Mastercard tries to make crypto less scary for banks

Mastercard has signaled a strong interest in cryptocurrency, even if banks have been a bit wary. The card network is moving forward with a strategy that addresses these concerns head-on.

Mastercard said Monday that it would connect cryptocurrency trading service Paxos to banks, and manage security and compliance. The service comes as Mastercard builds a wide-ranging digital asset and blockchain business to diversify beyond card payments — and after the value of cryptocurrencies was more than halved in the past year. 

"We are not here to say invest in this or that. But we are offering choices and to make sure it's easy to use, safe to use and compliant," said Raj Dhamodharan, head of crypto and blockchain at Mastercard. 

Called Mastercard Crypto Source, the program will include buy, hold and sell support for specific cryptocurrencies. It would also offer identity management, cyber risk support, security and advisory services. Paxos will power trading and custody, while Mastercard will handle the linkage to banks. Paxos is also PayPal's crypto trading partner, and has existing partnerships with Mastercard, Bank of America and an international network of fintechs. 

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The Mastercard program is similar to PayPal's crypto service, which offers buy, sell and hold for PayPal and its Venmo app and is designed to ease access to cryptocurrencies for new users. Block (formerly Square), offers crypto trading and investment support through Cash App, the P2P app that is the nexus for its merchant and consumer-facing products. The payment companies are competing against crypto firms like Coinbase, which is adding payments and financial services following its initial public offering.

With the digital asset market retrenching, Mastercard is betting its long-standing relationships with banks and existing consumers will quell anxiety.   

"As big banks usually are very conservative and adopt innovations much slower, having a big name as a partner in this project creates a required comfort level for them," said Serhii Zhdanov, chief executive of EXMO, a cryptocurrency firm. "It's scary to be the first in everything. Mastercard took this role and a huge number of banks, which previously considered crypto above their risk level, now could give it a green light."

There has been some movement in the financial services industry toward supporting cryptocurrency. Some banks offer cryptocurrency savings products and there has been some early-stage support from credit unions.

But for the most part, banks have been reluctant to support crypto out of fears of volatility and crypto's long-standing reputation for risk. Federal Reserve Vice Chair for Supervision Michael Barr last week said banks should be cautious about working with cryptocurrency firms, and JPMorgan Chase CEO Jamie Dimon likened cryptocurrency to a "decentralized Ponzi scheme." 

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Only 23% of financial institutions plan to launch cryptocurrency investment services during 2022 and 2023, according to Cornerstone Advisors, which also reports 60% of crypto users would access digital investment services through their banks if available. Only 4% of crypto users said they would not switch from their current fintech crypto trading platform, according to Cornerstone. 

A Mastercard survey found 65% of consumers prefer to use crypto services from their financial institution. Globally, 29% of consumers hold crypto. 

"As consumers get more educated about crypto, they will be more comfortable," Dhamodharan said. "And a lot of that education happens through their financial institution." 

If or when the crypto market bottoms and recovers, the payment companies and banks that support crypto trading can offer consumers a way to grow assets that can be redirected to savings, spending or other investments. 

And other digital assets are also emerging, such as nonfungible tokens, and crypto has emerged as an option for charitable giving and incentive marketing. These provide potential use cases for banks that go beyond crypto as an investment asset. 

"As a middleman, Mastercard can assist businesses with this migration to digital assets, gain new revenue from on-ramping and off-ramping, and develop smart contracts to support complex lending, borrowing and invoicing," said Pat White, CEO and co-founder of Bitwave, an enterprise digital asset firm, referring to the process of connecting digital assets to traditional currency — and the reverse process, which is key to supporting cryptocurrency payments. 

Mastercard and Visa have made crypto and related blockchain projects part of their respective strategies to diversify revenue streams through value-added services.  Visa did not provide comment for this article,

Mastercard, for example, acquired the cryptocurrency security firm CipherTrace in 2021 and made it part of the new Crypto Source service. Both card networks are additionally working with governments on central bank digital currency projects and support for stablecoins, a form of crypto that's designed to avoid volatility, and as such is more likely to be used for direct purchases. 

Crypto Source is designed to be one service among a large group of crypto products that Mastercard's issuer network could access, Dhamodharan said.   

"It's not just about buy, sell and hold crypto," Dhamodharan said.  "There is a range of services that can be made available."