Issue 18

PayPal’s PYUSD & CBDCs: What to Know

August 14, 2023, 1:00PM EDT · 5 min read

Hey Reader,

Note from the editor.

Welcome to Issue #18 of the keepitasatoshi.com newsletter, where we examine the top crypto asset projects and their communities.

​Recent developments have thrust Central Bank Digital Currencies (CBDCs) into the spotlight. As nations pilot their CBDC projects, we dive into what this means for you and the broader crypto landscape. What better time to jump back into this ever changing industry. Buckle up!

Stay curious and, as always, keep it a satoshi.

KB

CBDCs Explained: Simply put, CBDCs are digital versions of a country's traditional currency, controlled and issued by its central bank. Unlike decentralized cryptocurrencies such as Bitcoin, CBDCs represent the nation's official monetary supply.

Why Should You Care?

They are the digital equivalent of traditional paper currency and differ fundamentally from decentralized cryptocurrencies like Bitcoin or Ethereum and even corporate issued stablecoins like USDT, USDC, and GUSD.

With several countries flirting with the idea of launching their CBDCs, what does this mean for the traditional finance sector and the cryptocurrency industry?

Let's explore the potential benefits and drawbacks of CBDCs.

The Upside of CBDCs:

1. Efficiency: Digital currencies have the potential to significantly reduce transaction times, making cross-border trade and remittances more efficient.
2. Financial Inclusion: CBDCs could bring banking to underbanked populations, given the lower costs associated with digital currency infrastructure compared to brick-and-mortar banking.
3. Policy Implementation: CBDCs can offer central banks a more direct way to implement monetary policies, potentially making interventions more timely and effective.
4. Transparency and Security: With the blockchain’s inherent features, CBDCs could offer greater transparency and security, reducing fraud and money laundering.

The Other Edge of the Sword:

1. Privacy Concerns: With CBDCs, transactions can be tracked, raising concerns about state surveillance and individual privacy.
2. Financial Stability: If CBDCs lead to massive withdrawals from commercial banks (in the event of a panic, for instance), it could jeopardize financial stability and make commercial banks obsolete.
3. Tech Challenges: The infrastructure required for CBDCs is vast and complex. Ensuring it is secure and scalable is a mammoth task.
4. Impact on Cryptocurrencies: With state-backed digital currencies, we could see increased regulations for decentralized cryptocurrencies. Some believe this might stifle innovation, while others argue that CBDCs could serve as a ‘gateway’ to the broader world of cryptocurrencies.

For the cryptocurrency enthusiast, CBDCs represent a paradox. On the one hand, they validate the concept of digital currencies and blockchain; on the other, they stand in stark contrast to the decentralized satoshi vision of cryptocurrencies like Bitcoin and Ethereum.

CBDCs are centralized by design, controlled by state entities, and lack the censorship resistance that has been a cornerstone of the crypto movement.

It’s also worth noting the international race for CBDC dominance. As other countries like China advance their CBDC projects, there’s geopolitical pressure for other nations to not get left behind. This ‘digital currency Cold War’ could shape the global financial landscape in the coming years.

Based on current trends and the U.S.’s financial regulatory behavior, the adoption of CBDCs will introduce 5 things counter to Satoshi's vision that we need to be aware of:

1. Transaction Monitoring: The U.S. government already has robust financial monitoring systems in place, such as the Bank Secrecy Act (BSA), which mandates that financial institutions report certain types of transactions. Extending this monitoring to a CBDC would be a logical extension of existing regulations.
2. Identity Linking: The U.S. has strong Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations for its financial institutions. It’s likely that any CBDC system would require a similar level of identity verification to prevent misuse and to track the flow of funds for tax and legal reasons.
3. Control Over Funds: Similar to how bank accounts can be frozen due to illegal activities or court orders, a U.S. CBDC could allow for the same kind of intervention if there’s evidence of illegal activity or if mandated by a court.
4. Mandatory Reporting: As with current bank transactions, certain large transactions or patterns might need to be reported to prevent money laundering or other illicit activities. The threshold for reporting and the specific criteria would likely be determined based on existing financial regulations.
5. Restrictions on Self Custody Wallets: Given the current regulatory scrutiny of cryptocurrency exchanges and the emphasis on preventing money laundering and financial crimes, there might be tight controls or monitoring of self custody wallets and any transfers between CBDCs and cryptocurrencies.

Now that we understand CBDCs, there's a recent development from PayPal you should know about. In a strategic move, the Silicon Valley payments giant PayPal has unveiled its U.S. dollar stablecoin, PYUSD, developed in collaboration with Paxos.

Joe Burnett (🔑)³ @IIICapital The crypto community cheering on Paypal for launching a USD "stablecoin" is a sign they have completely lost the plot. Buy #Bitcoin. Hold it in cold storage. That is the innovation. Not "Dollars on blockchain" by big tech. 2:38 PM • Aug 7, 2023 59 Retweets 506 Likes Read 68 replies

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This digital token, anchored to the dollar, will be incrementally introduced to PayPal’s U.S. clientele, as outlined in a recent press release. Paxos will take the helm in issuing the coin, dubbed PayPal USD or PYUSD.

Built on the Ethereum blockchain, PYUSD guarantees full backing by U.S. dollar deposits, short-term Treasuries, and analogous cash assets, as stated by the company.

Functionally, PYUSD will align with the likes of USDT, USDC, GUSD, and others, operating in a manner similar to CBDCs but under corporate, not governmental, stewardship. More importantly, this adds PayPal's 430 million users to the world of Web3. Not ideal, but being built on Ethereum and not World Coin Government Chain is a win, we'll take.

In conclusion, as with all technologies, CBDCs present both opportunities and challenges. Their rise seems almost inevitable, but their impact on traditional finance is still a story unfolding especially considering how they will coexist with corporate stablecoins and decentralized cryptocurrencies.

One thing is certain; we’re on the cusp of a transformative era in the financial world. We should be thankful we are alive to witness it all unfold.

Thanks for being a part of this journey.

And remember, in this rapidly evolving space, knowledge is your most valuable asset. Now what's your take on CBDCs?

Reply to this email, we would love to hear from you!