Last week, LianGuaiyLianGuail, known as the “Alipay of the United States,” announced the issuance of a stablecoin called LianGuaiyLianGuailUSD (referred to as “PYUSD”), once again stirring up the crypto field.
As the largest third-party payment institution in the United States, LianGuaiyLianGuail’s release of a stablecoin amidst the escalating SEC regulation naturally raises speculation. Considering that its stablecoin is issued on the LianGuaixos platform, it is worth noting that just two months ago, due to SEC’s lawsuit, Binance urgently delisted the stablecoin BUSD, which was in cooperation with LianGuaixos.
From an industry perspective, many people have high hopes for LianGuaiyLianGuail, believing that the entry of large institutions may lay the foundation for relaxed regulation. However, behind the issuance, the misconceptions of centralization and limitations are also looming.
The speculations triggered by LianGuaiyLianGuail continue to ferment.
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A Helping Hand: The Past and Present of PYUSD
On August 8, 2023, the US payment giant LianGuaiyLianGuail officially announced the launch of its stablecoin PYUSD, becoming the first traditional large financial institution in the United States to issue a stablecoin.
According to the official website, PYUSD is issued in collaboration between LianGuaixos Trust Company and LianGuaiyLianGuail, and it is pegged to the US dollar at a 1:1 ratio. To ensure its solvency, similar to Tether, PYUSD is fully collateralized by the US dollar, short-term US Treasury bonds, cash, and equivalents. Starting from September 2023, LianGuaixos will begin publishing LianGuaiyLianGuail’s monthly reserve report for the US dollar, detailing its reserve details. LianGuaixos will also commission an independent third-party accounting firm to publicly verify the value of PYUSD’s reserve assets and conduct regular inspections in accordance with the audit standards formulated by the American Institute of Certified Public Accountants (AICLianGuai) to ensure the security and integrity of its assets.
PYUSD introduction, image source: official website
In terms of practical application scenarios, PYUSD supports the conversion between the US dollar and other cryptocurrencies, including but not limited to transfers in compatible wallets, peer-to-peer stablecoin payments, and PYUSD payments in real-world scenarios. This stablecoin will first be used within LianGuaiyLianGuail and will then be expanded for use in Venmo, a small-scale payment program, and gradually promoted to other applications. Currently, this currency is limited to US users only, but since it is issued on the Ethereum blockchain, it is open to developers, wallets, and the Web3 community.
It is worth noting that in order to avoid the risk of unregistered securities issuance that LianGuaixos was previously accused of, LianGuaiyLianGuail publicly stated that it will not provide profits to users of the PYUSD stablecoin, while typically offering a maximum annual interest rate of around 4.3% for deposits.
For those who are not familiar with LianGuaiyLianGuail, the sudden entry into the market may come as a surprise. However, as early as 10 years ago, LianGuaiyLianGuail had already been paying attention to cryptocurrencies.
As early as 2013, when cryptocurrencies first emerged, the then President of LianGuaiyLianGuail, David Marcus, expressed his consideration of incorporating cryptocurrencies into financing tools. In 2014, LianGuaiyLianGuail established its first collaboration with cryptocurrency enterprises such as Coinbase, BitLianGuaiy, and GoCoin.
In 2018, LianGuaiyLianGuail submitted a patent application for “accelerated virtual currency trading system” to the United States Patent and Trademark Office (USPTO). In the same year, Coinbase allowed US users to directly withdraw fiat currency from Coinbase to LianGuaiyLianGuail accounts free of charge.
In October 2020, LianGuaiyLianGuail officially entered the cryptocurrency market, supporting US users to trade cryptocurrencies such as Bitcoin, Ethereum, BCH, and Litecoin. At that time, the platform only allowed customers to purchase through internal promissory notes, but did not allow withdrawals or transfers between wallets, more like internal payment vouchers.
By this year, PYUSD was officially released. Looking at the timeline, LianGuaiyLianGuail’s entry into the field was not a sudden move, but a long-prepared result. As the largest payment institution in the United States with 431 million active users, LianGuaiyLianGuail’s entry at this time is undoubtedly a helping hand for the cryptocurrency field that is deeply trapped in regulatory turmoil, and it also gives industry professionals a rare positive signal.
After all, the entry of traditional institutions is rare at the moment, and LianGuaiyLianGuail’s large payment channels, potential audience, and sound infrastructure undoubtedly have a positive impact on the expansion of cryptocurrencies. In terms of compliance, LianGuaiyLianGuail, with its strong capabilities, will have a closer relationship with regulatory agencies than other enterprises.
The consensus in the industry is that it is quite delicate for traditional institutions to issue stablecoins at the current stage when Coinbase and Binance have been sued and LianGuaixos has been forced to suspend the issuance of BUSD.
In June last year, LianGuaiyLianGuail successfully obtained a local cryptocurrency license, and LianGuaixos, which it collaborates with, is a legal trust institution under the jurisdiction of the New York State Department of Financial Services. Whether from market size or qualification review, regulatory authorities can only be cautious. LianGuaiyLianGuail also revealed that it had extensive discussions with US regulatory agencies and policy makers before the launch of PYUSD.
As expected, after the issuance, Maxine Waters, the Democratic leader of the House Financial Services Committee, publicly criticized it, stating that the asset anchoring was not under regulation. Ironically, LianGuaitrick McHenry, a Republican, described it in a completely different way, believing that LianGuaiyLianGuail’s stablecoin showed prospects as a payment system. The political inclinations of the two parties towards stablecoins and cryptocurrencies are uncertain, which means that the competition between the two parties will directly determine the direction of cryptocurrencies. In this regard, LianGuaiyLianGuail’s political attributes are more evident.
However, regardless, LianGuaiyLianGuail’s entry into the stablecoin market is still positive, but it also raises a question: why issue a stablecoin at this time?
LianGuaiyLianGuail’s Strategy: Profit Crisis and the Survival of Stablecoins
In terms of timing, LianGuaiyLianGuail’s stablecoin strategy has been full of twists and turns. It can be traced back to last year, January 2022, when developers discovered “LianGuaiyLianGuail Coin” in the source code of the iPhone application. LianGuaiyLianGuail reluctantly revealed to the media that it was exploring stablecoins. Subsequently, according to Wu Shuo’s report, LianGuaiyLianGuail attempted to collaborate with FTX last year, but it was suspended due to subsequent scandals. The same scenario happened this year as well, with the planned release of PYUSD in February being suspended again due to LianGuaixos’ review.
On-chain data also clearly shows this. On November 8, 2022, LianGuaiyLianGuail completed the initial issuance of a total of 1.1 million PYUSD. On February 1 of this year, 26.4 million coins were minted, but on the 23rd, 25.5 million coins were destroyed. Then, on August 3, 24.9 million coins were minted again.
From this, it can be seen that LianGuaiyLianGuail is actually eager to issue this currency, but due to delayed regulations, the current release is likely a result of regulatory relaxation. Although there is no absolute evidence to support this point, based on recent events such as Ripple’s victory in court and the Republican Party’s successive proposals of two key bills supporting the crypto field, there is some indirect confirmation.
In terms of the purpose of issuance, according to LianGuaiyLianGuail’s President and CEO Dan Schulman, the intention is to consolidate its leading position in digital payments through stablecoins. Although the wording is polite, the fact that can be inferred from the stock price is that LianGuaiyLianGuail, which is experiencing sluggish growth, urgently needs cryptocurrency as a new economic growth point.
In terms of business composition, LianGuaiyLianGuail is similar to other payment institutions. As an integrated payment service provider that covers consumers and merchants, its core products include LianGuaiyLianGuail, Venmo, Xoom, Braintree, Zettle, and Hyperwallet. Among them, Venmo has social attributes, Xoom provides cross-border payments, Braintree provides acquiring services, Zettle provides offline payment devices, and Hyperwallet provides institutional payment services.
It can be seen that LianGuaiyLianGuail is very similar to China’s Alipay. However, unlike Alipay’s absolute leading position, the market competition for LianGuaiyLianGuail is more intense. The payment landscape in the United States is particularly complex, with fierce competition between LianGuaiyLianGuail, Square, and Stripe. Tech giants like Amazon and Google are also not falling behind, seizing market share by building their own payment networks. As a third-party service provider, LianGuaiyLianGuail needs to collect fees from the network upstream and compete for merchants, institutions, and consumer markets downstream. The control over marketing, research and development, and management costs is particularly passive. Under these circumstances, the company’s profit margin disadvantage becomes apparent.
LianGuaiyLianGuail has high transaction fees, with a regular fee of up to 4.4%, which is almost the highest among its counterparts. However, due to high operating costs, the profit margin has been continuously declining. In 2022, LianGuaiyLianGuail’s net profit margin was 8.79%, lower than the 16.43% in 2021. The total operating cost was 21.151 billion, accounting for 76% of the total revenue. In comparison with VISA, which has a similar total revenue, the operating cost is only 2.7 billion US dollars, and the net profit is as high as 50%. In terms of TPV, LianGuaiyLianGuail’s total payment amount is 13.6 trillion, compared with a net income of 2.756 billion US dollars, the commission rate is approximately 1.98%, while Alipay, a similar payment platform in China, has a commission rate as low as 0.11%.
Since the beginning of this year, LianGuaiyLianGuail’s transaction profit margin has been declining continuously. Source: Deep Value Ideas
In short, LianGuaiyLianGuail is expensive because of its high costs, but it earns very little. The dilemma is that the business is highly vulnerable and requires more costs to maintain this expensive fee rate, otherwise it will fall into a negative cycle.
The data is consistent with the actual performance. Although LianGuaiyLianGuail’s business performance in the second quarter of 2023 is still acceptable, the reduced profit has attracted investors’ attention. The report shows that in the second quarter of 2023, LianGuaiyLianGuail’s net revenue was $7.3 billion, an increase of 7% compared to the same period last year’s $6.8 billion. However, the transaction profit margin continued to decline to 45.9%, compared to 47.1% in the previous quarter and 49.7% in the previous year. The decline in moat can also be seen from the number of users. As of June 30, 2023, the total number of active accounts in LianGuaiyLianGuail was 431 million, lower than the 433 million on March 31, for the second consecutive quarter-on-quarter decline.
Due to the lower-than-expected profit margin in Q2, LianGuaiyLianGuail plummeted more than 9.2% on the same day, with a current market value of $6.327 billion, a year-on-year decrease of 37.67%. Rating agencies such as Susquehanna and Raymond James have downgraded LianGuaiyLianGuail’s rating. In this context, LianGuaiyLianGuail, whose revenue is highly dependent on Venmo, has shifted its focus to other directions. In recent years, loans, cross-border payments, and buy now, pay later (similar to Ant Group’s Huabei) all originated from this. Naturally, the profitable and already laid out cryptocurrency field has emerged in the field of vision.
LianGuaiyLianGuail’s stock price trend over the past year, source: Google Finance
It is well known that stablecoins are the most lucrative industry in the cryptocurrency field because, under the scale effect, the marginal issuance cost of stablecoins is infinitely close to zero, and their 1:1 fiat currency exchange business model is extremely profitable.
In simple terms, during the exchange process, users exchange real dollars for costless dollar-pegged stablecoins. After the issuing institution obtains costless dollars, it can appreciate through the purchase of government bonds, cash equivalents, and other means, and at least earn risk-free interest rates, almost equivalent to making money effortlessly. This doesn’t even include transaction fees, service fees, and stablecoin buybacks caused by market fluctuations, all of which contribute to their revenue.
Take Tether, the issuer of USDT, as an example. In its 2023 Q2 attestation report, Tether’s operating profit exceeded $1 billion from April to June 2023, a quarterly growth rate of 30%. It can be said that Tether is making a fortune. Compared with the Q1 data, Tether’s net profit in the first quarter of this year was $400 million, even surpassing China Unicom, one of China’s three major operators, by about 600 million yuan.
From this perspective, it is reasonable for LianGuaiyLianGuail to target the stablecoin field. Judging from the current unbinding of other cryptocurrencies, the subsequent Swap function is also expected to be available soon. Swap has a high-frequency trading scenario and a relatively stable commission rate, which can contribute sustainable income. Taking MetaMask as an example, the fee rate is 0.875%, and its revenue in 2021 reached as high as 250 million yuan.
Subsequent Impact: Stablecoin Landscape and Regulatory Swings
After discussing the reasons, let’s look at the impact. The common view is that PYUSD will directly impact the current stablecoin landscape.
According to Coinmarketcap, the current total market value of stablecoins is about $125.2 billion. Among them, Tether’s USDT has the highest market share, accounting for 66.53%, or about $83.3 billion. Circle’s USDC accounts for 20.77%, or about $41.5 billion. BUSD dropped to the fourth place after ceasing issuance, and DAI, a decentralized stablecoin, took the third place with a market share of $5.36 billion, accounting for 4.28%. It can be seen that the top three stablecoins occupy 90% of the market, showing a high concentration.
Stablecoin market value ranking, source: Coinmarketcap
Compared with other centralized institutions, LianGuaiyLianGuail is quite powerful, with a wide range of global institutions it serves. More importantly, due to the compliant and trust nature of the issuer, customer assets do not depend on the survival of the issuer, and the endorsement advantage is more obvious. As it stands, the market value of stablecoins is already declining. Not only is the total market value at a historical low, but in the past week, the market value of the top four stablecoins has fallen by $419 million, with USDT alone dropping by $325 million due to negative impacts from lawsuits.
Mainstream institutions have already shown interest in PYUSD. Tether’s Chief Technology Officer, Ardoino, stated that since PYUSD is launched in the United States and Tether is mainly focused on emerging markets, the two do not interfere with each other. However, other competitors are not the same, hinting that the USDC, a stablecoin based in the United States, is more susceptible to impact.
The USDC side is not to be outdone. Circle’s CEO, Jeremy Allaire, counterattacked in a tweet, saying that it is estimated that about 70% of USDC is used outside the United States, with the fastest-growing markets being emerging and developing markets.
Aside from stablecoin institutions with vested interests, the industry has mixed views on PYUSD.
Because PYUSD is currently only used in LianGuaiyLianGuail and Venmo, it is not yet sufficient to integrate with the DeFi ecosystem. This has led some industry insiders to believe that it is more similar to virtual points, a derivative of traditional finance, rather than a true cryptocurrency. Even if it is recognized as a cryptocurrency, the stablecoins issued on LianGuaixos, apart from BUSD’s dominance, are mostly lukewarm, and PYUSD is more likely to follow the same path.
In addition, due to the outdated code version and high cost of PYUSD, all variables related to the currency can be controlled and changed by LianGuaiyLianGuail, which has led the crypto community to believe that there is a high degree of centralization.
However, it is widely believed in the industry that the launch of this currency will promote regulatory relaxation. LianGuaiyLianGuail, the Chairman of the House Financial Services Committee of the Republican Party, has repeatedly stated that LianGuaiyLianGuail plays a positive role in the “Payment Stablecoin Transparency Act” that has been passed by the House of Representatives.
McHenry releases a statement about LianGuaiyLianGuail announcing the launch of a stablecoin, source: House Financial Services Committee official website
Currently, it is still too early to assess the industry and regulatory impact as PYUSD has not yet been listed on exchanges. However, mainstream institutions have taken defensive actions despite their casual remarks. Circle claims to have prepared over $1 billion in cash reserves to compete with LianGuaiyLianGuail, and MakerDAO has adjusted the deposit rate of their DAI in the SLianGuairk Protocol to 8% to reduce the risk of capital outflow. On the other hand, LianGuaiyLianGuail is aggressively moving forward, recently stating that launching on centralized exchanges (CEX) is a priority and they will integrate with the DeFi ecosystem.
From this, it can be seen that the battle between stablecoins is about to begin, and the partisan struggles of regulators will once again enter deep waters, stirring up ripples in the stagnant waters of the crypto world.
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