PayPal has announced the launch of a new service enabling its customers to buy, hold and sell cryptocurrency directly from their PayPal account.

The US payments giant also signalled its plans to significantly increase cryptocurrency's utility by making it available as a funding source for purchases at its 26 million merchants worldwide.

Mainstream adoption of cryptocurrencies has traditionally been hindered by their limited utility as an instrument of exchange due to volatility, cost and speed to transact. However, COVID-19 has accelerated an already significant shift to digital wallets backing online transactions.

"The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly," said Dan Schulman, president and chief executive of PayPal.

"Our global reach, digital payments expertise, two-sided network, and rigorous security and compliance controls provide us with the opportunity, and the responsibility, to help facilitate the understanding, redemption and interoperability of these new instruments of exchange.”

He added: “We are eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce."

PayPal will initially feature Bitcoin, Ethereum, Bitcoin Cash and Litecoin, directly within its digital wallet. The service will be available to PayPal accountholders in the US in the coming weeks.

The company plans to expand the features to Venmo and select international markets in the first half of 2021. It is enabled in the US through a partnership with Paxos Trust Company, a regulated provider of cryptocurrency products and services.

PayPal has also been granted a first-of-its-kind conditional Bitlicense by the New York State Department of Financial Services (NYDFS).

As part of this offering, PayPal will provide accountholders with educational content to help them understand the cryptocurrency ecosystem, the risks and opportunities related to investing in cryptocurrency, and information on blockchain technology.

There will be no service fees when buying or selling cryptocurrency until the end of this year, along with no fees for holding cryptocurrency in a PayPal account.

Consumers will be able to instantly convert their selected cryptocurrency balance to fiat currency, while merchants will have no additional integrations or fees, as all transactions will be settled with fiat currency at their current PayPal rates. In effect, cryptocurrency simply becomes another funding source inside the PayPal digital wallet.

In addition, PayPal has been exploring the potential of digital currencies through partnerships with licensed and regulated cryptocurrency platforms and with central banks around the world.

For the past five years, PayPal has increased its focus and resources on exploring the next generation of digital financial services infrastructure and enhancements to digital commerce through an internal blockchain-focused research team.

In 2019, PayPal Ventures invested in TRM Labs, a company focused on helping financial institutions prevent cryptocurrency fraud and financial crime, and Cambridge Blockchain, a blockchain-based identity management and compliance software company.

Commenting on the move, CryptoCompare chief executive Charles Hayter said that it brings digital assets to the mainstream public in a more meaningful way than anything else we have seen this year - although users will not be allowed to transfer cryptocurrency to or from PayPal and will not control their private keys.

"So whilst cryptocurrency adoption will grow thanks to PayPal’s move, the firm won’t be a true on-ramp to the cryptocurrency ecosystem as users who purchase cryptoassets using PayPal will be unable to interact with blockchain-based applications.

“Retail trading of bitcoin has been a significant profit generator for Square and PayPal has been rewarded for tapping into this lucrative market with a four per cent bump in stock price - we can expect to see more payment providers follow suit," added Hayter.

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