Mastercard said on Wednesday that it is planning to offer native support for cryptocurrencies on its network. If that really happens, it will be big business, helping 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. In fact, it is not clear whether any of them do.
It is difficult to be 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 support, the price of bitcoin is highly volatile. Users have no recourse against funds lost due to hackers or fraud. The bitcoin network does not comply with anti-money laundering laws that conventional financial networks must follow – although some bitcoin intermediaries do.
For bitcoin purists, these are points in favor of bitcoin. They believe that bitcoin’s open architecture and lack of bureaucracy make it a fertile platform for innovation and a brake on government power. But those same characteristics make the network a nightmare for financial institutions that Does they need to offer consumer protection and comply with money laundering laws.
That exact tension hindered Facebook’s ambitious Libra project – which has since been renamed Diem. In their first few months, Libra leaders tried both. On the one hand, they said that the Libra network would be open and decentralized like bitcoin (although they admitted that full decentralization would take a while). On the other hand, they said that the Libra network will fully comply with the rules governing conventional financial networks.
But the Libra Association was never able to explain how it would work. For example, if Libra is an open network in which anyone can participate, who will apply the 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 the authorities identify as belonging to terrorists or drug traffickers? Libra struggled to answer these questions and it is unclear whether they can be answered. The creation of a decentralized blockchain network that obeys these rules may not even be possible.
Mastercard dilemma
Mastercard left the Libra Association in 2019, while Libra struggled to answer questions like these from regulators. Shortly after, Mastercard launched 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 preventing money laundering”. In a bureaucratic euphemism, the company said that “many of today’s 2,600 digital currencies fail to do this.”
Now Mastercard says it is planning to start supporting some cryptocurrencies natively. Some companies already issue payment cards that allow customers to make payments through the Mastercard network using their bitcoin reserves. But these bitcoin payments are currently converted into dollars – or another conventional currency – before being transmitted over the Mastercard network. If the recipient wants to receive payment in bitcoins, he must convert the dollars into 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 receive the same digital asset that the sender sent, without the need to convert to dollars and vice versa.
“People need a vehicle to spend”
However, it seems unlikely that bitcoin will be successful, as digital currency fails on several Mastercard criteria.
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 where they are used” – something that bitcoin does not do in much of the world. Qualifying cryptocurrencies “will need to provide the stability that people need in a vehicle to spend, not to invest.” Bitcoin is highly volatile and is rarely used for day-to-day transactions.
The same analysis applies to many other major cryptocurrencies, such as ether, litecoin and dogecoin. Their values vary widely and they are too decentralized to significantly enforce money laundering rules.
The main stablecoin, called tether, showed a history of stable value. But tether does not look better in the other criteria. For example, experts have long raised questions about the company’s solvency behind the tether.
USDC probably fits the bill, but does anyone care?
So, what could Mastercard be thinking? Few cryptocurrencies out there have been designed specifically for this purpose. Perhaps the best known is the USDC, which is currently the second most popular dollar-based stablecoin after the tether. The company behind USDC, an American company called Circle, signaled its commitment to regulatory compliance.
The USDC network will not be fully open like a conventional cryptocurrency network. Instead, Circle will allow a limited number of financial institutions to issue USDC tokens, and those institutions, in turn, can grant access to customers after verifying their identity. This, in turn, allows the chain to enforce anti-money laundering laws.
Therefore, some industry experts expect the USDC to be the first cryptocurrency supported on the Mastercard network. There may not be many others that meet Mastercard’s criteria. The big question, then, is how many people really want to make payments in US dollars through the Mastercard network. If you want to send someone a dollar through the Mastercard network, just send a dollar. Or if you want to send someone a USDC token, you can do it natively on a blockchain network.
Still, the ubiquity of the Mastercard network can make this an attractive option for some people who do not have access to specialized cryptocurrency exchanges. We will have to see what Mastercard really does and how the market responds.