How Mastercard's crypto strategy is distinct from its new stablecoin plans

How Mastercard’s crypto strategy is distinct from its new stablecoin plans

The crypto space lit up late Wednesday when news broke that Mastercard was expanding the scope of its digital currency support.

Mastercard said in a blog post that it was moving to enable its systems to facilitate payments in the form of stablecoins directly to merchants who choose to accept them. Such a service will complement Mastercard’s existing crypto card-focused offerings, through which consumers can spend their cryptocurrencies via an issuer’s card – though in the end, the transaction is settled outside of Mastercard and in the form of fiat currency like the U.S. dollar.

The payments firm’s chief financial officer, Sachin Mehra, discussed the expanded offerings during a virtual event hosted by Goldman Sachs on Wednesday, according to a published transcript obtained by The Block. But more broadly – and, perhaps, more importantly – Mehra provided a clear-cut break down of how Mastercard views what he termed “sub-categories” of digital currencies: cryptocurrencies, fiat-backed stablecoins and central bank digital currencies, or CBDCs.

Mehra called crypto “an asset class,” adding: “It’s not a payment vehicle as far as we’re concerned.” He spoke about Mastercard’s crypto card program and indicated that such efforts would continue and grow over time. “We’re seeing tremendous growth in that space,” said Mehra, saying later:

“So that’s kind of – and we’ve got numerous agreements in that regard, which are already in play. And we’ll continue to do more and more of those because people want to be able to use that asset class to make payments at the point of sale.”

On the subject of stablecoins, Mehra noted that “we have plans to enable those, regulation pending, across our network.”

Mehra continued:

“So in other words, the delivery of those stablecoins and to allow the settlement of those stablecoins with those merchants who wish to be settling in those stablecoins on a forward-going basis. So we are enabling our network to allow for that to happen yet this year.”

Lastly, Mehra discussed Mastercard’s work in the area of CBDCs, which is perhaps a bit more theoretical given that such currencies remain in their nascent stage. Yet payments firms big and small appear to be positioning themselves as possible service providers should they take off – PayPal being one of those, according to statements from the firm’s leadership – and it seems that Mastercard is no exception.

“We can bring the technology,” said Mehra. “We have – we’re the leader – one of the leaders in terms of the patents we have developed in terms of DLT. And how we can help [central banks] at the infrastructure level and/or the application and services level is something we remain engaged with on numerous [fronts] with several central banks.”

Mehra concluded his remarks by calling the broader crypto sphere “a space to keep an eye on.”

“I think it will ebb and flow depending on what the flavor of the day is as it relates to cryptos. We’ve seen run-ups in crypto prices in the past. But broadly speaking, the use of digital ledger technology is something we will remain focused on.”

One potential conclusion from Mehra’s comments is that whereas Mastercard is interested in capturing value around the interest in cryptocurrencies, the payments firm views stablecoins as worth the investments required to integrate them into its systems. And as for CBDCs, those remain on the horizon – albeit one that might one day constitute an entirely new business line.

Mastercard will soon support cryptocurrencies, but Bitcoin may not be one of them

Mastercard has outlined a strict set of criteria that cryptocurrencies will have to fall under to be directly supported on its payments network as part of changes being made this year. The financial services giant, during 2021, will begin to support select cryptocurrencies if they prove to be secure, compliant with industry standards and regulations, as well as proving stable enough to be used as a “vehicle for spending”. Not all cryptocurrencies will be supported on Mastercard’s network, however, and the company has strongly suggested many of the most mainstream assets, such as Bitcoin, won’t make the cut. The firm has hinted, instead, that it will rely on partnerships with central banks to create new digital assets that are likely to be so-called ‘stable coins’ - cryptocurrencies that are pegged to fiat currencies, such as the dollar. “Mastercard isn’t here to recommend you start using cryptocurrencies,” said Mastercard’s ‎EVP for blockchain, digital asset products and partnership, Raj Dhamodharan. “But we are here to enable customers, merchants and businesses to move digital value - traditional or crypto - however they want. It should be your choice, it’s your money. “Doing this work will create a lot more possibilities for shoppers and merchants, allowing them to transact in an entirely new form of payment."

Bitcoin is the most widespread cryptocurrency, making it an ideal candidate, on paper. Although it has enjoyed a surge in valuation and popularity in recent months, it’s this wild fluctuation in price that makes it unlikely that Bitcoin will be supported. Mastercard has outlined four criteria that cryptocurrencies must firmly fall under before they can be considered for support on its payments network: Consumer protections : The same level of privacy and security of consumer information that people have come to expect in their credit cards.

The same level of privacy and security of consumer information that people have come to expect in their credit cards. Strict compliance with protocols : Cryptocurrencies must follow standards in the financial industry, including Know Your Customer, which is designed to “snuff out” illegal activity and deception in payment networks.

Cryptocurrencies must follow standards in the financial industry, including Know Your Customer, which is designed to “snuff out” illegal activity and deception in payment networks. Legally-sound : Candidates must be legal and compliant with local regulations in the regions in which they’re used.

Candidates must be legal and compliant with local regulations in the regions in which they’re used. Stability: Most importantly, Mastercard will only support digital assets that offer the stability people need in a vehicle for spending, not investment. Considering the likes of Ether and Bitcoin, two of the most widely-used cryptocurrencies, are deemed highly volatile and subject to surges and crashes, it’s unlikely they’ll be deemed stable enough to be considered. This isn’t to mention the likes of Dogecoin, which has similarly surged wildly in recent weeks due to interest from figures like Elon Musk. Cryptocurrencies have also been at the centre of organised crime in recent years - famously used to launder money by those behind Silk Road. Bitcoin is also among cyber criminals’ preferred payment methods following a ransomware attack, due to the high degree of anonymity it offers.

Mastercard will support cryptocurrency payments later this year

Mastercard has become the latest payment company to give cryptocurrencies its blessing. The financial services firm has begun preparations to support select cryptocurrencies later this year, Mastercard’s digital asset and blockchain VP Raj Dhamodharan said in a blog post.

Of course, if you want to be part of the establishment, you have to play by the rules. After seeing a surge in crypto transactions, Mastercard is gearing up to onboard select currencies that meet its criteria around security, reliability and compliance. That effectively means that many virtual currencies may not make the cut at the first hurdle. At the same time, the move will allow many more retailers to accept crypto as a form of payment.

The primary metric that a stablecoin will be judged by is consumer protection, including privacy and strict oversight of consumer information — essentially “the same level of security people have come to expect in their credit cards,” Dhamodharan said.

In addition, cryptocurrencies will need to implement strict compliance measures, including “Know Your Customer,” which put simply is the customer verification process used by the financial services industry. They must also adhere to local laws and regulations in the regions they operate in. Finally, the digital assets must be accepted as a form of payment, instead of functioning as an investment opportunity.

“This is a big change that will require a lot of work. We will be very thoughtful about which assets we support,” Dhamodharan adds.

Mastercard’s decision to fully embrace crypto follows in the footsteps of fellow payments firm PayPal — which began allowing US users to buy, sell and hold virtual currencies in November. Tesla also recently purchased $1.5 billion in Bitcoin and said it would soon start accepting it as a payment.

For its part, Mastercard has dabbled in crypto, but has never allowed the currencies to move through its network, instead relying on its partners (including Wirex and BitPay) to convert the digital assets into traditional currencies for spending. It also holds 89 blockchain patents globally, with an additional 285 applications pending.