PayPal Remittance on Solana: A Product Case Study
Let us begin from the passionate words of Kram:
It is not just the buzzwords that I care about. Blockchain, decentralization, tokens, smart contracts, NFTs — -these are all but trees that make up a financial forest.
What I care about is that forest. I care about open finance. I care about creating a better system for people to transact upon.
It should be easy to send money. It should be easy to own assets. And it should be hard to steal money. It should be hard to appropriate someone else’s assets.
That’s why I work in “crypto.”
I believe the crypto experience is better than what exists in the real world.
Because I can send money across the world in seconds.
When I take out a loan, I don’t need to ask for permission, I just post my collateral. I own my usernames and in-game assets, and that identity travels with wherever i want to take it.
If i get nervous about a bank run or a financial application, I simply look at the code. When I purchase something, it is mine. I own my assets without qualification, without help.
Of course, too many problems still abound: high fees ravage normal users, complex UX confuses everyone, scams populate the mainstream narratives, and prices fluctuate excessively.
But these are problems that can be fixed as long as we focus on the important question:
since we’re trying to recreate finance on the internet, how can we best do it?
The global financial system, while essential for facilitating economic activity on a global scale, is faced with lots of challenges and shortcomings that hinder its effectiveness, stability, and inclusivity.
We will look into some of the prevailing problems of the global financial system:
- Inequality and Wealth Disparities:
One of the most significant problems plaguing the global financial system is inequality and wealth disparities. Access to financial services, opportunities for wealth creation, and economic mobility are often limited to privileged individuals and institutions, widening the gap between the rich and the poor; and, the unbanked.
2. Lack of Financial Inclusion:
A large portion of the global population remains excluded from formal financial services, such as banking, credit, and insurance. This lack of financial inclusion disproportionately affects marginalized communities, rural populations, and individuals in developing countries, hindering their ability to access capital, build assets, and improve their economic well-being.
3. Systemic Risk and Fragility:
The global financial system is inherently susceptible to systemic risk and fragility, as evidenced by past financial crises such as the 2008 global financial crisis. Relationship between financial institutions, complex financial products, and regulatory loopholes lead to widespread economic disruptions, threatening the stability of the entire system.
4. Regulatory Arbitrage and Jurisdictional Challenges:
Regulatory arbitrage, whereby financial institutions exploit regulatory differences between jurisdictions to gain competitive advantages, undermines the effectiveness of global financial regulations. Additionally, jurisdictional challenges and inconsistencies in regulatory frameworks complicate cross-border transactions and regulatory compliance, creating legal uncertainties and loopholes.
5. Lack of Transparency and Accountability:
Ambiguous and lack of transparency in financial markets and transactions contribute to inefficiencies, market manipulation, and fraudulent activities. Complex financial products, off-balance-sheet transactions, and shadow banking activities obscure risk exposures and hinder regulators’ ability to monitor and regulate the financial system effectively.
6. Prolonged Process: The process of completing the remittance process is tedious and tasking taking hours to days to complete a financial transaction.
A typical case of traditional remittance represented in the diagram above:
- Initiation:
- Sender initiates a remittance transaction to send money to a recipient in another country.
2. Sender Verification:
- The remittance service provider verifies the sender’s identity and ensures compliance with anti-money laundering (AML) and know your customer (KYC) regulations.
3. Funds Collection:
- Sender deposits the funds into the remittance service provider’s account or provides cash at a physical location.
4. Conversion (Optional):
- If the sender’s currency differs from the recipient’s currency, the remittance provider may convert the funds into the desired currency, often at a fee or exchange rate markup.
5. Transfer Initiation:
- The remittance service provider initiates the transfer of funds to the recipient’s country through various channels such as banks, payment networks, or third-party intermediaries.
6. Intermediary Processing:
- Funds may pass through multiple intermediaries, such as correspondent banks or clearing houses, as they are routed to the recipient’s country.
7. Recipient Payout:
- Once the funds reach the recipient’s country, the remittance service provider facilitates the payout to the recipient through various methods, including bank deposits, cash pickup, mobile wallets, or prepaid cards.
8. Recipient Notification:
- The recipient is notified of the availability of funds and may be required to provide identification to claim the remittance.
9. Recipient Verification:
- The remittance service provider verifies the recipient’s identity and ensures compliance with AML(Anti-Money laundering) and KYC (Know -Your-Customer) regulations before disbursing the funds.
10. Funds Disbursement:
- The recipient receives the funds in their preferred form, either as cash, digital currency, or credited to their bank account.
11. Transaction Completion:
- The remittance transaction is considered complete once the funds are successfully disbursed to the recipient and any associated fees or charges are deducted from the sender’s account.
12. Confirmation and Tracking:
Both the sender and recipient may receive confirmation of the transaction, along with tracking information to monitor the status of the remittance. Long process!
How PayPal can Change Remittances' using PYUSD on Solana
The prevailing problems of the global financial system are multifaceted and interconnected, posing significant challenges to economic stability, inclusivity, and sustainability. Blockchain technology can address this problem through it’s novel Decentralized finance DeFi and tokenization.
DeFi integrations, is becoming more and more well-liked as a better approach to financial transactions that does not require middlemen like banks.
A good example happened recently as the top regulated blockchain and tokenization infrastructure platform, Paxos, profiting from Solana’s high-performance architecture and intends to make the USDP stablecoin available to the general public in mid-January 2024.
The USDP stablecoin that Paxos plans to make publicly available is an extension of their expanding payments ecosystem on the Solana blockchain. We have also seen other Stables being launched on the ecosystem such as the USDY and OUSG integrations by Ondo finance.
DeFi as a blockchain-based financial services provider solve global financial issues highlighted above through lending, borrowing, trading, and investing among other services. PayPal PYUSD with a market capitalization of over $290 million, integrating into Solana high volume on-chain transaction’s ledger solves the problems of global finance.
For a user to make a payment, transactions on Solana blockchain ledger and PayPal must perform a one-time exchange of account identity credentials. This in turn goes through both parties authentication. PYUSD can then be used for transaction settlement over and over.
Authentication and Association: Onboarding of users is done when a user express interest in a financial instrument, and, in this case PayPal. Paypal authenticate users bio-data. The bio-data is shared with Solana.
Solana requests if the user is associated to PayPal through captured user data and users that are stored on-chain on Solana network. Users data stored on-chain can be called on through the network data account when making purchase, remittance or other transactions.
Purchase: Users can make purchase using PYUSD to different merchants using Solana Pay integration. All that is required is that the Solana ledger sends a remittance statement to PayPal in order to secure user funds and to know the appropriate amount. Once confirmed, often through an OTP code or on-chain signature, transaction is approved.
Remittance: Users on the Solana network sends remittance statement through its account ledger to PayPal for a specific amount of PYUSD. PayPal authenticates that the user has an instrument on the platform. It responds to the required amount of PYUSD by sending it to the Solana wallet address.
These process occurs in couple of minutes and remittance transaction is completed. However, in the diagram below we showed how the actual remittance flow between these parties occurs, the authentication, the notification and acceptance, and, how funds are being disbursed to the appropriate SOL wallet address on-chain.
Remittances, the transfer of money by foreign workers to their home countries, represent a significant aspect of global finance. Traditional remittance methods are often plagued by high fees, lengthy transaction times, and lack of transparency. However, the integration of blockchain technology through Solana and Stablecoins like PYUSD, presents a transformative solution to the challenges highlighted above.
From the above diagram:
- Solana Blockchain (Account Ledger): The on-chain ledger on Solana network that does the authentication check, along with other authentication tasks.
- PayPal: The company that offers PYUSD payment to its users.
- PYUSD: The Stable coin that PayPal uses for financial settlement.
- Solana Wallet Address: The wallet address that Solana uses in transactions for tokens.
In the above example, we saw how PayPal, a leading digital payments platform, can leverage PYUSD on Solana to revolutionize the remittance payment process and drive mass adoption.
The benefits of this integration through the blockchain technology can be seen in the following instance:
- Instant Transactions:
Utilizing Solana’s high throughput and low latency, PayPal can enable near-instantaneous remittance transactions for its users. Leveraging the lightning-fast transaction speeds of Solana, users can send and receive PYUSD across borders in a matter of seconds, eliminating the delays associated with traditional remittance methods.
2. Cost-Efficiency:
Traditional remittance services often impose exorbitant fees on users, eating into the funds intended for recipients. With Solana’s low transaction costs, PayPal can drastically reduce remittance fees, making cross-border transfers more affordable and accessible to users of all income levels.
3. Transparency and Security:
Blockchain technology inherently provides greater transparency and security compared to traditional financial systems. With Solana’s immutable ledger, PayPal can offer users real-time visibility into the status of their remittance transactions, enhancing trust and reducing the risk of fraud or errors.
4. Global Accessibility:
PYUSD, as a stablecoin on Solana, offers global accessibility and interoperability especially with recent fitch ratings on the instrument. Users can seamlessly convert PYUSD to local fiat currencies or other digital assets, facilitating cross-border transactions without the need for currency conversions or intermediaries.
5. Integration of PayPal Ecosystem and RWA:
PayPal can seamlessly integrate PYUSD remittances into its existing ecosystem, allowing users to send and receive funds directly from their PayPal wallets. This integration streamlines the remittance process, using PayPal’s user-friendly interface and extensive network to drive adoption in tokenization of RWAs among its vast user base.
6. Regulatory Compliance:
Compliance with regulatory requirements is paramount in the remittance industry. The Solana’s ecosystem, with its SPL token standard, which expanded to Token extensions. Their are different types of extensions that ensures adherence to regulatory standards and KYC/AML. Token extensions such as transfer hooks, transfer fees and confidential transfers ensures that PayPal can offer remittance services in compliance with global regulations, mitigating legal risks and ensuring user protection.
7. Educational Initiatives:
To drive mass adoption of PYUSD remittances, PayPal can invest in educational initiatives and hackathons to raise awareness among its users. As a result of providing resources, tutorials, and incentives, PayPal can empower users to embrace blockchain-based remittance solutions and capitalize on the benefits they offer.
Revenue Feasibility:
Potential revenue growth potential for PayPal when partnering with Solana would involve assessing various factors such as market demand, competitive market share, technical integration, regulatory considerations, and potential synergies between the two platforms in the following areas:
- Market Demand:
The demand for stablecoin transactions within PayPal’s existing user base and the broader market will continue to rise as highlighted above with a broad adoption of DeFi as a whole in different sectors such cross-border payments, remittances, e-commerce transactions, and peer-to-peer transfers. The growth trajectory of stablecoin adoption and the potential for increased demand with PayPal’s entry into the market will be exponential.
2. Payments:
PayPal’s unique value proposition and competitive advantages with Solana infrastructure, such as low transaction costs, scalability, speed and security using custom token extension will outweigh other blockchain platforms within DeFi ecosystem. Furthermore, integrating Solana’s blockchain technology with PayPal’s existing infrastructure will not be complicated due to its interoperability.
3. Distribution:
PYUSD’s distribution earlier this year, based on Nansen on-chain data held in different exchanges are: 38.7% (112.8 million) of the total token supply is held by Crypto.com, which has the greatest chunk. This is followed by DeFiance Capital with 39.1 million (13.4%), Curve with 32.4 million (11%), Kraken with 31.92 million, and Paxos with 30 million. While Tether USD still maintain the lead in blockchain stablecoins ($98 billion), PYUSD integration with Solana creates an opportunity for joining the Tether’s league of co-dominance, aligning with PayPal's revenue goals.
Final Thoughts
PayPal has the opportunity to revolutionize the remittance industry by leveraging PYUSD on Solana. Through instantaneous transactions, cost-efficiency, transparency, and global accessibility, PayPal can address the pain points of traditional remittance services and drive mass adoption among its user base. Therefore, embracing blockchain technology and offering innovative solutions, PayPal can position itself as a leader in the future of cross-border payments and financial inclusion.
Appreciation: Special thanks to Yash Agarwal for his writing insights and Arjun who reposted the crypto notes of Kram. It really help me with coming up with this essay.
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