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Aug 7 (Reuters) - Payments giant PayPal (PYPL.O) said on Monday it has launched a U.S. dollar stablecoin, becoming the first major financial technology firm to embrace digital currencies for payments and transfers.

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 2.5% in afternoon trading, reflects a show of confidence in the troubled industry that has over the last 12 months grappled with regulatory headwinds that were exacerbated by a string of high-profile collapses.

Prior attempts by major mainstream companies to launch stablecoins have met fierce opposition from financial regulators and policymakers. Meta's (META.O), 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.

Last month, the U.S. 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.

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

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Argus Research Corp analyst Stephen Biggar said PayPal's brand name makes the stablecoin launch significant but the company has been associated with crypto previously so it's not a surprise.

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

Reporting by Jaiveer Singh Shekhawat and Manya Saini in Bengaluru and Tom Wilson in London; Editing by Nivedita Bhattacharjee, Shounak Dasgupta and Shinjini Ganguli