The keys are rising investor demand for crypto and regulators who have begun to "embrace" it

Expectations are building that another season for cryptocurrency may be at hand. When news broke that PayPal, which has 340 million users worldwide, would handle Bitcoin, Ethereum, Bitcoin Cash and Litecoin, the price of Bitcoin responded immediately, jumping more than 10%. The pace of the rally cooled after follow-up reports suggested the news had been overstated, but the overall strength has continued.

PayPal has obtained a license from the New York State Department of Financial Services (NYDFS) that allows it to sell cryptocurrency to ordinary customers. But PayPal is not offering a service for transferring Bitcoin. In other words, this is not a service for making payments or settlements in Bitcoin. Customers can buy or sell Bitcoin through the PayPal application (app), and PayPal itself holds the customers' crypto assets in custody.

Bitcoiners who hold to a fundamentalist standard of decentralization are wary of reading too much into the move, dismissing it as just one more centralized crypto exchange. Yet PayPal is close to the original among the techfin companies founded and made successful during the popularization of the internet, and it was also the launching point that made Elon Musk's name widely known. On the strength of that symbolism alone, one could argue the market is still underestimating the value of the news.

Mike Novogratz, the billionaire investor and chief executive officer (CEO) of Galaxy Digital, a crypto-focused asset manager, made no attempt to hide his astonishment, saying that for Wall Street the PayPal news was like the single shot fired to announce the start of a war. Measured by customer deposits, PayPal would rank among the top 30 banks in the United States, he noted, which leaves other financial firms with no choice but to ask themselves, "What are we doing?"

In a tweet he said, "Every bank will now race to offer crypto services. We have crossed the Rubicon." Chamath Palihapitiya, CEO of the private space company Virgin Galactic, also said on Twitter, "After the PayPal announcement, global banks have started discussing Bitcoin. It is no longer 'optional.'"

"The Shot Announcing the Start of a War Has Been Fired"

PayPal's corporate ethos of binding the entire world into a single payments network overlaps with the design intent of Bitcoin.

Peter Thiel, one of PayPal's founders, praised Bitcoin early on, saying that Bitcoin had accomplished what PayPal had set out to do but failed to achieve. In fact, back in 2014 PayPal announced that it would adopt Bitcoin as one of the currencies it accepted for payment. But PayPal has not always been friendly to Bitcoin. Bill Harris, a former PayPal CEO, went so far as to denounce Bitcoin as the greatest scam in history. When Big Tech companies such as Google and Facebook were blocking advertisements for Bitcoin and initial coin offerings (ICOs), he made it clear that PayPal had no intention of handling Bitcoin either.

There is nothing new about mainstream financial elites flip-flopping on Bitcoin. But the question of why now is well worth asking. In particular, we need to examine what has changed since last year's Facebook Libra episode, which amounted to little more than a storm in a teacup.

First, the establishment has detected the market demand of people who want to access cryptocurrency through large companies they can trust. Bitcoiners argue that placing one's cryptocurrency in the hands of a financial company is a betrayal of Bitcoin.

But as we saw when the U.S. Office of the Comptroller of the Currency (OCC) explicitly stated that banks may provide crypto custody services and crypto prices rose on the news, the public's perception that access to buying, storing and using cryptocurrency can only be solved by companies people trust is an inescapable reality.

According to a recent survey of 3,000 American consumers by Cornerstone Advisors, 14% of PayPal users have owned cryptocurrency at some point. Among those who do not use PayPal, only 8% have held crypto. Fifteen percent of PayPal users said they intend to buy cryptocurrency within the next 12 months. Although the survey was limited to U.S. users, if 10% of PayPal's 340 million users worldwide -- 34 million people -- were to buy Bitcoin through the PayPal app, that would exceed the number of wallets that currently hold any Bitcoin balance at all. For reference, there are 32 million Bitcoin wallets with a non-zero balance, and only 5 million of them are active wallets that actually generate transactions.

Singapore's Largest Bank Launches a Crypto Exchange

Second, regulators have set a course toward letting financial firms embrace the crypto market. When a Big Tech company such as Facebook charged ahead, the market assumed it must have reached an understanding with regulators in advance. Reality turned out otherwise. Regulators in the United States and elsewhere pushed back hard, and Facebook ultimately had to postpone the Libra project indefinitely. PayPal's declaration this time is different.

To begin with, it obtained approval from the financial authority of New York State, the first jurisdiction in the world to create a Bitcoin licensing law. And from a regulator's point of view, the substance of PayPal's business is unremarkable. It is close to the crypto custody service that the OCC said banks may provide.

Meanwhile, news followed that showed how much effort PayPal is putting into communicating with regulators. TRM Labs, a blockchain analytics firm connected to PayPal, recruited Ari Redbord, formerly an adviser at the Financial Crimes Enforcement Network (FinCEN) under the U.S. Treasury Department. The company traces transactions between wallets to uncover the routes taken by illicit funds. Mainstream companies moving into cryptocurrency are taking the lead in putting forward anti-money-laundering measures, and what is significant here is that PayPal went so far as to pick someone straight out of a supervisory agency to head that effort.

Crypto intermediaries -- the firms known as CeFi -- are hiring talent from the regulatory agencies. Kathryn Haun, the prosecutor who investigated Bitcoin-related crimes, was brought onto the board of the crypto exchange Coinbase. The sharing of a talent pool between regulators and the industry they supervise is sometimes criticized as a revolving door, but it is a path that is hard to avoid as a fledgling industry becomes mainstream.

Korea has settled on a direction that in effect delegates the licensing power over crypto exchanges to the banks. Individual banks will be allowed to decide whether to provide real-name accounts to exchanges. To survive under such a regime, exchanges will have to load their boards with people who come from banking.

To push the inference a little further, the idea is to make a promising line of business such as crypto exchanges into a new field for the banks. As a rule, mainstream elites can institutionalize a controversial industry only when they are confident they can protect their vested interests.

As if on cue, DBS Bank, Singapore's largest bank, has also launched a crypto exchange. Planning to attract mainly institutional crypto trading, this exchange -- unlike others -- does not open on weekends, and even on weekdays it trades only from 9 a.m. to 4 p.m.

The PayPal news is a symbolic sign that, 11 years in, Bitcoin is entering yet another chapter. The institutionalization of Bitcoin is no longer a matter of dispute. All that remains is the question of who will take the upper hand in this new industry.