PayPal is going to support Bitcoin and that’s big news, but there is a downside

PayPal will support Bitcoin from 2021, the payment service announced. PayPal users will be able to easily buy and sell bitcoins via their account and it will also be possible to pay with bitcoin at 26 million affiliated webshops. It is high-profile and big news, but the knife cuts both ways.

The rumors have been circulating for some time, but on Wednesday PayPal announced in a press release that it will support Bitcoin from 2021. PayPal users will be able to buy, sell and store bitcoin via the payment service from next year. This will be possible for American customers first, but expansion to other countries would soon follow.

In addition, it will be possible to pay with bitcoin via a PayPal account at the 26 million affiliated webshops and online service providers. PayPal automatically converts the bitcoin payments during the transaction and the merchant simply receives euros or dollars. Since most webshops and online services support PayPal, this could of course strengthen the role of bitcoin as a means of payment.

PayPal has approximately 346 million users worldwide. Many of them will soon be able to buy bitcoin very easily via their existing account. On the other hand, there may only be 101 million people worldwide who own bitcoin right now. That number can therefore grow considerably due to the network effect of PayPal.

The downside

It seems like big news and the impact can be big, but the knife cuts both ways. The downside is that PayPal’s services will work on the basis of a so-called custodial wallet . Unlike with a normal bitcoin wallet, you do not own and manage the bitcoins yourself, but PayPal takes on that task. In fact, only PayPal has a bitcoin wallet and PayPal users do not.

That makes a difference. If you, as a user, would buy a bit of bitcoin via PayPal, then it is actually PayPal that buys and owns and keeps the bitcoins. In exchange, as a user you will receive a number on your account page that represents how much it is. Actually little different than internet banking at an old-fashioned bank.

It also seems that PayPal is planning a closed system. You may buy bitcoin through them, store it and redeem it at a later time by spending it at an affiliated web store, but it does not seem to be the intention to facilitate bitcoin payments from bitcoin users without a PayPal account. It will also not be possible to withdraw purchased bitcoins to your own bitcoin wallet, or to send them to another. Bitcoin via PayPal mainly seems to be a means of investing and speculating from your PayPal account, but nothing else.

Little innovative

This goes beyond the innovations of Bitcoin. In particular, it negates the benefits of decentralization because PayPal acts as a central intermediary. For example, they can refuse services, collect big data , apply censorship, confiscate or freeze accounts, and for that package of services you are probably allowed to pay a percentage commission.

Normal bitcoin wallets

normal ( ‘non-custodial’ ) bitcoin wallets because they provide users with a ‘master seed’ or ‘seed phrase’ : a series of 24 English words that are a kind of secret access code for the bitcoin wallet. Only if you have this secret string of words yourself are you the owner of the wallet and the bitcoins it contains. You can read more about it here.

You also never know for sure whether the bitcoins you buy via PayPal really exist or whether it is just a number on your account page. This is the same for all custodial wallets . Compare it with internet banking: your balance is also shown there in full, but due to fractional banking, banks do not have nearly enough to pay out all credits. Who says it’s different with PayPal?

It is also unwise and risky to have large amounts of bitcoin from different people managed by one party. Bitcoin exchanges are regularly hacked and PayPal will also be targeted. The recent hack on Twitter shows that large and established tech companies are not immune either.

Bitcoin is precisely intended as a solution to these kinds of trust issues. Decentralization ensures that power lies with the users and that trust in central intermediaries is not necessary. To participate you need a normal bitcoin wallet and not a web page renamed custodial wallet .

It doesn’t matter for Bitcoin

PayPal’s plan may conflict with the traditional Bitcoin ethos, but it really doesn’t matter much to Bitcoin. It’s just an unbiased network and protocol and happily simmers on regardless of what we think or what we do with it. An additional, centralized and closed system from PayPal with investment options based on the bitcoin price does not change this, because the real and decentralized Bitcoin network will continue to exist alongside it.

In the short term, it does provide benefits. It is likely to be beneficial to Bitcoin’s image and societal acceptance. It also did not harm the price, because it rose sharply after the announcement. As a result, the total market value of Bitcoin is now even greater than that of PayPal.

However, if you are interested in the longer term and if you hope that Bitcoin changes something in the world through financial inclusion, emancipation and sovereignty, you can contribute by simply keeping your bitcoins in a normal wallet. And don’t forget: “Not your keys; not your coins” .

PayPal’s embrace of Bitcoin seems to follow the example of payment provider Square, Twitter’s sister company, which has been offering Bitcoin services for some time and has achieved success with it. Recently, Square even decided to convert 1% of their total assets into bitcoin.

Footage: danielfoster437, CC BY-NC-SA 2.0

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