What Mastercard's crypto plans signal for the future of digital payments

Major payment companies have long looked on at cryptocurrencies as too risky to touch, but too tempting to ignore. Mastercard's latest move signals that the card brands are ready to make a firm pitch for crypto spending.

However, the stigma attached to cryptocurrencies still hasn't gone away. The recent use of bitcoin as part of a takeover of prominent Twitter accounts, and revelations of fraud and deception by Germany's Wirecard — a major crypto debit card provider — strengthened the association between cryptocurrencies and cybercrime.

At the same time, there's a clear benefit to supporting legal crypto payments. In a quarter that saw many traditional payment companies lose considerable volume due to the coronavirus lockdowns, Square's Cash App, which allowed users to trade bitcoin, helped the company's revenue in the second quarter even as its seller volume fell.

Mastercard made its first significant move into cryptocurrency products in July, announcing Wirex as the first crypto provider to roll out a product through Mastercard Accelerate, which Mastercard has primed as a turnkey launching pad for other cryptocurrency providers.

Wirex will launch a Mastercard-branded cryptocurrency card enabling users to buy, hold and exchange traditional funds and cryptocurrencies, with up to 1.5% rewards back in bitcoin for in-store purchases; Mastercard said it’s in discussions with other crypto exchanges for product launches.

Mastercard's goal is to develop the industry's friendliest platform for cryptocurrency operators and end users, said Raj Dhamodharan, Mastercard’s executive vice president of digital asset and blockchain products and partnerships.

“We want to create an ecosystem to contract with cryptocurrency providers in an efficient and trusted manner so crypto can be exchanged in a safe and secure way,” Dhamodharan said.

The payment networks' growing interest in the crypto arena lends credibility to a category that many mainstream financial services operators have viewed with skepticism.

Visa recently outlined its plans to expand crypto products in a blog post, emphasizing why stablecoins that blend digital currencies with traditional currencies like the U.S. dollar look promising.

More than 25 crypto wallets are already linked to Visa, plus there is Coinbase's card-issuing deal announced in February and a card Visa announced in April with the startup Fold that generates rewards in bitcoin. And PayPal reportedly is developing a method enabling consumers to buy bitcoin through Venmo via a mobile wallet upgrade that could go live as early as this fall.

“Mainstream payments companies have moved cautiously because there’s been a history of criminal activity and money laundering around cryptocurrency,” said Colin Whitmore, a senior analyst with Aite Group.

The volatility and risk that long characterized cryptocurrency still cast shadows, but the rise of stablecoins and Facebook's Libra project are motivating financial services providers to take action, according to Whitmore.

“Banks are highly exposed, but like payment companies they need to be aware of cryptocurrency and find ways to get into it in a safe and managed way, because it’s too important to ignore,” Whitmore said.

Mastercard’s involvement with cryptocurrency so far is constrained. With Wirex’s crypto Mastercard, initially available only in the U.K., funds flowing through Mastercard's network are kept in traditional currency.

“It’s important to know we’re not actually supporting these currencies in our network, and any conversion that happens during transactions is under individual wallet providers’ policies,” Dhamodharan said.

But Mastercard’s platform adds broad access and convenience for cryptocurrency holders who have struggled to find ways to spend their funds, with no direct risk to Mastercard.

Some critics have suggested payment card networks are interposing an unnecessary layer in the emerging cryptocurrency sphere, and Dhamodharan is clear about the limitations of Mastercard’s role in the Wirex deal.

“It’s not a crypto product; this is a card product at the core,” Dhamodharan said.

At the same time, he says the card network has an essential role in helping cryptocurrencies reach the next stage of development.

“Crypto right now is going through a transitional phase toward maturity," Dhamodharan said. "There are a lot of promising use cases yet to emerge. Our goal is to commercialize use cases, and we hope to bring many solutions to scale in the years to come.”

The card network’s global reach to consumers, businesses and banks is an ideal fit for cryptocurrency exchanges, he said.

“Demand for ways to manage and spend cryptocurrency is coming from nearly every continent, in both developed and mature markets. People want more ways to accumulate, hold and spend cryptocurrency, and stablecoins backed by fiat currency are increasingly popular,” he said.

After the decade or so that cryptocurrencies have been evolving, the card networks’ recent moves point to the beginning of what may eventually become significant new services, Whitmore said. But their collective impact so far is minimal.

“The percentage of people using cryptocurrencies right now to transact and buy things is really small," he said. "When you listen to people in bitcoin circles, it sounds huge but when you put it in perspective with the many trillions involved in traditional payments, it’s a drop in the ocean.”