Financial Inclusion

PayPal one of the largest payment networks in the world with more than 25 million merchants and more than 300 million accounts has announced a partnership with New York located and financially regulated PAXOS to allow all PayPal account holders to trade cyrptos and to accept or make crypto payments. PAXOS own website advertises “hold US dollars without opening a US dollar Bank account”

You may find it surprising that Ayodo Foundation, with its mandate for Financial Inclusion, would be supportive of PayPal’s initiative. Consider the diagram below and Imagine all Yodo Merchants being fully vetted and strictly regulated (KYM) and further assume a PayPal account is required of each registered merchant. Everyone below the red-dotted line in the diagram, the YodoPay mobile customers, would transact in fiat cash, transformed of course into “cloud money”. The required Merchant Settlement could be performed using the merchants’ own PayPal accounts. Originally Ayodo was planning to perform this settlement function using a product such as the block chain project Centarus but deploying with PayPal could accelerate the product development cycle and be mutually beneficial.

Ayodo was not supportive of Facebook’s earlier attempt to launch Libra, due largely to Facebook’s proven inability to protect user’s personal data. You may also remember PayPal was initially a major supporter of Libra prior to backing out when several regulatory bodies voiced their concern. The difference here is PayPal has payments ( think bank-security) in its DNA, and both PayPal and PAXOS are already established regulated financial entities. Additionally Paxos offers a white labelled Stable Coin (USD backed) so when it comes to using the virtual coins, the Yodo merchants settling with PayPal could effectively still be transacting on a cash basis. ” PayPal will convert the cryptocurrency into the relevant national currency, so the company being paid will never receive the virtual coins – just the correct amount of pounds or dollars”. Effectively combining the efficiencies of the blockchain, the stability of fiat-backed cryptos plus instant automated Cash-In Cash-Out to the merchants, which has often been a major hindrance to greater Financial Inclusion.

Dependent upon PayPal’s fee structures, this development could represent a positive outcome for Financial Inclusion, especially if applied to Yodo’s global merchant settlement. PayPal’s intentions, of course, are to roll out the service to all PayPal account holders, whereas Ayodo believes it would be better for the service to be rolled out first to registered merchant account holders. A global service permitting registered merchants to hold, trade and settle with each other via their PayPal accounts using a stable coin and a block chain could be mutually beneficial and more accommodating of regulator angst. The majority of customers, especially those living on modest incomes, are not interested in holding, trading or paying with crypto currencies and similarly the small merchants they patronize, would likely prefer to accept cash. The nearly 2 billion unbanked adults would not use a PayPal account for the same primary reason Findex has consistently found – they do not have a bank account for lack of financial resources. This won’t change simply by offering PayPal in a Crypto version. Worldwide small Merchants, busy running their businesses, are themselves often not financially sophisticated, nor prepared to suffer a potential loss due to the high volatility of crypto values. They may, however, be quite accepting of the use of a stable coin and prepared to entrust PayPal to settle, or pay them in local fiat currencies, when it would help build their customer base and introduce business and cost efficiencies to their payments practices by accepting not-for-profit payments schemes such as mobile YodoPay.

Interesting also, therefore that recent Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the Act) changes, effective June 1, 2020, include entities trading in virtual currencies under FINTRAC’S purview to align with FATF Regulation 16 . Wisely the guidelines only apply on Crypto transactions exceeding $1,000 which is similar to the “carve out” to the rules for pre-paid products, the exemption which has allowed YodoPay to remain an anonymous mobile payments product since inception. Assuming merchant settlements are timed to automate at values below this $1,000 threshold, PayPal’s new service may represents an ideal system for Ayodo’s own vision of Global-Yodo-Merchant-Settlement (GYMS).

Especially in the developing world, small merchants are most often long term, well known licensed members of their communities. Merchants are of fixed physical location and more likely than their customers to be themselves banked. Perfecting a cash based Merchant centric paradigm would allow the bar to be raised on monetary transactions, preserving necessary KYM requirements on the merchants. All significant movement of funds would occur at the top of the pyramid on fully regulated channels and even here could be limited to amounts less than one thousand dollars in each instance. Know-Your-Merchant (KYM) requirements, with only balance and velocity constrains on individual pre-paid customer accounts, would ease the regulatory compliance costs while allowing individuals to transact digitally. Merchant settlement effectively aggregates the flow of cash through the regulated channel (PayPal) which can result in cost efficiencies. Replace difficult to implement and enforce KYC with easier to implement and enforce KYM. By regulating and monitoring Merchants themselves, while allowing individuals to transact digitally on essentially fiat cash yet in a fully digital form, will create a more inclusive financial system.

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