How PayPal Turned the Crypto Debate on Its Head in Washington DC
In late July, Republicans on the House Financial Services Committee achieved their goal of passing a bipartisan stablecoin bill. Still, they left DC without the broad bipartisan vote that Chairman Pat McHenry had sought. The session ended with fresh allegations about old disputes, particularly about the level of state vs. federal regulation in a new regulatory framework, throwing a dark cloud over the prospect of legislation that would win the support of McHenry, ranking member Maxine Waters and the Biden White could win house.
John Rizzo is senior vice president of public affairs at the Clyde Group. Rizzo most recently served as senior spokesman at the US Treasury Department, where his role included leading the public affairs strategy on digital assets.
And then PayPal and Paxos came into the chat. The surprise revelation of PYUSD could be the accelerator needed to find a compromise in DC and bring about the legal enshrinement of a comprehensive regulatory framework for stablecoins. It could also represent a new, more aggressive strategy for American fintech companies’ dealings with the federal government and DC regulators.
To understand why the launch of PYUSD is so monumental, one has to realize that it comes from one of the world’s largest digital payments companies, with over 430 million accounts. With just a click of a button, hundreds of millions of users can access and transact stablecoins through a service they are already familiar with. It will accelerate cryptocurrency adoption and make it harder to get a grip on the ecosystem through congressional action.
The prospect of a major market player exploring a stablecoin project is a dynamic I observed firsthand when I served as a senior spokesperson at the US Treasury Department in 2021 and 2022. During these years, the federal government tried to implement a comprehensive regulatory framework for stablecoins against the background of the failure of Diem’s stablecoin project, Meta, in the summer of 2021 (when it was announced, the project was known under the name Libra and Meta under the name Facebook ).
Had it succeeded, Diem would have presented two challenges that were publicly debated at the time, e.g the federal government to contend with. The Libra stablecoin was launched when there was no comprehensive regulatory framework for stablecoins in the US, meaning it was in a legal and regulatory gray area. And while that reality would pose a challenge to the federal government, other stablecoin projects have been, and will be, in the same regulatory gray area. What made Diem special was that the regulatory challenge would have been exacerbated by the fact that the billions of Facebook users would have had overnight access to this regulated, unregulated crypto token.
PayPal is not Meta/Facebook, but the prospect of hundreds of millions of users soon having easy access to a stablecoin on a platform they already use and are familiar with creates a new urgency for DC lawmakers, to find a compromise regulatory framework for stablecoins. This was not the case when only a handful of Democrats voted in favor of Chairman McHenry’s stablecoins bill.
Prior to the PYUSD release, the stablecoin market was reasonably stable and consisted of the same players and a similar level of adoption. Hundreds of millions of PayPal users will soon have a crypto asset in their immediate vicinity. Democratic DC policymakers who have bucked McHenry’s Stablecoins Act in search of a better deal must reckon that stablecoin adoption and use could soon ramp up, increasing some of the risks that policymakers in identified DC in assessing stablecoin regulation.
Legislative computation is not the only equation that has changed for Democrat policymakers following the PYUSD disclosure. Regulatory computation has also changed, potentially ushering in a new era in the way American crypto market participants interact with DC.
According to reports, Libra’s stablecoins project’s backers extensively sought approval from DC policymakers ahead of the token’s launch. It made sense on paper. Unlike the transportation policy shown by Uber and Lyft, it can be changed through willpower and mass adoption. Financial services are heavily regulated at the federal level. Forcing fiscal innovation without the prior approval of regulators is daunting unless you operate in a financial services area that is primarily governed by governments.
This is PayPal’s ace up their sleeve. Because of this, it could partner with Paxos Trust and transform the pool of potential stablecoin users overnight. Its core business, money transfer, is regulated by a federal licensing system, which means that the ability of the federal government to charge PYUSD backers for launching a stablecoin without obtaining prior approval is limited.
The PYUSD lobbying strategy could be a somewhat new approach by American crypto companies towards DC. Rather than asking for permission, they are demanding a seat at the table, potentially bringing hundreds of millions of users with them who will accelerate cryptocurrency adoption and make stablecoins a part of everyday economic life.
Having observed power up close during 14 years of federal service between Congress and a presidential administration, achieving an outcome is in DC isn’t always about winning the competition of ideas. Instead, influencing politics is about power and influence. Most of the time in DC, those who have it prevail and those who don’t have it don’t.
Stablecoin advocates and market participants are now having an impact on the federal government, including regulators and lawmakers, in a way that was not there weeks ago. It could pave the way for a comprehensive regulatory framework for stablecoins in Congress, ushering in an era in which American crypto companies will force the federal government to deal with them on their terms.
