The advantage to a virtual currency, should one ever be accepted in the US as legal tender, is that it eliminates the phase in traditional payment schemes called settlement. You Zelle money to me and I see it instantly, but in reality, my bank doesn’t get that money until it is sent by the sending bank during a payment phase called net settlement. So my bank is out the money until later that day or the next. More importantly, all the banks need to keep records of all transactions made to all other banks so that they know how much needs to be sent. This record keeping doesn’t come cheap, which is why the ability to send a virtual currency with each individual transaction is so compelling. Now each transaction is a complete transaction with settlement built right in.
Solving for the lack of a virtual currency that is accepted by banks as legal tender with card transactions would help a blockchain move value, which is an important capability, but it not only fails to eliminate the settlement phase, it makes that phase even more complex by bolting yet another record keeping system onto the already overburdened networks. As any large merchant, bank, or corporate enterprise where they spend all their time and it is resolving all of the paperwork and transactions to determine if the books are properly settled. None of this is mentioned in the many articles that have been covering the patent Mastercard was issued called “Mastercard CA2986563A1 – Method and system for linkage of blockchain-based assets to fiat currency accounts” including the article in American Banker:
“Mastercard’s latest blockchain patent might be its most ambitious to date and, in theory, could help banks better protect themselves against fraudulent transactions that occur in traditional payments.
The card network was recently awarded a patent for the “fractional reserve management of blockchain assets” that would combine the use of traditional payment networks and payment systems technologies with blockchain-based currencies to provide better security for consumers and merchants.
Mastercard’s claims somewhat mirror patents Bank of America, Barclays and TD Bank have filed in the past two years that focus on how funds transfers and data security would benefit blockchain technology.
“There is a need to improve on the storage and processing of transactions that utilize blockchain currencies,” Mastercard wrote in its patent application.
“The use of traditional payment networks and payment systems technologies in combination with blockchain currencies may provide consumers and merchants the benefits of the decentralized blockchain while still maintaining security of account information and provide a strong defense against fraud and theft.”
In a statement provided to American Banker, Mastercard would not go beyond its application, saying it does not speak publicly about what it files.
As a result, exactly why Mastercard is interested in blockchain technology is unclear, but it has mentioned in it at least two patent applications the need for better protections against fraud and theft for both consumers and merchants.
In theory, such a system could help banks better track transactions, in addition to traditional methods such as Know Your Customer regulations.
“By linking the blockchain transaction with the fiat transaction, I think it gives the banks much better visibility into who’s making the transaction, and where the money is coming from,” said Gabriel Wang, a capital markets and fintech analyst for Aite Group.
Mastercard has filed multiple blockchain-related patents over the past two years.
In October, the company was awarded a patent for a way to “partition a blockchain,” which would make it possible to store multiple transaction types and formats. Another patent from over the summer showed how Mastercard could speed up cryptocurrency payments. Bitcoin in particular is known for relatively slow transaction approvals, which can take as long as 10 minutes.”
If all blockchain transactions are tied to a bank account then those transactions can all be traced back to the account owner which will indeed meet BSA requirements – and that’s a good thing! But it’s really just a band-aid until the US either creates its own virtual currency or connects one of the faster payment networks that will also perform real-time settlement to the blockchain with a similar technique as identified in this patent.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
