Digital payments company PayPal (PYPL) just launched a U.S. dollar-pegged stablecoin called PayPal USD, becoming the latest firm to offer customers a stablecoin payment option.

PayPal USD would allow customers to transfer the stablecoin between digital wallets, send person-to-person payments, fund purchases via the digital currency, and convert any of PayPal's supported cryptocurrencies to and from PayPal USD.

The new stablecoin is fully backed by U.S. dollar deposits, short-term Treasurys, and cash equivalents. As with most USD-backed stablecoins, it's redeemable for U.S. dollars at a 1-to-1 ratio. PayPal is partnering with Paxos Trust Company, a New York-based fintech company specializing in blockchain, to issue the digital coin.

"The shift toward digital currencies requires a stable instrument that is both digitally native and easily connected to fiat currency like the U.S. dollar," said Dan Schulman, PayPal's president and CEO.

Should You Invest?

Like derivatives, stablecoins derive their value from another financial asset, which tends to add new layers of risk, complexity, and volatility. Even stablecoins backed by the U.S. dollar or Treasury bonds are not immune to volatility, given the stunning collapse of TerraUSD last year.

Given PayPal USD's peg to the U.S. dollar, any significant depreciation of the dollar could also affect the coin's value. On the other hand, stablecoins like PayPal USD offer consumers increased flexibility and payment options, as well as a decentralized means of finance.

SEC's Crackdown on Crypto

Paxos, PayPal's partner in issuing the stablecoin, has recently run afoul of the Securities and Exchange Commission (SEC), which threatened to sue Paxos in February on grounds that the company's Binance USD coin was not a registered security.

It was part of a wider crackdown by the agency on crypto companies that it believes are violating federal investment laws and whose crypto assets could pose a threat to the financial system. Enforcement action accelerated after the collapse of the cryptocurrency Luna and its associated stablecoin, TerraUSD, last year.

While the SEC has gone after a number of crypto firms in recent years, it has yet to develop a framework for defining and regulating stablecoins. In its February notice against Paxos, the SEC alleged that Binance USD constitutes an investment contract with profit-earning potential, and therefore qualifies as a security. This stance was different from the one the agency took against Terra, which was considered an algorithmic stablecoin not backed by actual investments.

Stablecoins are cryptocurrencies whose value is pegged to that of another financial instrument, usually a currency or commodity, and can be used as a means of payment. U.S. dollar-backed stablecoins are among the most prevalent, the biggest of which include TetherUSD, USD Coin, and Binance USD.