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frMastercard and digital currencies: Launch of a test platform for central banks
The payment giant Mastercard announced Wednesday the launch of a platform allowing central banks to test digital currencies (CBDC).
Mastercard and the blockchain
Mastercard is a global technology company in the payment industry that today operates in more than 210 countries and territories. Its mission is to
- To connect and power a digital economy;
- To help individuals, financial institutions, governments and businesses using secure data and networks.
The vision of the global payments company has always been to become a digital payments giant. By 2016, it was beginning to widen the gap with its competitors, without rushing to integrate blockchain technology into its business model. Mastercard had added three new blockchain APIs to its development site that allow developers to use the famous technology.
Garry Lyons, Director of Innovation at MasterCard, said at the time:
Although the company is 'very, very interested' in blockchain technology, it will take a cautious approach to experimenting with this technology while it believes it is still in development.
The year 2017 is the year when, for the first time, Mastercard offers the possibility to send money through the blockchain. Mastercard was also one of the founding members of Facebook's Libra association with Visa, PayPal and Stripe.
Mastercard left the Libra in October 2019 after expressing concerns about the compliance of the service and its business model.
The CEO of Mastercard noticed some inconsistencies in the way Libra was presented. He explained:
'For financial inclusion, the government has to pay you in this [currency], you have to receive it as an instrument that you can understand, and you have to be able to use it to buy rice and cycles. If you are paid in Libra [coin] [...] that goes to Calibras, which returns in pounds to buy rice, I don't understand how it works.
However, Facebook's Libra is now seen as the catalyst that will lead central banks to look seriously at digital currencies.
Showing central banks the benefits of interoperability
A more recent survey by the Bank for International Settlements found that 80% of the world's central banks are engaged in some form of digital currency research. Mastercard realized that each central bank is different in its exploration of CBDCs, hence the payments giant designed a platform to explore whether CBDCs (Central Bank Digital Currencies) fit the needs of a region or a country.
According to a study called 'A Survey of Research on Retail Central Bank Digital Currency' by the International Monetary Fund (IMF) released in 2018, institutional investors are experimenting with digital currency to reduce costs and mitigate the growth of private crypto currencies such as Bitcoin. Mastercard's virtual platform can therefore be individually adapted to the environment in which the central bank operates, allowing it to simulate a CBDC's issuing, distribution and exchange ecosystem with banks.
In its statement, Mastercard said the new platform promises to enable the simulation of local or regional issuance, distribution and exchange of CBDCs between banks, financial service providers and consumers to help financial institutions understand the feasibility of CBDCs and allow them to explore new use cases.
One of the possibilities of the new Mastercard Protocol or 'sandbox' in technical language is to demonstrate 'how a CBDC can be used by a consumer to pay for goods and services wherever Mastercard is accepted around the world'.
In addition, banks will be able to assess the compatibility with existing payment methods, such as payment cards. As such, Raj Dhamodharan, Executive Vice President, Digital Assets, Products and Blockchain Partnerships at Mastercard, said:
'Mastercard is driving innovation with the public sector, banks, fintechs and consulting firms in exploring CBDCs, working with partners that are aligned with our core values and principles. This new platform supports central banks in their current and future decisions on the way forward for local and regional economies'.
CBDCs are designed to connect directly with consumers, avoiding the need to go through commercial banks for the distribution and collection of money; they are equivalent in value to a country's paper money and are subject to the same government-backed guarantees. However, some conceptions focus only on institutional money transfers.
According to Mastercard's CEO, one of the objectives of the platform could indeed be to show central banks the benefits of interoperability, which could perhaps ensure Mastercard's continued relevance as payments evolve.
Sheila Warren, Head of Blockchain, Digital Assets and Data Policy at the World Economic Forum, explained that central banks can benefit from support in exploring the range of options available to them with respect to CBDCs, as well as insight into the opportunities that may arise. She stated:
'Collaborations between the public and private sectors in exploring central banks' digital currencies can help central banks better understand the range of technological possibilities and capabilities available to them as they relate to CBDCs'.
As most central banks are still in the early stages of examining digital currencies, could this Mastercard tool support central banks in their choice of payment modernization?
Written by Laetitia Harson
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