Regulation will keep PayPal's new crypto services from looking anything like crypto

Published at: Oct. 21, 2020

Earlier today, PayPal confirmed that it would be adding crypto payments to its global platform over the coming months.

The rollout will begin in the United States, where PayPal also became the first recipient of the New York Department of Financial Services', or NYDFS, conditional Bitlicense, a program that the regulator announced this past summer. 

The devil in the details

While the news is huge for crypto, PayPal will be under intense scrutiny. The nature of the conditional Bitlicense is that conditional licensees have to pair off with firms that have full Bitlicenses (in this case, Paxos) that will act as mentors of a sort. Per the NYDFS, conditional licensees also "may be subject to heightened review, whether in regard to the scope and frequency of examination or otherwise."

The conditional license lasts for two years, and its renewal or upgrade to full Bitlicense status is wholly contingent on Superintendent Linda Lacewell's decision.

Representatives for PayPal declined to comment on what form heightened scrutiny will take, instead directing Cointelegraph to speak with NYDFS. In turn, representatives for NYDFS declined to specify what "heightened review" might mean for PayPal beyond the vague statutory language already available.

Meanwhile, representatives for Paxos declined to comment on their role in PayPal's conditional Bitlicense. Which is to say, all three of these organizations made great efforts to publicize this morning's news without going into detail on the regulatory arrangement. Their disinterest in doing so when pressed is concerning. 

Crypto is as crypto does

While nobody is being transparent about the specific hoops that PayPal — which has well over 340 million users worldwide — will have to jump through to satisfy regulators, the firm is clearly going to have to do everything in its power to make crypto behave unlike crypto on its platform, beyond the customer data gathering that PayPal has always done. 

PayPal's wallet will be not only custodial but siloed. Per the firm's cryptocurrency FAQs, users will not hold private keys, nor will they be able to move their holdings to other wallets: 

"Currently, you can only hold the Cryptocurrency that you buy on PayPal in your account. Additionally, the Cryptocurrency in your account cannot be transferred to other accounts on or off PayPal."

So, what does that mean? Not only are coins held on PayPal most certainly not your coins, but also, this may be the standard that big firms will have to abide by in order to dabble in crypto. 

There's been talk for some time of regulatory "whitelists" — i.e., crypto exchanges and firms looking to comply with stringent regulations will only be able to transact with approved wallet addresses. That practice has not yet gone into law.

With PayPal, what we may be looking at is regulators allowing crypto on major platforms only when it has no chance of going to other platforms, which is more aggressive than a whitelist. That is, full dependence on third parties, zero threat of peer-to-peer transfers and zero chance of interacting with people who wouldn't already be able to get PayPal accounts — which, ultimately, isn't really crypto. At least for now.

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