Since launching on August 7, Paypal’s stablecoin PYUSD hasn’t received the best of welcomes. From centralization concerns to regulatory scrutiny, there are signs to suggest that the stablecoin might have a hard time settling in, and a recent development further cements this belief. 

Fed’s Warning To Banks

In a letter dated August 8, the Federal Reserve further stipulated guidelines for state member banks that may be looking to issue, offer, and trade dollar-backed stablecoins. Recall that the Fed had initially, in a press release, provided that supervised-state banks had to demonstrate to the Federal Reserve supervisors that it had put “appropriate safeguards” in place to conduct stablecoin-related transactions safely and soundly. 

According to the Fed, these banks must first receive “written notification of supervisory nonobjection” from the agency before they can proceed to transact with dollar-backed stablecoins. Even after receiving this notification, such banks will be subject to “supervisory review and heightened monitoring of these activities.”

The agency further went on to state the risks (associated with trading stablecoins) that these “appropriate safeguards” are meant to cover. Such risks include operational risks, illicit finance risks, consumer compliance risks, liquidity risks, and cybersecurity risks. 

How This Could Hinder PYUSD Utility

While this may simply be the Fed doing its job, these guidelines could undoubtedly cause unease among banks that may have been looking to accept Paypal’s PYUSD or any other stablecoin for that matter. Furthermore, what constitutes “appropriate safeguards” is subjective (and only known to the agency), and without the Fed’s approval, these banks cannot transact these dollar tokens. 

Looking at the guidelines, banks may be forced to take the easy route by refraining from dabbling into these proposed activities rather than going in and getting burnt by the regulator. We have seen this play out when several banks refused to allow fiat on-ramp onto crypto exchanges through their banking system. 

If banks choose to go on with plans to offer stablecoins, they can be at least rest assured that the cybersecurity risks and liquidity risks mentioned by the Fed is well covered. The Fed referred to the network on which the dollar tokens are transacted, and regarding this, PYUSD and other notable stablecoins like Tether’s USDT and Circle’s USDC are transacted on the Ethereum network – the blockchain happens to be one of the most robust and secure in the industry.

Regarding liquidity risks, stablecoins are less volatile compared to other cryptocurrencies and are fully backed by an underlying asset. Paypal has asserted that its stablecoin is backed by US dollar reserves, and customers can redeem them anytime. 

While this recent development may represent a setback for the fintech company, there are, however, some positives, as crypto exchange Huobi recently announced that it was going to list PYUSD and include it in its trading pairs. 

“Once market circulation and liquidity conditions reach their prime, Huobi will promptly initiate trading for PYUSD.” the exchange stated in its press release.