How PayPal is bridging crypto and commerce through payments

A few years ago, firms diving into crypto were tiptoeing through uncertainty. Fast-forward to today, a Bitcoin-focused product strategy within the lineup seems to be a safer bet. 

Take Block, for example. Its early, all-in stance on Bitcoin now seems like a stroke of genius, given that crypto markets are maturing, Bitcoin is reaching new peaks, and a new administration is seemingly opening the door to crypto and Web3.

PayPal is another payments firm carving out a spot in the crypto landscape with a more calculated approach. It has woven Bitcoin into its strategy over the past five years.

“Several years ago, we began testing cryptocurrency transfers to better understand the technology as it relates to payments and immediately saw the value it could provide,” says May Zabaneh, VP of Product at PayPal. 

“The ability to send a payment over the blockchain in seconds at a fraction of the cost was simply incredible. We needed to explore it further and determine in what capacity we wanted to be involved. That’s when we realized that we wanted to bring this incredibly promising technology to our users,” she shares.

In late 2020, PayPal took its first crypto leap, letting users buy, sell, and hold select digital currencies within their accounts. By 2024, its stablecoin PYUSD — initially launched on Ethereum — expanded to Solana for faster, lower-cost transactions. PYUSD is now on both Ethereum and Solana. That same year, PayPal extended crypto trading capabilities to business accounts.

We take a closer look at PayPal’s crypto evolution, its applications, and the trade-offs that come with digital currency transactions.

PayPal’s crypto evolution

PayPal laid the groundwork for its crypto venture by obtaining approvals and engaging with regulators.

The firm received a conditional Bitlicense from the New York State Department of Financial Services (NYDFS) in October 2020 and became one of the first companies to receive a full Bitlicense in June 2022. “PayPal chose to become fully licensed because it was the best way forward to offer cryptocurrency services to its users, given the robust framework provided by the NYDFS for such services,” notes Zabaneh.

With regulatory approval in place, PayPal took decisive steps forward each year, as illustrated in this chart:

The firm also works with over 25 companies to integrate PYUSD more deeply into the crypto ecosystem. These include:

• On/off ramps, services or platforms that allow users to convert fiat currencies into cryptocurrencies, to major exchanges like Coinbase, Crypto.com, and Kraken.
• Institutional platforms such as Anchorage Digital and Fireblocks.
• Technology enablers like LayerZero and Zero Hash.

Crypto solutions for consumers & merchants

While PayPal focuses on attracting new users, it’s also encouraging its existing consumers and merchants to integrate crypto into their transactions to drive wider adoption.

For Consumers: PayPal is strengthening its relationship with consumers by offering crypto options and enabling them to put their digital assets to use. Zabaneh explains that consumers can buy, send, or spend crypto through various channels, including:

1. Checkout with crypto – Customers can use crypto as a funding source when checking out with PayPal at supported merchants. The crypto is sold at the time of purchase and the merchant receives fiat.
2. Crypto rewards – Users can convert rewards, such as cashback from their Venmo Credit Card, into crypto.
3. Low-cost transfers – PYUSD has been integrated as a cost-effective transfer option for Xoom remittances.

Zabaneh believes payment choice is key. “As with almost anything with payments, consumers and shoppers should be given the choice in how they want to pay,” she says. 

For Merchants: Last year, PayPal expanded crypto access to business account users, letting them buy, hold, and sell digital assets. For merchants already integrated with PayPal Checkout, this means providing more payment options for consumers — without requiring any additional integration or operational changes. 

“This provides business owners the ability to explore and understand cryptocurrency from a trusted brand so they can begin to get comfortable with it as a payment method,” says Zabaneh.

Here’s what happens during a commerce transaction: If a shopper has a $60 cart and enough BTC or ETH, they can use their crypto just like a balance or credit card. Once the transaction is confirmed, PayPal converts the crypto to fiat and sends it to the merchant. This means merchants never have to handle crypto directly when getting paid.

This method can help businesses receive payments faster, improve cash flow management, and avoid international currency fees.

“We plan to continue to deliver more use cases for merchants and consumers around the world,” says Zabaneh.

The double-edged sword of crypto payments and how PayPal is working through it

While progress with crypto payments continues, certain grey areas still require clearer guidelines, and PayPal is working to address them. Among them are:

i) Chargeback protections: Traditional credit card transactions come with chargeback rights and fraud protection. Crypto transactions might not have the same level of dispute resolution.

However, Zabaneh sees PYUSD differently, as it is backed by cash and Treasuries and is issued and managed by Paxos Trust Company, a centralized entity regulated by the NYDFS.

“Within PayPal’s crypto integration, buyer and seller protections remain in place, much like traditional transactions,” Zabaneh says.

She further explains that PayPal maintains the same security and protections that merchants are accustomed to. Additionally, PayPal converting crypto to fiat before settling with merchants also helps reduce the risk of irreversible transactions.

“We are actively working to deepen the integration between cryptocurrency and our payments platform to enable a more seamless experience when using crypto to shop and buy,” Zabaneh adds. 

However, Zabaneh notes that dispute resolution falls under the merchant’s payment processor. “We provide a very seamless dispute system and work with merchants to ensure proper resolution occurs in a timely manner,” she says.

If a refund is issued, consumers receive fiat — the equivalent value in PYUSD, since it’s pegged 1:1 to the US dollar.

ii) Privacy concerns: Using PYUSD involves blockchain tracking due to centralized control.  This may raise concerns about user data privacy and transaction transparency.

While blockchain tracking oversight, helps prevent fraud, ensures redemption stability, and protects consumers, it may come at the expense of privacy and decentralization.

By expanding its PYUSD to Solana, PayPal tapped into the blockchain’s native token extensions and features to enhance data privacy. These features, like ‘Confidential Transfers’, let merchants obscure transaction amounts while still meeting regulatory requirements — offering a balance between privacy and compliance.

“Token Extensions provide Solana with the ability to add payment features that users are familiar with when using their cards or paying cash,” says Zabaneh. “Features like hiding the amount or adding a memo to a transfer for additional context are things people expect in their payment experience and help move crypto from the fringe to a more accepted payment method.”

Even cryptocurrencies built around decentralization are beginning to see anonymity fade. Eswar Prasad, an author and economics professor at Cornell University, believes Bitcoin is on the way to becoming more centralized as it moves further into the mainstream, driven by compliance and regulatory pressures, among other factors. 

“Anonymity is no longer the big selling point of these digital currencies anymore,” he told Yahoo Finance. 

The jury’s still out on how this shift may affect consumer behavior or how the new administration will introduce more defined regulatory guidelines in this area.

Future outlook

Looking forward, could direct PYUSD settlement become the next big thing for merchants in crypto payments?

“While we don’t share details about our unannounced products or features, we are definitely looking into providing merchants with more experiences that enable settling in PayPal USD,” notes Zabaneh.

This indicates that PayPal is exploring different pathways to broaden merchant crypto payment settlement options. Last year, the company enabled merchants using SAP’s digital currency hub integration to send and receive digital payments instantly using PYUSD.

“We continue to listen to our customers about features and functionality that they are interested in, use our payments expertise to think of innovative solutions, and make decisions based on those as well as other insights to drive our product roadmap,” she says.