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For PayPal, Visa and Mastercard, cryptocurrencies could unlock new revenues

PayPal Holdings Inc. caused a stir last month when it announced that it will enable users in the U.S. to buy, sell and hold cryptocurrency via their accounts. But it is by no means a first for U.S. cards and payments majors. Square Inc. has allowed users to transfer cryptocurrency since 2018, while Visa Inc. and Mastercard Inc. have both ramped up their cryptocurrency debit card plans in recent years. Cryptocurrency may appear to be a niche or even experimental segment for these companies, but they are treating it with increasing seriousness, according to industry experts.

Customers of PayPal in the U.S. will be able to start transacting cryptocurrency from their digital wallets "in the coming weeks," while customers of subsidiary Venmo LLC and PayPal users in "select international markets" will be able to do the same in the first half of 2021, the company said in October. PayPal customers will initially be able to transact in Bitcoin, Ethereum, Bitcoin Cash and Litecoin.

The motivations to enter the cryptocurrency space include the potential to boost revenues, as Square has done with its Bitcoin offering, industry observers told S&P Global Market Intelligence. Payments majors are also watching the growing interest that central banks have taken in creating their own digital currencies, or CBDCs.

'Stake in the ground'

Visa, Mastercard and now PayPal want to see themselves as key players in the move toward digital and cryptocurrencies, according to Jordan McKee, research director at 451 Research, a division of S&P Global Market Intelligence.

"They feel they need to put a stake in the ground," he said.

Stephen Biggar, director of financial institutions research at Argus Research, said PayPal appears to be positioning itself to avoid "being on the outside looking in" if cryptocurrencies and digital currencies go mainstream.

"It's a fairly inexpensive way for them to hedge the bets in case there is traction in cryptocurrencies," he said in an interview.

For Meltem Demirors, chief strategy officer of CoinShares, a digital asset investment company, the commercial opportunity that cryptocurrency represents for PayPal is a serious one.

"This is partly a story about revenues and performance," she said, pointing to the example of Square's strong growth in Bitcoin revenues this year.

Central bank digital currencies

PayPal's statement accompanying the launch of its cryptocurrency services suggests that the move is motivated not just by consumer appetite, but by the possibility that CBDCs could become mainstream in the not-too-distant future.

"We are eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce," President and CEO Dan Schulman said in the statement.

Some 20% of central banks around the world are planning to launch a digital currency — that is to say, a digital representation of fiat money rather than a cryptocurrency — in the next few years, according to the Bank for International Settlements.

Schulman's comments about the growing importance of CBDCs follow similar remarks from Visa and Mastercard.

In Mastercard's third-quarter earnings call, President and CEO-elect Michael Miebach called CBDCs "a big topic."

"Particularly in the light of COVID, you see a lot of governments that have even increased interest in modernizing their payment stack. ... Before the crisis, there was a whole range of governments looking at central bank digital currencies. And I think with the crisis, more are even considering that as a tool," he said.

Mastercard announced in September that it was launching a sandbox for experimentation with CBDCs.

Visa, which appointed a head of cryptocurrency last year — Cuy Sheffield, an internal hire — also issued a statement in June in which it expressed a bullish sentiment about digital and cryptocurrencies.

"We believe that digital currencies have the potential to extend the value of digital payments to a greater number of people and places. As such, we want to help shape and support the role they play in the future of money," the statement said.

All Square

PayPal's smaller competitor, Square, has been offering Bitcoin transactions for more than two years, and this may have been a catalyst for PayPal's move into the space, according to McKee.

"I have to imagine this caught the eye of PayPal," he said, adding that Square are seeing "a tonne of traction" with their Bitcoin offering.

Gross profit from Square's CashApp, the product that provides the cryptocurrency transactions, stood at $32 million in the third quarter, a fifteenfold year-over-year increase, a spokesperson for Square said in an email.

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A rival for Libra?

Demirors sees the significance of PayPal's cryptocurrency launch as running deeper still, and said that it could be a precursor to the eventual launch a digital currency of its own, which could potentially rival Facebook Inc.'s stablecoin, Libra.

"This announcement sets the stage for PayPal to launch its own dollar-pegged digital currency within their payment network, to reduce dependence on the correspondent banking system and other card networks, similar to what Facebook has done with Libra. We have long expected PayPal to develop its own stablecoin as opposed to adopting an existing one developed by another corporate," she said.

PayPal declined to comment.

Libra, which was first announced in mid-2019 and is yet to launch, differs from cryptocurrencies such as Bitcoin and Ethereum in that it is pegged to basket of major world currencies in order to reduce volatility.

PayPal was one of the original members of the Libra consortium, which was spearheaded by Facebook and included a range of payments and tech companies along with nongovernmental organizations. However, it pulled out of the project in October 2019, along with Visa, Mastercard and Stripe, citing regulatory concerns.