PayPal is a centralised system: Can you trust them with your NFTs?

PayPal explained

Since 1998, PayPal has provided consumers and businesses with an alternative way to conduct payments in an international economy. The online payment platform has millions of active accounts in more than 200 countries. 

PayPal gained popularity as a suitable digital payment option for eBay. It enabled individuals and businesses to send and receive money securely, either by its website or mobile app.  

When linked to a user’s bank account, credit or debit card, PayPal can be used to make e-commerce purchases. In simple terms, PayPal serves as the middleman to keep users’ bank data safe. 

This online payment platform processes an average of 41 million transactions each day. It supports more than 100 currencies and allows withdrawals in more than 50 fiat currencies.

A look into the past

As mentioned above, PayPal was first launched in the late 1990s – a software company named Confinity created a digital payments system for Palm Polit users. The company later merged with an online banking company and took the name PayPal in 2000. 

Two years later, eBay decided to acquire PayPal and make it its official payment system. Since PayPal became a preferred payment mechanism for eBay users, the platform gained popularity in a very brief time. In 2015, PayPal became an independent company through a spin-off. 

A corporate spin-off occurs when a parent company issues shares in an existing business or division to parent company shareholders. The spin-off has a separate management structure, yet retains the same assets and intellectual property. 

Since 2015, PayPal has acquired other companies to support areas such as digital money transfer and the payments market. These acquisitions brought to the table technological innovations and interesting features that were incorporated into the platform. 

The PayPal ecosystem is now looking into crypto assets to enhance its services once again and retain its position as one of the major players on the global scene.

In 2024, several international banks announced the introduction of crypto trading services. To learn more about these novelties, check out this article: 'Banks launching crypto trading services in 2024'.

How does PayPal work?

PayPal presents an intermediary between you as a user and your bank. You have to link your bank account, and credit or debit card to the PayPal platform; whenever you are making an online payment, the transactions are being processed through the platform instead of the bank.  

Users’ money is accommodated in their PayPal accounts. It can be used for e-commerce purposes and transfers. Regarding individual users, PayPal provides simple money transfers, check cashing, and e-check services. Merchants typically enjoy a wide variety of business-related services such as shipping, invoicing, and loans. 

Setting up a PayPal account is free, but the platform imposes additional fees for using its services. The platform makes much of its revenue from the fees it charges.

Is PayPal centralised?

The global financial system has been dominated by centralised financial institutions for a long time such as banks, financial intermediaries and digital payments service providers. Well-known intermediaries in the centralised system are, for example, PayPal and Mastercard. 

Therefore, PayPal is a centralised system. As with any centralised system, it encompasses certain drawbacks. Generally speaking, the influence of such financial powerhouses has led to growing concerns regarding data privacy, financial freedom, and security.

Not your keys, not your coins?

Before we move on to explaining PayPal’s new crypto ventures, we will lay down an example of the platform’s centralised nature regarding cryptocurrency purchases.  

In 2020, PayPal made a breakthrough into the crypto realm and enabled users to hold and trade cryptocurrencies such as Bitcoin, Ethereum and Litecoin through Venmo, the mobile wallet owned by the platform.  

Although this sounds great for crypto’s mainstream adoption, PayPal’s centralised nature gets in the way. The coins users are buying are not technically theirs because PayPal manages the digital wallets. 

Let’s simply explain this- when you purchase cryptocurrency, you are provided with a public and a private key pair. The public key is your crypto wallet address, and the private key gives you control over that wallet and your funds. 

To learn more about crypto keys, why not read this article: 'Understanding crypto keys & addresses'.

However, PayPal provides you with your public address but retains control over the private key. It is similar to bank deposits; users have to trust that the bank has their funds in their bank accounts. Therefore, you cannot move your crypto assets to cold storage. 

PayPal remained a popular service provider option since not all users want to be responsible for their private keys. Similar to centralised exchanges, PayPal is easy to use; it provides a user-friendly and intuitive interface that enables customers to move around the cryptocurrency space more easily.

How do PayPal and crypto differ?

First and foremost, crypto is decentralised, and PayPal is centralised. The original idea behind the crypto movement was to create a decentralised system to send and receive digital currencies. No one controls a truly decentralised network. On the other hand, PayPal lays down a centralised structure for financial services that is under the control of its parent company. 

With the use of blockchain technology, the main purpose was to create a public ledger where users could audit transactions. All transactions are verified using a consensus mechanism; decentralisation is the secret ingredient that makes transactions trustless. 

Crypto platforms, either centralised or decentralised exchanges, and PayPal make digital transactions possible, but they need to make money to stay in business. That is why they charge a fee on each transaction. However, PayPal’s fees are higher compared to crypto fees. 

Similar to crypto platforms, PayPal is a secure financial service provider with encryption technology. Crypto utilises cryptography as an advanced type of encryption and enables the use of hardware wallets for an additional layer of security. The main difference here is that PayPal is a centralised structure and users trust them with security while within the crypto ecosystem, users are in charge of their security. 

PayPal is more user-friendly so it is suitable for beginners. On the other hand, PayPal is not available in particular countries due to a clear regulatory framework, insecure banking systems, trade bans, and U.S. tax legislation. Crypto is available all around the world. 

Paypal's venture into blockchain technology and digital assets

PayPal’s interest in crypto is not a new thing; this platform first expressed interest in cryptocurrencies back in 2013 when David Marcus, the president of PayPal at the time, stated that the company is thinking about adding Bitcoin to its funding structure.  

Nothing happened in 2013, but a year later PayPal published a promotional video that included a line about Bitcoin. The video led through a debate within the crypto community about whether PayPal is serious about adding Bitcoin to its platform. However, the video was replaced by another video that didn’t contain the notorious line about Bitcoin. 

However, only a few months later PayPal enabled online vendors to accept Bitcoin payments due to strategic partnerships with BitPay, GoCoin, and Coinbase. This was the first move PayPal made to embrace the crypto market. 

The digital payments giant continued to examine the crypto space and filed a patent application in 2018 with the U.S. Patent and Trademark Office for an ‘Expedited Virtual Currency Transactions System’; the system in question was designed to reduce transaction times by creating secondary wallets that exchange private keys linked to a predetermined amount of crypto. 

In 2019, PayPal made its first crypto investment by taking part in Cambridge Blockchain’s Series A funding round, and joined the Libra Association along eBay, Uber, and Mastercard. A year later PayPal officially entered into the cryptocurrency space with a new digital asset service.

What is PayPal USD?

In August 2023, PayPal launched a U.S. dollar-denominated stablecoin created for digital payments and the Web3 environment. PayPal USD (PYUSD) is a stablecoin fully backed by U.S. dollar deposits, short-term U.S. treasuries and similar cash equivalents. As stated by PayPal, the stablecoin can be redeemed 1:1 for U.S. dollars. 

PayPal’s stablecoin is fully regulated and issued by Paxos Trust Company, a licensed limited-purpose trust company overseen by the New York State Department of Financial Services. Back in 2022, PayPal acquired BitLicense by the same regulatory body. 

In November 2023, PayPal has received a subpoena from the United States Securities and Exchange Commission (SEC) regarding its U.S. dollar-pegged stablecoin.

PayPal’s shift towards stablecoins was inspired by providing a digitally native currency linked to a stable fiat currency such as the U.S. dollar. However, several legislators were quick to criticise the new financial product. For example, one of the leading representatives on the House Financial Services Committee, expressed security concerns over the dollar-pegged stablecoin because it was issued before an official regulatory approval at the federal level. The head of the Senate Banking Committee has been highly suspicious of the new stablecoin as well.

Nevertheless, the introduction of PayPal USD was mainly accepted as a positive thing for the crypto space. A few industry experts stated that this is a win for the crypto community as mainstream adoption is going through broad Web2 fintech companies that set out real use cases for crypto. 

Sounds familiar?

Meta (ex-Facebook) tried to do a similar thing a few years ago. The company tried for several years to launch a global payment system powered by a cryptographic stablecoin. Although Meta worked on compliance issues, regulators were too concerned that it would undermine the stability of the global financial market.  

The stablecoin project was launched in 2019 as Libra, but it quickly ran into opposition from regulators. In simple terms, the Meta network has about 2 billion users around the globe, and policy-makers thought that such a wide presence could challenge the utility of fiat currencies such as the U.S. dollar.

Centralisation issues

PayPal’s decision to join the stablecoin environment has drawn criticism from a part of the crypto community as well. Specifically, concerns have been raised that PayPal’s stablecoin is, at its heart, a centralised asset operated by a centralised company. In other words, crypto users shared concerns that tokens could be frozen and seized by the company due to an ‘asset protection’ feature. 

On the other hand, such centralised features shouldn’t come as a surprise; industry experts noted that U.S. regulators would not welcome a stablecoin without such a functionality and that PayPal couldn’t have more decentralised features than other popular stablecoins.  

PayPal USD was also criticised by several developers since it utilises old code; however, the company explained that the use of tested contracts instead of new code that has not been probed thoroughly was due to security reasons.

PayPal's NFT ambitions

Back in March 2022, PayPal filed a patent application regarding a system created to facilitate transfer and trading of non-fungible tokens (NFTs), both on and off-chain, within the PayPal network.  

The patent application lays down a structure where customers can trade NFTs using a third-party service, and includes many images, figures and technical explanations of used methods and systems involved in enabling off-chain transactions via the NFT marketplace. 

The abstract of PayPal’s patent application states that the NFT marketplace corresponds to a decentralised blockchain associated with an entity that differs from the service provider. In simple terms, PayPal aims to create a system that allows customers to send and receive NFTs within their PayPal accounts. 

Furthermore, the patent application mentioned several key areas of PayPal’s NFT marketplace. For example, the system will be able to accommodate different forms of currency for NFT transactions, and the users will be able to access it through digital wallets that are managed by the service provider. All compliance and risk management procedures will be carried out by the service provider as part of the processing. 

Can you trade any NFTs?

Not really – PayPal has excluded NFT transactions above $10,000 in its revised seller protection program. Items represented by NFTs including digital art, collectibles, and media, either physical or digital, that are over $10,000 in transaction are ineligible. 

The amendment in question follows the occurrence of NFT thefts and scams. A part of the PayPal community thinks that there might be past instances of NFT frauds on the platform which has led to this rule.

Can you trust PayPal with your digital assets?

The digital payments platform is committed to its crypto journey and building a more sustainable NFT sphere. The PayPal ecosystem and its venture into the NFT space presents a clear signal of embracing crypto products and services, along with making them more accessible to a bigger audience. 

Even though this is a win for the crypto community, and the wider adoption of blockchain technology, keep in mind that PayPal is still a centralised entity, and that centralisation brings to the table a few drawbacks.