PayPal has become the country's first major financial company to issue its own stablecoin backed by the U.S. dollar.

PayPal USD (PYUSD) will be redeemable 1:1 for American dollars, according to the company. This means that one U.S. dollar can be redeemed for one PayPal USD and vice versa. As a stablecoin, it is backed by a physical asset and should therefore maintain a fairly consistent price. This is in contrast with other types of cryptocurrencies, whose value is based on the amount that traders are willing to pay for them at the moment of the transaction.

In a press release about the new cryptocurrency, PayPal said that PYUSD would be “100% backed by U.S. dollar deposits, short-term U.S. Treasuries and similar cash equivalents.” It will be rolled out gradually to American customers.

PayPal customers who purchase the stablecoin will be permitted to transfer it into compatible external crypto wallets. They can also use it to pay for purchases and make peer-to-peer payments. Users will also be allowed to convert PayPal USD into one of the other cryptocurrencies that PayPal supports; the company started allowing its users to receive, send and transfer several popular digital tokens last year, such as Ether and Bitcoin.

PayPal noted that when a customer tries to buy or sell cryptocurrency or check out with crypto using their service, an exchange rate will be disclosed, along with any fees that will be added to the transaction.

The company says that the only way to purchase this stablecoin right now is from PayPal directly. So far, there are no signs that they intend to make it available through third-party crypto exchanges. However, a few fake crypto tokens claiming to be PYUSD have already shown up on the Uniswap exchange in hopes of cashing in on the hype.

Last week, PayPal 's shares plunged in the wake of investor disappointment over their quarterly operating margin. At 21.4 percent, it fell below the company’s estimate of 22 percent. It identified its credit portfolio as being behind the situation, blaming lower revenue than expected. Shares of PayPal dropped by more than 10 percent on Thursday morning after the news was released.

Will PayPal set a new trend?

The fintech firm Paxos Trust Company is issuing the stablecoin, which will live on the Ethereum blockchain. The company will start publishing monthly reports outlining the assets that are backing the stablecoin.

Paxos has reportedly been approached by a number of major traditional financial institutions and ecommerce companies to help them issue their own digital dollars, and some experts believe that PayPal may be setting off a new trend.

An analyst for MoffettNathanson, Lisa Ellis, told Forbes: “I assume as soon as there's legislation and proper guardrails, we'll see big banks having stablecoins the same way they have any other financial instruments that are used to create liquidity in all different types of markets."

Many believe PayPal’s foray into stablecoin is a smart business move. First, it will enable them to capture payments that might otherwise take place via other channels. In the past, PayPal was a closed-loop system in which both senders and receivers needed an account. However, with PYUSD, the stablecoin can be used even without both parties having a PayPal account.

Stablecoins can also be very profitable for companies. For example, Tether earned more than $800 million last quarter from their stablecoin issuance.

In addition, PayPal is well positioned to inspire broader stablecoin adoption as many people already trust the brand, and it has a significant customer base and e-commerce network.

Sources for this article include:

Bloomberg.com

Forbes.com