A Review of MasterCard’s Opinions on Digital Currencies

MasterCard released its report on digital currencies recently, citing its opinions on the potential benefits and risks associated with the use of digital currencies and its associated industry. Before we start, I want to remind you of a quote by Henry Ford

“If I had asked people what they wanted, they would have said faster horses.”

As an analogy, this quote perfectly summarizes MasterCard’s opinions that “the claims pertaining to the speed and safety of digital currencies do not hold up” when compared to MasterCard. In reality, bitcoin is not comparable to MasterCard, it is a new technology, comparing it to existing systems is a futile venture; let’s have a look at their argument.

“When compared to MasterCard’s network, the claims pertaining to the speed and safety of digital currencies does not hold up, not least given that on average it takes 10 minutes for a block to be verified”

This is an interesting statement; it seems that MasterCard has forgotten how their business operates. MasterCard’s settlement takes two days, meaning, any payments made can be reversed within a 48-hour window. This is not the case for Bitcoin; bitcoins settlement time is one hour, vastly faster than MasterCard.

Bitcoin transactions can be verified in seconds. A transaction can be checked for authenticity against the protocol before admission into a block, this process takes seconds and is equivalent to the time it takes for a MasterCard based transaction to be initiated. To state MasterCard is faster than Bitcoin is simply not true.

“Digital currencies are far more susceptible to hacking attacks”

This statement is as invalid as stating that Bitcoin is dead, which has happened 71 times and counting. Bitcoin, the digital currency in question has never been hacked. In fact, its security is one of the biggest achievements in computer science ever.

Stating that digital currencies are susceptible to hacking attacks is misappropriating the security of the protocol with the security implemented by the individual. Bitcoin is vastly more secure than any other payment system, but like any other payment system it is still vulnerable to physical or digital theft, someone can steal your credit card just like someone can steal your bitcoin wallet, but, with bitcoin no one can ‘skim’ your credit card details and withdraw your money.

Bi tcoin, if stored securely is FAR more secure than credit cards; bitcoins stored in cold storage are only susceptible to physical theft, unlike credit cards. The person who wrote this paper must have forgotten about the 40 million stolen credit card numbers from the Target Hack last year. MasterCard is far more susceptible to hacking attacks than Bitcoin.

It’s harder to steal bitcoins than it is to steal your credit card information. Did you know 5.2¢ out of every $100 of credit is fraudulent, equating to $12 billion dollars annually, which of course is offset as fees to the consumer.

“If a digital currency system collapses then all funds are lost. In comparison, depositors in the UK are protected by the Financial Services Compensation Scheme up to £85,000 per person”

Seriously? If a digital currency collapses? Bitcoin cannot collapse, only its relative value in a fiat currency can collapse, a bitcoin will always be worth the same or greater value, which is one 21 millionth of all bitcoins. One of bitcoins main assets is that it cannot be inflated and lose its relative value.

Ignoring this fundamental difference between fiat and non-fiat currencies, no amount of ‘compensation money’ is going to create value. If a Bank were to lose its consumer funds, effectively making it insolvent, printing more money as compensation doesn’t create more wealth; it creates more public debt, inflation and inequality. If bitcoins could be ‘printed’ to compensate for consumer loses it would erode its value over time.

The part not mentioned here is the likelihood of a currency collapsing. Historically, every fiat currency ever created has collapsed, yet finite commodities (which have been used as currencies in the past) like gold have remained the best stores of value known to man. If you could create more gold when an institution lost its holdings it would not be considered an excellent store of value.

Saying a fiat currency cannot collapse because in the event of a collapse we can print more is an ironic statement.

“As we have learned from the Mt. Gox situation the existence of a ‘block chain’ does little to enable law enforcement”

Mt. Gox consumer funds were not stored on bitcoins blockchain; it had its own internal system of storage, which involved fractional reserve banking. What we learned from the Mt. Gox situation is that centralized authorities cannot be trusted to hold your funds in your best interests; this is the exact problem that the blockchain solves. The blockchain is an excellent tool for law enforcement, assuming they learn how to use it.

Every year $2 trillion USD (5% of global GDP) is laundered, if all financial services used blockchain’s when accounting there would be an immutable ledger to prevent criminals from covering their tracks, that’s the whole benefit of using the blockchain, it’s a tool that has the potential to greatly enhance law enforcement, using Mt. Gox as an example of the blockchain failing to ‘enable law enforcement’ is misleading and false.

The main point MasterCard has failed to recognize: a Push payment system (Bitcoin) vs. a Pull payment system (MasterCard)

To read more about the differences between push and pull systems click here

MasterCard is doing the classic, looking at a transformative new technology from an ‘in-the-box’ point of view. MasterCard thinks bitcoin is a strangely designed horse, in reality; it’s a car; a concept so new it’s beyond MasterCard’s ability to comprehend it would seem. But who can blame them; their entire business is based on Bitcoin not succeeding. MasterCard are selling horses and bitcoin is the first car on the market.