Global payments provider PayPal has almost 350 million users and 26 million vendors in its network so the introduction of crypto payments has been widely lauded as bullish for the industry.
Crypto markets surged and Bitcoin cranked to a new 2020 high of $13,200 during the hours after the news broke. Many industry experts have praised the move as a great thing for Bitcoin and the entire crypto ecosystem, but all might not be what it seems.
User base:
PayPal 346m+
Bitcoin 187m+
This is a big deal.
Estimating how many HODLers of BTC from on-chain forensics is from the incredible work of @glassnode. pic.twitter.com/QlOkZ9WRJZ
— Willy Woo (@woonomic) October 21, 2020
Enabling decentralized digital assets on a highly centralized platform with astronomical fees may not be the best combination, and here is why.
No Crypto Withdrawals, Big Fees
Firstly, PayPal will not allow crypto assets to be withdrawn to external wallets, so essentially once they’re on the platform PayPal can set whatever price it wants for users needing to convert back to fiat.
If anyone has used PayPal to change currencies or send money to an account in another country they’ll be painfully aware of the forex spread which can be as much as 8% depending on the currency being converted. OKCOIN COO Jason Lau pointed out the pain that may be in store regarding the fees.
Paypal's crypto offering has some caveats:
1) Users won't be able to withdraw.
2) Expensive. You have to pay a spread AND fees. pic.twitter.com/zNIyb542rb
— Jason Lau (@jasonklau) October 21, 2020
Additionally, PayPal will not allow crypto transfers between different accounts as observed by lawyer Jake Chervinsky;
This is the highlight of the PayPal news for me.
They're not only preventing withdrawals to self-custody, they won't even allow transfers between accounts.
I'd be glad to speak with @PayPal's legal team about why these restrictions aren't required for regulatory compliance. pic.twitter.com/DIVUqkCkGC
— Jake Chervinsky (@jchervinsky) October 21, 2020
Essentially, PayPal has mimicked the purchasing of crypto assets on trading platforms such as Robinhood, offering users exposure to the asset but preventing them from owning it independently. Chervinsky added if you can’t make withdrawals to self-custody, and don’t hold your own keys, is it even Bitcoin?
The Taxman Cometh
The whole setup could also open a huge can of worms when it comes to taxes. PayPal is only offering crypto services to U.S. account holders initially, and America happens to have some of the harshest tax regulations on the planet.
The U.S. Internal Revenue Service (IRS), classifies crypto assets such as Bitcoin as property, not currencies, therefore they are subject to capital gains taxes. The means that PayPal users buying, selling, or spending crypto will be generating taxable events that need to be reported.
If a user buys a smartphone using Bitcoin, for example, they would need to declare the price they obtained the BTC at, and the price it was when they sold it for the item, paying taxes on any gains it may have made in addition to VAT on any items purchased.
The documentation for reporting is a minefield and PayPal has already stated it is down to the individual, not them, to complete tax returns.
“It is your responsibility to determine what taxes, if any, apply to transactions you make using your Cryptocurrencies Hub.”
The good news is that PayPal may introduce the concept of cryptocurrency to millions of new users, but the drawbacks will probably prevent them from using the platform in the long run.
