Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re taking a look at the stablecoin market, which welcomed a new player on Monday.
The crypto market appeared to receive a much-needed shot in the arm this week when PayPal said it would launch its own stablecoin. If crypto is ever to become a widely used store of value, who better to give it a push than one of the world’s biggest consumer payments brands?
What’s odd about it is the timing. Other well-known brands, such as Revolut, are walking back their plans while US regulators are busy waging a protracted crackdown on digital assets.
But the mystery goes beyond that. Stablecoins are as vital to crypto markets and are akin to chips at casinos: they allow traders to move in and out of bets easily, into wallets rather than lots of traceable accounts.
Unfortunately, they are also fundamentally tied to sectors of the crypto market that have underperformed all year. According to research provider CCData, the circulating value of crypto’s dollar-pegged tokens has fallen to $125bn, down from $188bn in March last year.
The decline not only represents the sector’s lowest market cap since August 2021, but stablecoins are on trend to record 17 consecutive months of declines.
Volumes in crypto derivatives, where investors punt on the future price of “traditional” cryptocurrencies such as bitcoin, have fallen almost 50 per cent since the start of this year, as per CCData.
“Crypto derivatives trading tends to induce stablecoin activity as stablecoins serve as collateral. Crypto derivatives volumes have been weak over the past year,” JPMorgan’s Nikolaos Panigirtzoglou told me.
Even then, the figures do not tell the whole story. Most of the money that has been drained from the system has come at Circle, which operates USDC, one of the world’s largest stablecoins.
In March, the group admitted to holding more than $3bn of its reserves in now-collapsed Silicon Valley Bank. That admission caused its token to temporarily depeg from the dollar and kick-started the company losing roughly 40 per cent of its pre-SVB share of the stablecoin market. It now has $26bn worth of tokens in circulation.
In the same period, Tether, the market leader, strengthened its position in the sector by grabbing roughly two-thirds of the stablecoin market share. The BVI-registered operator now has roughly $83bn tokens in circulation, up from roughly $70bn in March.
“USDC’s temporary depeg event, caused by Silicon Valley Bank’s insolvency, led to a loss of credibility for investors,” said Rajeev Bamra, head of DeFi and digital assets strategy at Moody’s.
It begs the question as to why PayPal is doing it. There are some similarities with other stablecoins on the market.
Coin operators usually put their reserves backing the stablecoin in liquid assets such as short-dated US government bonds. They’re not only easy to tap but are now offering up to 4 per cent a year interest — which accrues to the operator, not the customer.
PayPal’s effort, known as PayPal USD, follows the same pattern, and will back its reserves 1:1 with short-term Treasury bills and other assets.
Heavy users of stablecoins are sensitive to interest rates and returns that can be made elsewhere. That is likely to be especially so if the market and coin prices are flat, as they are now.
“In an increased interest rate environment, as [PayPal’s stablecoin] is backed by US Treasury bills, it should generate about a 5 per cent yield, which they are unlikely to share with their customers,” Sankar Krishnan, head of digital assets and fintech at consultancy Capgemini, told me.
But PayPal USD comes with caveats. Most notably, its token can only be used within the PayPal ecosystem, unlike other dollar-pegged tokens that trade on public blockchains.
““They’re not going to compete with Tether. I think they’re trying to be stablecoin with real-world use cases…they want to use blockchain technology to provide a payment mechanism. It’s not designed for people to use to jump in and out of crypto,” said Ilan Solot, co-head of digital assets at London broker Marex.
“Why would a crypto native use it instead of another existing stablecoin? I don’t think it will compete at all with established stablecoins,” he added.
The most obvious comparison that springs to mind with PayPal is Meta/Facebook’s failed attempt with its Libra stablecoin — another big Silicon Valley name that misjudged what it was stepping into.
Meta didn’t anticipate the regulatory blowback: PayPal has to show who its product is for.
“Back in the day, everyone was setting up internet banking companies because they didn’t want to get left out even if they weren’t quite sure why they were doing it,” Tom Keatinge, founding director of the Centre for Financial Crime and Security Studies at UK think-tank Rusi, told me.
“PayPal has an existing consumer base, it’s trying to reverse into the crypto market by monetising its user base,” Keatinge added.
Whether that is feasible is another matter. Four years on from Libra, PayPal USD has to bridge a gaping chasm between crypto designed for widespread use and those products that have been developed by crypto for crypto markets.
Weekly highlights
The SEC crackdown on crypto continues: late on Thursday evening the regulator announced that Bittrex Inc. and the platform’s co-founder and former chief executive William Shihara agreed to settle charges that they had operated an unregistered national securities exchange, broker and clearing agency. Bittrex Global GmbH, the company’s foreign affiliate, also agreed to settle charges that it failed to register as a national securities exchange.
Last month, the Securities and Exchange Commission was dealt a setback when a New York judge ruled Ripple Labs did not violate securities law by selling digital tokens to members of the public. This week, the Gary Gensler-led regulator said it intended to challenge the decision. You can read the filing here.
Russia’s central bank announced on Wednesday it would launch pilot testing of a digital rouble with the participation of 13 banks. Olga Skorobogatova, first deputy governor of the Bank of Russia, said by the start of 2025 “individuals and businesses will be able to actively use the national digital currency, of course if they wish to”.
Soundbite of the week: pushback on PayPal
Unsurprisingly, a big consumer name getting into crypto attracted the attention of politicians.
Democratic congresswoman Maxine Waters, who serves on the House financial services committee, wasn’t best pleased since there are still no federal rules on stablecoins.
“Given PayPal’s size and reach, federal oversight and enforcement of its stablecoin operations is essential in order to guarantee consumer protections and alleviate financial stability concerns.”
Data mining: OKX makes headway in derivatives
One consequence of the US regulatory clampdown has been to redirect trading flows around the world, as US-based markets lose out and offshore exchanges benefit. One of the biggest beneficiaries has been OKX, which is headquartered in the Seychelles and is a regulated entity in the Bahamas, a well-known hub for crypto business.
According to data from CCData, OKX’s share has surged from 11 per cent in January to almost 21 per cent in August so far. The growth strengthens OKX’s position as the second-largest exchange for crypto derivatives.
FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com
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