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PayPal's stablecoin sees slow uptake as investors stick with Tether and USDC

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(Kitco News) - The launch of PayPal’s new stablecoin, PayPal USD (PYUSD), has thus far received a muted response from investors as crypto proponents have opted to continue using Tether (USDT) and USD Coin (USDC), the top two stablecoins by market capitalization.

PYUSD, which is issued by stablecoin provider Paxos Trust Company, is fully backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents. PayPal was issued a BitLicense by the New York State Department of Financial Services (NYDFS) in June, which enabled them to issue the stablecoin in partnership with Paxos.

According to findings from blockchain analytics firm Nansen, on-chain data shows that roughly 90% of PYUSD is currently held in wallets controlled by Paxos, and holdings on crypto exchanges account for nearly 7% of the total supply.

This means that only 3% of the supply of PYUSD is currently being held in digital wallets belonging to everyday investors, a sign that the public isn’t all that interested in another centralized stablecoin at this point in time.

“On the surface, there's a lack of demand from crypto users for PYUSD when other alternatives exist (might be due to PayPal targeting a different demographic),” the report from Nansen said. The largest individual holder of PYUSD holds less than $10,000 worth of the stablecoin, and fewer than ten holders, excluding contracts or exchanges, have a balance exceeding $1,000.

While the uptake of PYUSD has been slow out of the gate, the payment provider is working hard to change that by forming partnerships with cryptocurrency exchanges in a bid to increase access. Kraken listed the stablecoin just three days after it was launched, and Coinbase announced on Thursday that it would be adding support for the token.

The support from Coinbase followed an announcement from the exchange that users in Germany and the U.K. can now link their PayPal accounts with Coinbase to enable “seamless crypto transactions.”

In a report released shortly after PYUSD’s debut, Bank of America said the new stablecoin would likely help improve efficiency in the crypto market over time, but that adoption would be slow to start.

“We expect PYPL’s PYUSD launch to drive payments efficiencies and an improved customer experience over time, but PYUSD adoption is unlikely to be significant in the near term, given lack of wallet compatibility, exchange trading pairs or new functionality,” Bank of America said. “Over the longer term, we expect PYUSD to experience additional adoption headwinds as competition from CBDCs [central bank digital currencies] and yield-bearing stablecoins increases.”

They added that “Investors may have been fine holding non-yield-bearing stablecoins, such as USDT and USDC, when rates were close to zero, but yield-bearing stablecoins will likely become increasingly available and attractive with short-term rates above 5%.”

PayPal's new 'Cryptocurrencies Hub' lets users buy, sell, swap and transfer crypto

According to Jose Fernandez da Ponte, PayPal’s senior vice president of blockchain, the company’s initial plan to increase the adoption of PYUSD is to make the stablecoin available on the largest cryptocurrency exchanges and decentralized finance (DeFi) platforms.

“I think DeFi will be part of the first wave in the sense that we want to go where crypto users are using stablecoins today, and DeFi is a use case for that,” da Ponte said. “We are ramping up the product but definitely, the intention is that it will be available in main exchanges and when that distribution is available, then folks will be able to use it for the traditional use cases.”

Those plans also appear to have gotten off to a slow start as on-chain data shows that the available liquidity pools on decentralized exchanges, like Uniswap's PYUSD/wETH and PYUSD/USDC, hold less than 50,000 tokens.

Despite the muted uptake thus far, PayPal remains dedicated to increasing the distribution of PYUSD, and multiple analysts have suggested that the stablecoin will help boost the adoption of digital assets and bring new users into the cryptocurrency ecosystem over time. This is due to the fact that the platform boasts a global user base of 350 million users, and only a small portion of those users have engaged with cryptocurrencies via PayPal up to this point.

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