I got a few questions yesterday about the nature of Paypal’s crypto checkout feature we saw yesterday.
One question was how Paypal planned to perform the crypto to dollar/other currency conversion for every single purchase. It’s a legitimate question. Bitcoin transaction fees are notoriously high. See this article from Feb this year:
Since “the average bitcoin transaction fee has fluctuated between $24 and $31”, how could Paypal possibly do this economically? The answer lies in what your PayPal crypto holdings actually are:
Paypal’s crypto wallet is super-closed. In effect, you don’t hold actual crypto in your wallets – not in the way you would with blockchain.com (which we read about last week) or other wallets – you don’t own the private key (you don’t see your public key), and you can’t sweep it into a 3rd party wallet whose private key you do own.
When you buy say USD 1000 of bitcoin, it’s like Paypal gives you credit towards the number of bitcoins that USD 1000 would buy on that day. The value rises and falls according to the price of bitcoin.
If you sell it (back to Paypal; you can’t withdraw to another wallet at the moment), you’ll sell in USD. If you use it to buy things, your balance is debited for the corresponding amount of crypto and Paypal’s own balance is updated.
It’s all within Paypal’s books.
From their own terms and conditions:
You will not hold the digital Crypto Assets themselves in your Crypto Asset balance. All custody of and trading in Crypto Assets is performed for us by our licensed service provider, Paxos Trust Company, LLC (“Paxos”), or other appropriately licensed provider of trading and/or custody services that we identify from time to time..
And as for the limitations we discussed? This is also as clear as can be:
You currently are NOT able to send Crypto Assets to family or friends, or withdraw Crypto Assets from your Cryptocurrencies Hub to an external cryptocurrency wallet. You also CANNOT use Crypto Assets directly as currency to pay for goods or services. If you want to withdraw the value from your Cryptocurrencies Hub you will need to sell your Crypto Assets and withdraw the cash proceeds from their sale…
So, in conclusion, you hold a claim to bitcoin and other crypto within Paypal’s closed ecosystem. A friend described it as proxy crypto, which is not wrong.
In balance, I think personally that the benefits of bringing crypto to a large number of people outweigh the way in which Paypal has gone about this.
But there should be a time when people are educated about how cryptocurrency actually works, and what true ownership actually means.