This post was most recently updated on December 1st, 2019

We all know how much banks hate bitcoin and cryptocurrencies and we early this month wrote an article about Why Bitcoin is a Real Threat to the Traditional Financial System

But as an old proverb says “if you can’t beat them, join them” If your enemy is stronger then you, it is better for you to join their side.

This is what Mastercard is trying to do with the last patent they filed about Fractional Reserve Cryptocurrency Bank.

Cryptocurrencies & Mastercard: Not a Friendly Relationship

Like most financial institutions and companies, Mastercard never predicted the blockchain implementation, and by the time they noticed it, they were not prepared for the changes it could bring. So their reactions have been negative toward blockchain and cryptocurrencies. But at the same time, they have been exploring the blockchain technology to find ways for implementing it in their system, as well as seeking out ways to be able to make use of cryptocurrencies legally.

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Fractional Reserve Blockchain

After years of fighting bitcoin and associating cryptocurrencies with illegal things like money laundering, drugs, etc, Mastercard is claiming a patent for fractional reserve management of blockchain assets.

It is such an irony that fractional reserve banking is one of the things bitcoin was created to solve and now this company wants to create a fractional reserve for bitcoin.

Bitcoiners, in general, are not fans of debt-based currencies. And this step for not owning your private keys and being not sure if the financial institution is holding your funds is not in the same line with the Bitcoin philosophy.

Another negative impact FR might have on cryptocurrencies is because it is a derivative product which the company — in this case, Mastercard — have control over the supply and might inflate the bitcoin supply artificially causing price suppression like we have seen the Gold market for years. This is the reason why many Bitcoiners are against ETFs unlike they are like BAKKT that promises to offer Physically Settled Bitcoin Futures. Eventually, if BAKKT is approved the launch date will be 12th of December.

Bitcoiners Philosophy: Not Owning Your Keys Not Owning Your coins

The patent Mastercard is claiming (Application Nr. 20180308092) describes a system where crypto assets and fiat money is tracked. Basically, it is a web wallet that combines cryptocurrency accounts with fiat accounts.

Coinbase had trouble getting traction because of this narrative. Bitcoiners tend not to trust a third party even a financial institution to hold their keys. Because not holding your keys it is as not holding the coins at all. It can disappear at any time and you can not do anything about that. You can not even be sure if the bank is holding your funds. Most user base on Coinbase is compiled from newcomers in the crypto world that does not hold yet this philosophy.

What the Mastercard patent describes is a cryptocurrency credit card network.

“Thus, there is a need to improve on the storage and processing of transactions that utilize blockchain currencies. Existing payment networks and payment processing systems that utilize fiat currency are specially designed and configured to safely store and protect consumer and merchant information and credentials and to transmit sensitive data between computing systems. In addition, existing payment systems are often configured to perform complex calculations, risk assessments, and fraud algorithm applications extremely fast, as to ensure quick processing of fiat currency transactions. Accordingly, 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.”

They see an advantage to mixing conventional and cryptocurrency technologies, and the system described might possibly have their actual products and payment networks in it.

“Transactions that may be performed via a payment network may include product or service purchases, credit purchases, debit transactions, fund transfers, account withdrawals, etc. Payment networks may be configured to perform transactions via cash-substitutes, which may include payment cards, letters of credit, checks, transaction accounts, etc.”

What Mastercard does better than anything is processing transactions. Actually, a bitcoin payment needs 10 minutes to be confirmed. Mastercard is trying to help processing bitcoin transactions in a fraction of second. Despite the problems the fractional reserve would bring into the crypto sphere, it would also benefit the bitcoin mass adoption helping millions of their merchants accepting bitcoin payments.

However, patents take time to be processed so we will see how things will develop.

Do you think FR will be a good thing for bitcoin, or it is going to suppress the price like derivative products usually do?

Feel free to post your opinion in the comments below.

To protect against credit card fraud, always use dummy card numbers on unknown websites.