This file photo dated July 17, 2019 shows a PayPal call center in Chandler, Arizona. (PHOTO / AP)

Payments giant PayPal said on Monday it has launched a US dollar stablecoin, becoming the first major financial technology firm to embrace digital currencies for payments and transfers.

PayPal's announcement, which lifted its shares 2.66 percent on Monday, reflects a show of confidence in the troubled cryptocurrency industry that has over the last 12 months grappled with regulatory headwinds that were exacerbated by a string of high-profile collapses.

While stablecoins - crypto tokens whose monetary value is pegged to a stable asset to protect from wild volatility - have been around for years now, they are yet to successfully make headway into the mainstream consumer payments ecosystem.

PayPal's announcement, which lifted its shares 2.66 percent on Monday, reflects a show of confidence in the troubled cryptocurrency industry that has over the last 12 months grappled with regulatory headwinds that were exacerbated by a string of high-profile collapses

Instead, consumers mostly use stablecoins as a means to trade other cryptocurrencies, like bitcoin and ether. The world's largest stablecoin is Tether, followed by USD Coin, which is issued by crypto provider Circle.

Prior attempts by major mainstream companies to launch stablecoins have met fierce opposition from financial regulators and policymakers. Meta's, then Facebook, 2019 plans to launch a stablecoin, Libra, were foiled after regulators raised fears it could upset global financial stability.

A string of major economies, from Britain to the European Union, have since laid out rules to govern stablecoins. The EU's policies will come into force in June 2024.

"PayPal isn’t quite as polarizing as Facebook, but it’s a high-profile name that will surely get attention on Capitol Hill, and from the (Federal Reserve) and (Securities and Exchange Commission)," said Ian Katz, managing director of Capital Alpha Partners, in a note.

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Last month, the US House Financial Services Committee also advanced a bill to establish a federal regulatory framework for stablecoins, which will focus on rules for the registration and approval process for stablecoin issuers.

A Pakistani money trader shows $100 notes at a currency exchange office, in Lahore, Pakistan, on Jan 28, 2023. (PHOTO / AP)

In a statement on Monday, Representative Patrick McHenry, the committee's Republican chair, said that PayPal's announcement is an indication that stablecoins "hold promise as a pillar of our 21st century payments system."

PayPal's stablecoin, dubbed PayPal USD, is backed by US dollar deposits and short-term US Treasuries, and will be issued by Paxos Trust Co. It will gradually be available to PayPal customers in the United States

"We are currently at a crossroads to keep America at the forefront of digital asset innovation. Congress is making significant, bipartisan progress on legislation to ensure the US leads the financial system of the future," he said.

PayPal's stablecoin, dubbed PayPal USD, is backed by US dollar deposits and short-term US Treasuries, and will be issued by Paxos Trust Co. It will gradually be available to PayPal customers in the United States.

The token can be redeemed for US dollars at any time, and can also be used to buy and sell the other cryptocurrencies PayPal offers on its platform, including bitcoin.

"PYUSD is the first of its kind, representing the next phase of US dollars on the blockchain," Paxos posted on messaging platform X, formerly known as Twitter. "This is not just a milestone moment for Paxos & PayPal, but for the entire financial industry."

READ MORE: EU agrees tough line on digital currencies like Facebook's Libra

Visa also said in 2021 it will allow the use of cryptocurrency to settle transactions on its payment network.