PyUSD: Why This Is a Bad Idea

It has been approximately a week since the news sirens were whirring about the new PayPal stablecoin, PyUSD. It appears that executives at PayPal have their sights set on DeFi and will launch their stablecoin on Ethereum. The coin will be backed 1:1 by US dollars and it will be entrusted to Paxos to implement and manage this asset on the blockchain. All of the usual cliches of TradFi are stated in the marketing (e.g. “high standards of consumer protection”; “financial inclusion” etc.). There is a note on “freeze and seize”, so there is some up front honesty about Paxos and PayPal having the power to seize your assets or control who you can and can’t pay with them. This does not feel like a market niche that isn’t already filled by USDT, USDC and PaxUSD, in DeFi at least. It is understandable that consumers in TradFi would want a brand that they trust to manage their digital assets on the blockchain. At least for consumers that aren’t interested in self-sovereignty and value preservation. But for crypto enthusiasts, is PyUSD a good thing, or just more of the same from centralized entities? To answer this question from a coding perspective, I recommend this article. Here, I will answer this question from a narrative angle.

Image credit: Coinvestasi

The purpose of cryptocurrency is stated in the first sentence in the abstract of the Bitcoin whitepaper. To paraphrase slightly, it was to create a payment method without the need for the approval of a financial institution. Things have changed slightly since then, but the spirit of crypto finance should still be centered around this notion of decentralization. PyUSD empowers two central entities, separate from the US government, to hold sway over your financial decisions. Color me skeptical, this does not feel like the future of decentralized finance. Neither does it feel necessary. It feels like the actions of a FinTech company that is fearing the loss of relevance in a rapidly changing financial and technological landscape.

While BUSD, formerly the world’s largest stablecoin, is still available in DeFi on DExes like Pancake Swap, it is no longer being minted by Paxos. PayPal’s motives are clear, they wish to integrate their interface with emerging technologies and expand their influence in the ever-blurry lines between centralized and decentralized finance. What is interesting, is that Paxos are able to mint 1:1 backed stablecoins for PayPal but not Binance. This is peculiar and reeks of corporate-governmental collusion to me. Especially in the context of ongoing legal battles between, Ripple, Coinbase and the SEC and settled cases with Kraken and Paxos. Clearly, the idea of a 1:1 backed stablecoin is okay with the SEC, but not if this product is sold and managed in collaboration with Binance. This feels like a product that nobody, except perhaps PayPal customers are asking for. It makes sense in the context of their walled garden payment system but brings nothing new to DeFi protocols. For those interested in DeFi stablecoins on Ethereum and EVM, check out products from Liquity, FRAX, Synthetix and Maker Dao on Stargate before trusting PayPal with your financial freedom.

Image credit: Fikry Anshor on Unsplash

PyUSD is a product that makes no sense for the crypto-savvy investor. If you want to give away your financial freedom, you may as well just leave it in the hands of the government and stick to using fiat currency. At least this way, it is only a bank and the government between you and the value of your hard-earned. There will no doubt be innumerable links between centralized and decentralized financial systems moving forward. However, this is not a product with a decentralized purpose. Its purpose is to prolong the relevance of Web 2.0 products. Its existence stands staunchly against the point that the pseudonymous Satoshi Nakamoto was making in 2009. I’m no fan of Binance per se, but I am an advocate of financial fair play. This product feels like it is trying to fill a gap that was already filled. Perhaps, they are just more willing partners for the corrupt SEC. Paxos is not a company that I have any ill-will towards, despite the tone of this article so far. Like Circle, I respect that they are trying to bridge the cloudy waters between centralized and decentralized finance. I understand the perceived need for this in the minds of retail investors. I understood the partnership with Binance in this regard. I don’t understand the regulatory scrutiny against Binance and the lack of it against PayPal with respect to stablecoin regulatory clarity in the US. There is something fishy swimming in these cloudy waters and the SEC in unabashedly behind it.

Image credit: Jonathan Borba on Unsplash

It is a bad idea to give control over your funds to centralized entities if you wish to participate in decentralized finance. Of course, decentralization exists on a cline, and for those that are happy with a middling level of decentralization, then the aforementioned products from FRAX and Maker Dao should suit you nicely, the DAI and FRAX stablecoins. Ethereum is the blockchain that is most prepared for institutional investment. It will be the first port of call for the centralized takeover of its rather large share of decentralized finance. I am not worried about this as such, as I suspect that it will see the price increase in the short term. However, with a low Nakamoto Coefficient of 2 as reported by NakaFlow, I am not confident that all projects on the Ethereum blockchain will remain sufficiently decentralized for long. This is something that investors should keep in mind. Once more tools for measuring decentralization emerge (e.g. the Edinburgh Decentralization Index), it is my idealistic hope that decentralization will be at the forefront of the mind of the average investor.

Image credit: Niranjan _ Photographs on Unsplash

We are coming out of the bear market very soon. Prices are in slight decline and have remained stagnant for some time. This makes people nervous and unsure. I suspect that this move from PayPal has been designed to coincide with the indifference of retail investors towards crypto at the current time. The Bitcoin Halvening is happening in April next year. Times will start to get better in the market after this event has occurred. The next bull run will happen in 2025. My advice is to pay attention to projects that have been building in the bear market. The products mentioned above and other resilient DeFi products like Ethos Reserve, Kujira, and essentially anything on Cardano. Do not get swept up in the hype or convenience of centralized products like PyUSD. This product has problematic written all over it. Investing in PyUSD is a bad idea now and a bad idea moving forward. Perhaps the average investor in TradFi and DeFi trusts PayPal and the SEC, but with foresight and clarity of thought, I hope that they see that an investment in PyUSD is an investment in the stale old financial products of centralized finance and Web 2.0. Crypto and DeFi are about disruption, change and self-sovereignty and PyUSD represents the monoliths that stand against the progress that we have made thus far as a financial movement.

Moover and out!

Disclaimer: this is NOT financial advice. I’m a cow and I like to eat cereal. Any knowledge gained from this post is merely incidental and you are responsible for your own financial decisions. Make investments wisely and make sure to do your own research.