Mastercard said on Wednesday that it intends to support cryptocurrencies in its network. If this really happens, it will be a big deal to further legitimize virtual currencies and dramatically expand the market for their use.
However, Mastercard says it will only 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. It is indeed not clear whether any of them do.
It is difficult to be decentralized and regulated
Bitcoin, the first cryptocurrency, is designed to disrupt the power of governments and conventional financial institutions. The bitcoin network has a decentralized architecture that puts it out of the reach of any government. Without government support, the price of bitcoin is very volatile. Users have no recourse to funds lost due to burglary or fraud. The bitcoin network does not comply with the money laundering laws that conventional financial networks must comply with – although some bitcoin intermediaries do.
For bitcoin purists, these are points in favor of bitcoin. They believe that the open architecture of bitcoin and the lack of red tape make it a fruitful platform for innovation and an exploration of the power of governments. But the same features make the network a nightmare for financial institutions that do must provide consumer protection and comply with money laundering laws.
This exact tension has undermined Facebook’s ambitious Libra project – which has since been renamed. In the 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 (although they conceded that full decentralization would take a while). On the other hand, they said that the Libra network will fully comply with the regulations that apply to conventional financial networks.
But the Libra Association could never explain how it would work. For example, if Libra is an open network where someone can participate, who will enforce your client’s rules that require customers to identify themselves before using the network? If no one has control over the network, who will block transactions that identify the authorities as terrorists or drug dealers? Libra has struggled to answer these questions, and it is not clear that they can be answered. The creation of a decentralized blockchain network that complies with these rules may not even be possible.
Mastercard’s dilemma
Mastercard withdrew from the Libra Association in 2019 as Libra struggled to answer questions like these from regulators. Shortly afterwards, Mastercard announced its own list of principles for blockchain partnerships.
Mastercard said it was only interested in dealing with cryptocurrencies that “comply with all applicable laws and regulations, including those applicable to money laundering.” In a bit of a bureaucratic understatement, the company said that “many of today’s 2,600 digital currencies do not.”
Now Mastercard says it intends to support some cryptocurrencies initially. Some companies are already issuing payment cards that allow customers to make payments via their MasterCard network via the Mastercard network. But currently, these bitcoin payments are being converted to dollars – or another conventional currency – before being sent over the Mastercard network. If the recipient wants to receive the payment in bitcoins, they have to convert the dollars back to bitcoins and pay an extra fee for the service.
Mastercard says that by the end of the year, customers will of course be able to do this for some cryptocurrencies. The receiver gets the same digital asset that the sender sent, without having to switch to dollars and back.
‘People need to spend in a vehicle’
However, it seems unlikely that bitcoin will make the cut, as the digital currency boasts several of Mastercard’s criteria.
For example, the public ledger of bitcoin may not meet Mastercard’s criteria for customer privacy. Mastercard says that ‘these digital assets must comply with local laws and regulations in the regions in which they are used’ – something bitcoin does not do in much of the world. Qualifying cryptocurrencies “will have to provide the stability that people need in a vehicle to spend, not to invest.” Bitcoin is very volatile and is rarely used for daily transactions.
The same analysis applies to many other leading cryptocurrencies such as ether, litecoin and dogecoin. Their values vary widely, and they are too decentralized to apply money laundering rules meaningfully.
The leading stablecoin, called tether, showed a record of stable value. But the other criteria do not seem better to tie. Experts, for example, have long asked questions about the solvency of the company behind the tying.
USDC probably fits the bill, but would anyone care?
What would Mastercard think then? There are few cryptocurrencies designed specifically for this purpose. The best known is perhaps USDC, which is currently the second most popular dollar-based stable currency after determined. The company behind USDC, an American company called Circle, has indicated its commitment to complying with regulations.
The USDC network will not be completely open like a conventional cryptocurrency network. Instead, Circle will allow a limited number of financial institutions to issue USDC tokens, and these institutions in turn can grant clients access after verifying their identity. This in turn enables the network to enforce anti-money laundering laws.
Some insiders in the industry therefore expect USDC to be the first cryptocurrency supported on the Mastercard network. Maybe there are not so many others that meet Mastercard’s criteria. So the big question is how many people actually want to pay in USDC payments via the Mastercard network. If you want to send someone a dollar over the Mastercard network, you can only send one dollar. Or if you want to send someone a USDC token, you can do so on a blockchain network.
However, the ubiquity of the Mastercard network may make it an attractive option for some people who do not have access to specialized cryptocurrency exchanges. We need to look at what Mastercard actually does and how the market responds.