PayPal released a press release on Wednesday, October 21, 2020, announcing the launch of a new cryptocurrency service that will enable its users to buy, hold and sell cryptocurrencies. The press release comes on the heels of the New York Department of Financial Services (NYDFS) announcement that PayPal was granted the state’s first “conditional BitLicense.”
The conditional BitLicense is one of several recent developments in the New York virtual currency licensing framework. One of the “conditions” on the conditional BitLicense is the requirement to partner with an existing BitLicense holder. Here, PayPal has selected Paxos Trust Company as its NYDFS-licensed service provider. In addition to rolling out the conditional BitLicense, the NYDFS has released new guidance for companies to issue new virtual currencies as well as more robust resources for potential BitLicense applicants and licensees.
While the press releases already sent the price of bitcoin soaring, some functionality that users are likely expecting from the parent of the popular peer-to-peer payments company Venmo will be relatively limited in the beginning. PayPal simultaneously released the PayPal Cryptocurrency Terms and Conditions, which include a number of important disclosures, including the following disclaimer: “You currently are NOT able to send Crypto Assets to family or friends.” PayPal plans to expand the service to Venmo, as well as certain international markets in the first half of 2021.
In addition to peer-to-peer payments, using cryptocurrency to pay merchants is not one of the initial functionalities of the new service. Eventually, PayPal expects to leverage its 300 million active users and network of 26 million merchants to create a robust ecosystem for use of cryptocurrencies in everyday transactions. PayPal’s press release states that “Consumers will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees.” Merchants will have no additional integration fees, which could be a significant driver of adoption. This expanded functionality is expected in early 2021.
The PayPal cryptocurrency terms and conditions define “Crypto Assets” as the “particular digital assets that PayPal supports and that you may buy, sell, and hold” using a PayPal account. The initial cryptocurrencies that will be available to users include Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, which are widely considered not to be securities under the SEC’s Howey rubric. PayPal expects to broaden the service to include other established cryptocurrencies as the service matures.
To address consumer education, PayPal is releasing a variety of educational content to help its users understand cryptocurrency generally as well as the risks and opportunities related to investing in cryptocurrency, in addition to information on blockchain generally. The service will not include any fees when buying or selling cryptocurrency through the end of 2020, and there are no fees for passively holding cryptocurrency in a PayPal account. In 2021, PayPal anticipates generating revenue when users buy and sell Crypto Assets by charging a spread between the market price it receives from Paxos and the exchange rate between U.S. dollars and Crypto Assets displayed to users.
Another notable limitation is that PayPal users will not be able to transfer cryptocurrency to or from other wallets. The company will hold cryptocurrencies on behalf of users in an omnibus account and will keep a record of users’ interest in that omnibus account. According to PayPal, customers “do not own any specific, identifiable, Crypto Asset.” Users that want to transfer funds will have to sell their Crypto Assets and transfer the proceeds using traditional means. PayPal did not immediately release information on whether it will eventually add functionality, allowing users to transfer cryptocurrency between non-PayPal wallets or to cold storage – cold storage is a way of holding cryptocurrency tokens offline.
Cryptocurrency and digital assets generally are continuing to grow at a rapid pace in the non-banking space. It is reasonable to suspect that many Americans who are actively involved in buying and holding digital assets would be interested in having their primary bank help safeguard these assets. Unfortunately, it remains up to federal and state regulators to establish a more comprehensive regulatory framework that will serve to ensure banks can responsibly begin offering cryptocurrency services without the fear of regulatory scrutiny.