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 cryptocurrencies—but not the ones you think

Mastercard said on Wednesday that it is planning to support cryptocurrencies natively on its network. If this actually happens, it will be a big deal, helping to further legitimize virtual currencies and dramatically expand the market for their use.

However, Mastercard says that it’s only going to support cryptocurrencies that meet a number of requirements—including stability, privacy, and compliance with money laundering laws. The problem is that few cryptocurrencies meet Mastercard’s criteria. Indeed, it’s not clear if any of them do.

It’s hard to be both decentralized and regulated

Bitcoin, the first cryptocurrency, was designed to disrupt the power of governments and conventional financial institutions. The bitcoin network has a decentralized architecture that puts it beyond the reach of any government. Without government backing, bitcoin’s price is highly volatile. Users have no recourse against funds lost to hacking or fraud. The bitcoin network doesn’t comply with anti-money laundering laws that conventional financial networks must follow—though some bitcoin intermediaries do.

For bitcoin purists, these are points in bitcoin’s favor. They believe that bitcoin’s open architecture and lack of red tape makes it a fertile platform for innovation and a check on the power of governments. But these same characteristics make the network a nightmare for financial institutions that do need to offer consumer protections and comply with money laundering laws.

This exact tension has hobbled Facebook’s ambitious Libra project—which has since been rebranded Diem. In its early months, Libra’s leaders tried to have it both ways. On the one hand, they said that the Libra network would be open and decentralized like bitcoin (though they admitted full decentralization would take a while). On the other hand, they said that the Libra network would fully comply with regulations that govern conventional financial networks.

Advertisement

But the Libra Association was never able to explain how this would work. For example, if Libra is an open network where anyone can participate, then who will enforce know-your-customer rules that require customers to identify themselves before using the network? If no one is in charge of the network, who will block transactions that authorities identify as belonging to terrorists or drug dealers? Libra struggled to answer these questions, and it’s not clear that they can be answered. Creating a decentralized blockchain network that complies with these rules may not even be possible.

Mastercard’s dilemma

Mastercard pulled out of the Libra Association in 2019 as Libra struggled to answer questions like these from regulators. Shortly afterward, Mastercard released its own list of principles for blockchain partnerships.

Mastercard said it was only interested in dealing with cryptocurrencies that “operate in full compliance with all applicable laws and regulations, including those applicable to anti-money laundering.” In a bit of bureaucratic understatement, the company said that “many of today’s 2,600 digital currencies today fail to do this.”

Now Mastercard says that it is planning to begin supporting some cryptocurrencies natively. Some companies already issue payment cards that allow customers to make payments over the Mastercard network using their bitcoin holdings. But currently, these bitcoin payments are converted to dollars—or another conventional currency—before they are transmitted across the Mastercard network. If the recipient wants to receive the payment in bitcoins, they must convert the dollars back to bitcoins, paying an extra fee for the service.

Mastercard says that by the end of the year, customers will be able to do this natively for some cryptocurrencies. The recipient will get the same digital asset the sender sent, without the need to convert to dollars and back.

“People need in a vehicle for spending”

However, it seems unlikely that bitcoin will make the cut, as the digital currency flunks several of Mastercard’s criteria.

Advertisement

For example, bitcoin’s public ledger may not meet Mastercard’s criteria for customer privacy. Mastercard says that “these digital assets must follow local laws and regulations in the regions they are used”—something bitcoin doesn’t do in much of the world. Eligible cryptocurrencies “will need to offer the stability people need in a vehicle for spending, not investment.” Bitcoin is highly volatile and is rarely used for day-to-day transactions.

The same analysis applies to a lot of other leading cryptocurrencies like ether, litecoin, and dogecoin. Their values fluctuate wildly, and they are too decentralized to meaningfully enforce money laundering rules.

The leading stablecoin, called tether, has shown a track record of stable value. But tether doesn’t seem any better on the other criteria. For example, experts have long raised questions about the solvency of the company behind tether.

USDC probably fits the bill, but will anyone care?

So what could Mastercard be thinking? Few cryptocurrencies out there have been specifically designed for this purpose. Perhaps the best known is USDC, which is currently the second most popular dollar-based stablecoin after tether. The company behind USDC, a US company called Circle, has signaled its commitment to regulatory compliance.

The USDC network won’t be fully open like a conventional cryptocurrency network. Rather, Circle will allow a limited number of financial institutions to issue USDC tokens, and these institutions in turn can grant customers access after verifying their identity. This in turn enables the network to enforce anti-money-laundering laws.

So some industry insiders expect USDC to be the first cryptocurrency supported on the Mastercard network. There may not be that many others that fit Mastercard’s criteria. The big question, then, is how many people actually want to make USDC-denominated payments over the Mastercard network. If you want to send someone a dollar over the Mastercard network, you can just send a dollar. Or if you want to send someone a USDC token, you can do that natively on a blockchain network.

Still, the ubiquity of the Mastercard network may make this an appealing option for some people who don’t have access to specialized cryptocurrency exchanges. We’ll have to see what Mastercard actually does and how the market responds.