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.
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.
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.