Yesterday custody and trading platform Anchorage Digital announced that holders of the PayPal USD (PYUSD) stablecoin can earn rewards. Anchorage Digital’s new rewards program targets institutions that keep their stablecoins in the Anchorage Porto self-custody wallet.
In a previous iteration of this article, we stated that by working with PayPal there was an implication that PayPal was paying for the rewards – not directly but indirectly. A spokesperson for Anchorage Digital objected to this, saying that it is Anchorage Digital paying for the rewards.
However, we’d note that the new rewards program is only for existing institutional clients looking to custody PYUSD, not other stablecoins (so far).
Anchorage Digital emphasized the stablecoins remain in the client wallets. It is not staking the stablecoins, lending them out or re-hypothecating them in any way.
If the custody firm isn’t making use of the assets, there’s a question regarding the business model. However, Anchorage Digital didn’t specify the amount of the reward, so perhaps the rewards are sufficiently small that they’re less than the cost of using the wallet. We’ve requested an indication of the reward size.
Stepping back, the only party that’s really earning a return is PayPal on the stablecoin reserves. Which is why, in our view, it would seem logical for them to incentivize Anchorage Digital. While the Anchorage Digital spokesperson implied that’s not the case, we await a response to more detailed questions.
PayPal Ventures is an investor in Anchorage Digital alongside Visa, KKR, Goldman Sachs, Apollo, GIC and several other big names.
“Crypto innovators want to put their treasury cash to work but cannot compromise on asset security or accessibility,” said Nathan McCauley, CEO and Co-Founder of Anchorage Digital. “That’s why Anchorage Digital is proud to work with PayPal, a publicly-traded company with a proven track record in crypto innovation to launch Anchorage Digital’s stablecoin rewards program featuring PYUSD.”
Paxos is the issuer of the PayPal stablecoin. However, earlier this year PayPal landed its own trust charter, which would allow it to issue the stablecoin directly.
Stablecoin competition hots up
Last week Ledger Insights ran an opinion piece highlighting the need for asset managers to earn returns on their stablecoin holdings.
As more stablecoin issuers enter the market, the fight for market share is likely to become more competitive. One way to compete is to ‘reward’ holders or distributors of the stablecoins. At the same time, offering direct returns on stablecoins is not permitted in several jurisdictions as it’s a banking-like service. Anchor Digital Bank happens to be the first and only federally chartered crypto bank in the United States, although the Anchorage Digital spokesperson emphasized it is not the bank paying the rewards.
We recently highlighted the M^0 protocol, which aims to share the return on stablecoin reserves with distributors. M^0 was inspired by the MakerDAO, the protocol behind the DAI stablecoin. The DAO holds significant amounts of the USDC stablecoin. In 2022 MakerDAO first did a deal with Coinbase for it to custody around $1.6 billion in USDC in return for Coinbase paying a 1.5% reward.
Hence, institutional rewards on stablecoins aren’t that new. It’s just likely to become more common.
Update: we updated this article to incorporate the response from Anchorage Digital that it is paying for the rewards, and denying the implication that PayPal was paying indirectly or that there was a deal with PayPal. We have requested further clarifications.
