Bank of America Assesses Significance of Paypal’s USD Stablecoin and Fednow System

Bank of America has provided its analysis of Paypal’s U.S. dollar stablecoin and the Fednow payments system. The bank does not expect the widespread adoption of PYUSD to occur in the near future, noting that the introduction of Paypal’s stablecoin will not lead to “accelerated regulatory clarity.” Nonetheless, Bank of America believes that stablecoins have the potential to provide a more efficient payment solution.

Bank of America on Paypal’s US Dollar Stablecoin

Bank of America published a Global Digital Asset Strategy report last week covering its view on Paypal’s U.S. dollar stablecoin and the Fednow payments system. The report was written by Alkesh Shah, head of global crypto and digital assets strategy at Bank of America Global Research, and Andrew Moss, the bank’s global digital asset strategist.

Paypal (Nasdaq: PYPL) is launching a U.S. dollar-denominated stablecoin, called Paypal USD (PYUSD), which will be available to U.S.-based Paypal customers. According to the payments giant, the stablecoin will be compatible with select third-party digital asset wallets and backed by traditional assets, including the U.S. dollar, short-term Treasuries, and cash equivalents.

Noting that Paypal, with 435 million users, is the first global company “to launch a stablecoin with regulatory approval,” Bank of America stated:

We expect PYPL’s PYUSD launch to drive payments efficiencies and an improved customer experience over time, but PYUSD adoption is unlikely to be significant in the near term, given lack of wallet compatibility, exchange trading pairs or new functionality.

“Over the longer term, we expect PYUSD to experience additional adoption headwinds as competition from CBDCs [central bank digital currencies] and yield-bearing stablecoins increases,” Bank of America continued. “Investors may have been fine holding non-yield-bearing stablecoins, such as USDT and USDC, when rates were close to zero, but yield-bearing stablecoins will likely become increasingly available and attractive with short-term rates above 5%.”

Regarding crypto regulations, Bank of America stressed:

We do not expect PYUSD’s launch to lead to accelerated regulatory clarity, given the stablecoin’s issuance does not alter systemic risk for traditional markets, but the stablecoin may face regulatory headwinds if non-banks are ultimately barred from stablecoin issuance.

Bank of America on Fednow

The Bank of America report also provides an analysis of the Fednow service, which went live on July 20 to “enable financial institutions, specifically banks and credit unions, to facilitate bank account-to-bank account transfers of customer funds in (near) real-time,” the bank described. Shah and Moss detailed:

We view Fednow as a needed and innovative solution to a problem – inefficient domestic payments and transfers – that other countries have already solved.

The analysts explained that Fednow’s infrastructure does not leverage blockchain technology, stating: “Instead, Fednow uses traditional payment rails to produce an interbank settlement system.”

They emphasized: “As the digital asset ecosystem evolves, we see the potential for stablecoins and, ultimately, CBDCs to provide an even better solution that would be faster and cheaper, especially for cross-border payments and transfers, which Fednow does not support … We note that the efficiencies Fednow enables are unlikely to be fully captured without financial institution adoption and resulting network effects, as well as development of end-user interfaces and applications.”

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