PayPal made news with this entry into the stablecoin market with PYUSD. Cryptocurrency enthusiasts, for the most part, saw this as a positive sign.
While this could be good for recognition, from PayPal's perspective, there is a valid reason for getting into this: huge money.
This could be a major cash cow for the company. If we look at how this works, we will see the billions per year that PayPal might be able to create.
To illustrate, we will be looking at the portfolio for USDC.
PayPal Business Model
For the moment, PayPal has a business model where they basically survive on transaction fees. Each time a payment is made on the platform, a fee is charged to both the sender and receiver. The merchant has a small percentage removed.
This is standard for financial intermediaries. They control the network, hence are able to leverage that for profits.
PayPal, over the years, did an exceptional job at this. Now they are about to put things on steroids.
Before getting to that, we need to realize all the transactions are done using fiat currency. This means it can make money on the transactions, yet the money itself is not profitable. Whatever is on the network cannot be used by PayPal. It is not a lender.
Things are about to change with the introduction of PYUSD.
Reserve Generates Revenues
The idea of an asset backed security is the value is derived from the backing agent. This means the stablecoin have value because of the assets that stand behind it.
In this instance it is USD and short term U.S. Treasuries. The breakdown, at least with USDC, is 80% T-Bills and 20% cash. We will use this for our numbers.
Here is what USDC's allocation looks like on a chart from their website.
PayPal is likely to follow a similar path. The Treasures being held generate interest, payments the company gets. This can be further enhanced by using Repo market.
Here is where the world is about to change for PayPal. Consider doing the same business, but the majority of the network uses PYUSD. To the userbase, it is not much different. People are going to simply transact like usual.
When we look at Circle's portfolio returns, here is what we see (on Blockrock site.
Right now the company is making over 5% on 80% of its $24.2 billion in holdings. That means it has $19.36 billion being backed by Treasuries.
At the 30 day return, this is over $1 billion.
Consider the fact that PayPal had a net income of about $2.5 billion over the last year. This would about double it.
Of course, we are using USDC. If we took the same approach with Tether, it would be close to $3.5 billion.
There is big money in the backing of stablecoins.
Financial Products
Once there is a currency, the door opens for other financial products. This is something we discussed concerning the Hive Backed Dollar (HDB) and Hive bonds. The ability to create a network providing an assortment of financial services once a currency is available becomes evident.
PayPal, along with the other companies entering this market, will be able to do this. Of course, they will have to get approval from the regulators each step of the way. The key point is the opportunity will be there.
This is the thinking that is likely taking place in the executive offices at these companies. It is also what the decentralized finance (DeFi) world should be discussing. Sadly, the latter does not appear to be thinking in this direction. It is why DeFi projects are really nothing more than centralized entities using a marketing ploy.
Tens of Trillions
We need to be clear:
The stablecoin market is going to be worth tens of trillions of dollars. That is how many are going to be generated over the next decade. It is in addition to any CBDC that get issued although I do not believe they will end up being a huge factor on the global scale.
Financial institutions all over the world are likely to follow this path. It will take regulation for many of the bigger players to enter. However, it is easy to see how investment banks like Goldman Sachs or JP Morgan can get into this game.
This is what the world of decentralized finance is up against. PYUSD could rival the circulating supply of some of the larger stablecoins simply with the 400 million users they have now. A few hundred dollars per will put them in the 10 billion range.
Now we can see why Jeremy Allaire is targeting 1 trillion USDC. That would mean big money earned on the assets backing the token.
Here is the big appeal to these corporations. There is big money in stablecoins simply because people are giving them dollars to go buy Treasuries, netting the company interest, while giving them a token to use for transactions which is pegged to a dollar residing on the digital platform.
This is going to be explosive.
