Mastercard's buy-in a turning point for crypto payments

After years of only dipping a toe in the waters of crypto payments, Mastercard has dived into the deep end.

While the breadth of its support is still in question, Mastercard's Wednesday announcement that it would directly process cryptocurrency payments in its network will almost certainly lead to exponential growth in the number of merchants that allow direct cryptocurrency payments at the point of sale. It also positions Mastercard to be a major processor of central bank digital currencies.

Mastercard is accepted at 37 million merchants in 210 countries; while rival Visa, which is also expanding its support for cryptocurrency, is accepted at 44 million merchants in approximately 200 countries. Together with PayPal's planned support for crypto payments at about 29 million merchants in the next month, an international merchant network for crypto could develop very quickly.

Only 15,000 businesses globally accept cryptocurrency payments, so even nominal uptake for a limited number of digital assets and stablecoins would be a relatively huge jump. Mastercard's support could remove the need for a conversion between traditional currency and cryptocurrency, a complex step that is one reason the number of merchants that allow crypto payments is so low.

Andrew Harrer/Bloomberg

Mastercard referred questions to a public statement from Raj Dhamodharan, executive vice president of digital asset and blockchain products and partnerships. "These digital assets are becoming a more important part of the payments world," Dhamodharan said. "We are seeing this fact play out on the Mastercard network with people using cards to buy crypto assets, especially during bitcoin's recent surge in value."

The card network is additionally seeing more usage of crypto cards to access digital assets and convert them to traditional currencies for spending. Mastercard currently supports crypto payments through Wirex, a third party that aids in these conversions.

Mastercard's direct in-network crypto support strategy is still unclear. The card brand hasn't decided which cryptocurrencies it will accept, and it won't start processing crypto payments until later this year. While not overtly saying Mastercard would not allow cryptocurrencies like bitcoin and ether, Dhamodharan's statement suggests stablecoins — which avoid bitcoin's volatility by pegging their value to a government-issued currency — will be a big part of Mastercard's mix.

Dhamodharan's statement stresses Mastercard is looking for cryptocurrencies that can be used for payments more than as an investment. Visa CEO Al Kelly also recently suggested stablecoins would be of interest. Processing stablecoin transactions would enable Visa and Mastercard to support central bank digital currencies and private-sector initiatives such as the Facebook-affiliated Diem.

Mastercard's decision closely follows Tesla's announcement that it would invest $1.5 billion in bitcoin and allow crypto payments for its products. That generated a lot of attention and a boost for bitcoin's price, but Tesla is still only one merchant. Mastercard's network would provide much greater reach, but consumers and merchants will still have to choose to use crypto once it's supported.

Tesla's announcement also showcased the volatility of currencies like bitcoin — a factor that has made many merchants wary of accepting it.

"It's undoubtedly an encouraging sign to see Mastercard announce plans, but any real tipping point will be when they roll out the feature and we can see their customers using cryptocurrencies and digital assets for the first time," said John Wu, president of Ava Labs, a decentralized finance technology company. "That is where we'll see demand, and the product market fit for crypto within a cornerstone payments infrastructure."

Mastercard is working with central banks that are developing digital currencies and is using a test platform for central bank digital currency pilots.

"While stablecoins are more regulated and reliable than in the recent past, many of the hundreds of digital assets in circulation still need to tighten their compliance measures, so they won't meet our requirements," Dhamodharan said, adding consumers will rally around crypto assets that offer reliability and security.

Both Visa and Mastercard have been laying the technology groundwork to support crypto payments. Visa in 2020 filed a patent application for a computing system that receives information for a traditional currency and converts that into a digital form for a distributed ledger. Mastercard likewise is leaning on 89 blockchain patents and 285 pending patent applications to lend a variety of blockchain technology to support different versions of digital currency.

"We already have one of the payment industry's biggest blockchain patent portfolios to draw from to make these projects successful," Dhamodharan said.