PayPal Holdings Inc. (PYPL) intends to shorten the time it takes to process bitcoin transactions and has applied for a patent for a speedier cryptocurrency payment system, according to a filing with the United States Patent and Trademark Office.
It wasn’t clear at the outset of the internet era what potential the new “global wide web” contained. Most people were distracted by the potential to connect and speak with others, explore their content, and obtain news from all around the world, but others with vision saw that the internet could be so much more. In 1998, a group of individuals formed Confinity, which subsequently became PayPal (when Elon Musk joined), and the rest is history. PayPal has helped the internet become a medium for business as well as content since its IPO in 2002, and it continues to dominate the online payment industry to this day.
Despite PayPal’s widespread and ongoing success, with annual revenues steadily increasing from little over $3 billion in 2010 to $13 billion in 2017, the company’s foresight has warned of impending problems. In recent years, bitcoin payment options founded on blockchain have gradually spread. These decentralized systems suggest that PayPal, if it continues to operate under its existing business model, will face fierce competition and will begin to lose its grip.
This is due to PayPal’s perplexing pricing structure, which requires users and merchants alike to accept 5% charges each transaction for the pleasure of utilizing the platform, among other arbitrary regulations meant to keep the firm afloat.
‘Expedited Virtual Currency Transaction System’
On March 1, 2018, PayPal submitted a mystery patent application for a “expedited virtual currency transaction system” in order to foresee the future emergence of cryptocurrency payment solutions rivaling its own.
Decentralized cryptocurrencies achieve PayPal’s ultimate goal of transacting rapidly and cheaply across borders. While PayPal must rely on partnering financial institutions and payment processors to provide their service, which adds costs and valuable time to transactions (and still prevents them from entering some markets), distributed networks such as bitcoin are beginning to look like a better alternative, despite their flaws.
What is PayPal’s Game?
PayPal’s recent patent hints to its plans, indicating that it would not sit back and watch as other alternatives undermine its own value proposition. An “expedited virtual currency transaction system” suggests a cryptocurrency-based payment system that does not have the same transactional snags as, say, bitcoin.
Bitcoin’s decentralized infrastructure trades off speed and expense for enhanced democracy and rejection of the old centralized business model. PayPal, on the other hand, has no motivation to follow the bitcoin industry’s basic concept of decentralization. Quotes obtained in the previous several weeks also show that PayPal officials are concerned about the rise of cryptocurrencies.
PayPal CEO Dan Schulman has discussed the potential and challenges that bitcoin solutions face in the present environment. “Rules, along with a whole lot of other things, need to be straightened out,” Schulman said of the volatile and uneven regulations in the new market. It’s an experiment right now, and it’s unknown which way it will go.” While this may seem to be paradoxical, considering that his business had just filed a cryptocurrency-related patent a few days previously, the timing is impeccable.
Another notion comes from comments made last month by PayPal CFO John Rainey, who emphasized the risk that businesses taking bitcoin must bear.
“Given the volatility of bitcoin right now, it’s not a reliable currency for transactions because if you’re a merchant and you have a 10% profit margin and you accept bitcoin, and the very next day bitcoin drops 15%, you’re now underwater on that transaction,” said Rainey, who predicted that bitcoin would become ubiquitous “years down the road.”
While this is correct, it ignores alternative cryptocurrency solutions that have already outperformed bitcoin’s capabilities. COTI, for example, can handle up to 10,000 transactions per second and is free to use. COTI introduces a customized blockchain called Trustchain into the mix for cheaper and quicker transactions.
Systems like this one directly challenge PayPal by highlighting the company’s shortcomings. For one thing, the emphasis on increasing trust and lowering costs means that businesses have a more transparent payment system. Furthermore, putting these new platforms on blockchain eliminates PayPal’s transactional and cross-border challenges.
Reading Between the Lines
According to their recent remarks, PayPal’s two most senior positions are aware of continuing regulatory activities, bitcoin’s inherent weaknesses, and their own platform’s limitations in comparison to cryptocurrency alternatives. The remarks made by Schulman and Rainey during the previous month are genuine, but they do not contradict their patent objectives. PayPal may employ cryptocurrency technology in a variety of ways while ignoring bitcoin and remaining on top of continuing regulatory activities.
One possibility is that PayPal may launch a cryptocurrency exchange service, allowing anybody with any sort of cryptocurrency to use PayPal to effortlessly make and receive payments, with all settlement and exchange taking place in the background. Merchants that want a certain cryptocurrency for their products, for example, would be able to take payment in any fiat or cryptocurrency and get the desired coin or coins.
On the other hand, retailers that prefer fiat payments would be able to take cryptocurrency payments swiftly and cheaply, and would benefit from the same back-end exchange. (Also see Twitter billionaire Jack Dorsey’s investment in the Bitcoin Lightning Network.)
Another more likely scenario is that PayPal would build its own centralized cryptocurrency, similar to what Ripple has done. The power and control afforded by centralized cryptocurrencies, which assign one entity responsibility for the network over a group of peers, are more relevant to PayPal’s requirements. PayPal can control how many coins are created, limit volatility, and help merchants improve their bottom lines all at the same time.
In any case, PayPal will be able to break free from its peripheral service suppliers, expand into new markets, and offer customers a cheaper, quicker method to combine their real and digital funds. It will, however, face fierce competition and will need to respond quickly since it is currently well behind the curve. (See also: Passwords Are Obsolete; Adopt Blockchain.)
PayPal’s ultimate problem is that the services that allow it to be so handy threaten its market dominance. Few can square PayPal’s simplicity of use with its expenses, given the fees charged by collaborating banks, payment processors, and other services. They just don’t have any other choice, and neither does PayPal. Many merchants and consumers wind up paying between 3% and 5% every transaction, and will continue to do so unless PayPal finds a method to match the payments sector’s expectations while simultaneously cutting its own expenditures.
Though investors would be eager to contribute bitcoin or Ethereum to a PayPal ICO, such an event is unlikely to take place. Instead, the payment giant will almost certainly launch its own proprietary solution, causing even more ripples in the bitcoin sector. Their shadow looms vast, and when PayPal ultimately enters the fray, the splash might be strong enough to drown many promising decentralized alternatives, disrupting the disruptors. (See also: Bitcoin’s Lightning Network: 3 Potential Issues.)
Investing in cryptocurrencies and Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and neither Investopedia nor the author suggest that you do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author owns cryptocurrencies as of the day this post was published.
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