’s Soundbite: Backlash against PayPal
Unsurprisingly, major consumer names getting into crypto attracted the attention of politicians.
Democratic Rep. Maxine Waters, who serves on the House Financial Services Committee, wasn’t too happy because there are still no federal rules for stablecoins.
“Given PayPal’s size and reach, federal oversight and enforcement of stablecoin operations is essential to ensure consumer protection and alleviate financial stability concerns.”
Data mining: OKX advances with derivatives
One of the consequences of increased US regulation is that trade flows are redirected around the world, with US-based markets losing money and offshore exchanges profiting. One of the biggest beneficiaries is OKX, a regulated company headquartered in the Seychelles and regulated by the Bahamas, a well-known hub for crypto business.
OKX’s share has so far jumped from 11% in January to almost 21% in August, according to CCData data. This growth strengthens OKX’s position as the second largest exchange for crypto derivatives.
FT Cryptofinance is edited by Philip Stafford. If you have any comments or feedback, please send them to cryptofinance@ft.com.
