update 1 September 2021

5 Reasons Why You Shouldn’t Store Your Cryptocurrency in PayPal

The push towards mass adoption of cryptos continues to gain momentum. Governments and prominent business leaders who had shown reservations in their adoption are warming up to the industry now. It’s easy to see why these developments cause so much excitement. These stakeholders influence significant populations in their areas of operation. Consequently, their endorsement of crypto transactions is a massive shot in the arm for the efforts geared towards their mainstreaming.

PayPal is the latest major player in the crypto world. Its announcement that it would allow digital asset transactions on its platform continues to elicit various responses. What this change of tune means to the crypto community, and if it’s sound for one to hold their funds on the platform, should they be worried?

Significance of Paypal’s Crypto Entry

PayPal’s expertise in online transactions is well known. Additionally, it has over 300 million active accounts and 26 million merchant accounts, which give it a significant reach. Its actions could potentially alter the crypto landscape.

Allowing crypto trading on its platform opens the world of digital payments to millions of people. Having an easy account set up process and its convenience are incentives for users to hold funds on its platform. However, this may not be a prudent step.

The Downside of Saving Funds On PayPal

Whereas PayPal’s entry into the crypto world is welcome, its enthusiasts should resist the temptation to hold their funds on this platform. Here are the reasons supporting that stance.

Wallets are Custodial

One of the fundamental principles governing cryptocurrencies is the decentralization of functions. Guided by this principle, many crypto projects adopt non-custodial wallets. This accord the users with ownership of their private keys hence full autonomy in their transactions.

At Odds with Basic Principles

PayPal’s crypto project runs counter to this basic tenet. Part of its terms and conditions state that users will not hold the crypto-assets themselves in their asset balances. Additionally, Paxos or any other entity that PayPal authorizes to do so will have all custody of trading and assets on the platform.

Nothing but HODL

This emasculation of the users denies them the ability to:

  • Send crypto to family and friends.
  • Purchase goods and services using cryptos.
  • Transfer their assets to another wallet on the platform.
  • Withdraw funds to an external wallet.
  • Transact on any other exchanges apart from PayPal’s sanctioned one(s).

In a nutshell, you can’t do more than HODL.

Fears of Account Suspension

A common complaint against PayPal is their swiftness to freeze one’s account at the slightest whiff of suspect activity. The firm can hold the funds for up to 180 days, presumably to authenticate the transactions. Even then, some users have complained of the firm seizing the funds after the expiration of the hold period without giving explanations. One can expect that their adoption of cryptos won’t alter this reality.

KYC Requirements

PayPal requires strict adherence to KYC requirements before one can trade on its platform. Apart from their name and physical address, a customer will have to provide their date of birth and taxpayer identifier number. Additionally, PayPal may require them to submit a copy of their government-issued photo ID or utility bill to prove their residence.

Although critical in stemming crypto support for illegal activities, KYC flies in the face of Satoshi’s intentions. To the crypto purists, these actions negate the anonymity principle inherent in blockchain technology. There’s the danger of exposure of private information.

Crypto Payments to be settled in Fiat Currency

The irony in PayPal’s crypto product is that you cannot make purchases in them despite holding them in your account. PayPal will allow you to pay in crypto while shopping with its 26 million merchants spread worldwide. But there’s a catch to it. The merchants will not receive the funds in the crypto you’ve transacted in. Instead, the platform converts the funds to fiat at a fee.

The Customers Pain

Denying customers the ability to settle transactions in crypto exposes them to higher fees than they would have incurred if the reverse were the case. The following table indicates the rates obtaining per transaction:

Purchase or sale amount Fee
1.00 – 24.99 USD 0.50 USD
25.00 – 100.00 USD 2.3% of purchase or sale amount
100.01- 200.00 USD 2.00% of purchase or sale amount
200.01- 1,000.00 USD 1.80% of the purchase or sale amount
1,000.01 USD + 1.50% of the purchase or sale amount

Caps on Transactions

PayPal limits the weekly crypto transactions to $15,000. For those intending to transact larger amounts, this regulation makes holding funds on the platform unattractive.

Final Word

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Crypto enthusiasts should welcome PayPal’s entry into the crypto space with caution. On the face of it, it is news celebrated. Its reach could make a lot of difference in the push towards mass adoption. Disappointingly though, it contradicts the very foundations of blockchain technology and cryptocurrencies. As evident from the issues raised above, it takes away a user’s autonomy in managing their account. Moreover, by appointing a third party to manage all the crypto assets and transactions on its platform, it centralizes rather decentralize them. PayPal’s new platform is in its early stages, and we may see changes in the product moving forward, but as of today, it wouldn’t make sense to hold one’s funds on the platform.

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