For all those investing online in cryptocurrencies, the great white hope is that the decentralised digital alternative to traditional fiat currencies make it into the mainstream financial world. As such, today’s news that the payment processing giant Mastercard has secured a patent for cryptocurrency transactions to be made via a credit card will provide renewed hope that buying a coffee with cryptocurrency could become a reality.
While not all cryptocurrencies are intended as currencies that are used to pay for everyday goods and services, many are. Bitcoin, the first and still largest crypto, was originally put forward as a solution to central bank-controlled inflation and the need for intermediaries to facilitate transactions the pound, euro, dollar and other fiat currencies represent.
Bitcoin has become more of a store of value, or commodity, rather than a currency, not least as a result of the considerable scalability issues its underlying technology has been found to have. Extreme price volatility and the suspicion of manipulation are also obvious practical barriers to widespread adoption as a genuine ‘currency’.
Mastercard’s new patent does not, of course, mean that any particular existing cryptocurrency is set to become a mainstream unit of exchange in day-to-day transactions. The patent, the first of its kind, secures the payments technology company the right to cryptocurrencies payments system termed ‘fractional reserves of blockchain currency’. It, in theory, facilitates a new kind of user account that would peg cryptocurrencies to a fiat currency, or ‘legal tender’. This would mean a quick exchange could be made between the two, allowing the holder to pay for a coffee or lunch in a fiat currency, with the current exchange value fractionally deducted from cryptocurrency deposited.
A major bottleneck to retailers of goods and services accepting cryptocurrencies as payment is that current blockchain technology means that transactions usually require at least 10 minutes to complete. Traditional card payments only take a few seconds.
The fractional reserve system the Mastercard patent covers is based on the same model that traditional financial systems employ for fiat currencies. Holders of bank deposits can only withdraw or spend a certain amount of cash at a time – that which is backed by actual ‘cash on hand’. The rest is loaned out by the bank, freeing up capital and expanding the liquidity in the economy. Holders of a normal current account can’t normally just spend £20,000 on a single purchase with their debit or credit card, even if they have that balance on their account.
Before anyone rushes to buy Bitcoin or those already investing online in cryptocurrencies rejoices, the patent does not of course mean that it will be possible to spend blockchain currencies through a Mastercard anytime soon. While the move does indicate that Mastercard believes that supporting cryptocurrency payments could eventually become a valuable service to offer, big companies file many patents, with many of them never seeing the light of day. The company could simply be hedging its bets and positioning itself as a market leader in mainstream cryptocurrency payments should things develop in that direction.