The PayPal application on an Apple iPhone.
Andrew Harrer | Bloomberg | Getty Images
It is easier than ever to buy bitcoin. But be careful which platform you choose, because you may not actually own the bitcoin that you are buying.
Just take PayPal.
The digital payments company made a big push into crypto last year, and the platform now allows users in the U.S. to buy, sell, hold, and checkout with cryptocurrencies, including bitcoin, ethereum, bitcoin cash, and litecoin. Venmo, the mobile wallet owned by PayPal, also lets customers buy and sell cryptocurrencies.
Sounds pretty great, right?
But those coins you’re buying are not technically yours.
“PayPal manages the wallets, which means that you don’t necessarily hold your own bitcoin,” said Mike Bucella, general partner at BlockTower Capital.
Typically, when you purchase bitcoin, you are given two things to make that ownership official: A public and a private key pair. The public key is your wallet address, and the private key gives you control of that wallet.
With PayPal, you have access to your public address, but the company controls the private key.
In the “Crypto on PayPal FAQ” section of the app, the company explains that “the crypto in your account cannot be transferred to other accounts on or off PayPal.” It is a limitation which feels odd, given that this is meant to be an asset you own.
You can think of the custodial arrangement as a kind of IOU for your bitcoin.
“It’s similar to when you deposit U.S. dollars with Bank of America,” said Asheesh Birla, a general manager at Ripple. “You’re trusting that Bank of America actually has your U.S. dollars in their bank accounts, and they’re giving you an IOU.”
This means that customers can’t move their bitcoin to cold storage, nor can they transfer tokens to a wallet outside of the PayPal ecosystem.
Bucella explained that while the user is very limited in terms of what they can do with the asset, from a business perspective, it makes perfect sense for PayPal.
“It reduces a lot of the Know -Your-Customer (KYC)/anti-money laundering (AML) potential issues that some of the larger players had in managing wallet-to-wallet transfers that are not within their platform.”
To be fair, not everyone wants the responsibility of safeguarding their crypto holdings.
“If you lose the public and private key, you lose your coin,” said Birla. “If you’re a novice in the crypto space and you’re not comfortable holding your own private and public key, then it might be safer to delegate that access to PayPal.”
Ripple’s former CTO, for example, lost his private key, forfeiting about $400 million worth of bitcoin at today’s token price.
PayPal’s interface itself is pretty easy to use.
As soon as this service launched on PayPal, Bucella tested it out. “It is a fairly seamless UX…If I plan on doing nothing but buying and holding my bitcoin, and I don’t want to custody my own crypto, then it makes sense.”
If you already have a PayPal account, essentially all it takes to get in the crypto game is clicking a little button under bitcoin that says “Buy.”
“There’s very low friction,” explained Birla. “And if you’re going to buy just a bit, and you trust PayPal, that’s fine.”
People who care about self custody “are obviously not going to be using the service,” said Mati Greenspan, portfolio manager and founder of Quantum Economics.
As with any centralized exchange, you do assume a certain amount of risk.
PayPal has a long history of freezing accounts, much to the annoyance of some users. Centralized exchanges are also inherently vulnerable to threats that could potentially affect an entire network of users.
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