As bitcoin continues to gain mainstream acceptance, the currency is making credit card companies increasingly uncomfortable.
Last year, MasterCard asked regulators in Australia to move against cryptocurrencies, including bitcoin. Since then, the credit card company has become increasingly vocal about its concern with bitcoin especially. Most recently, MasterCard began lobbying the UK government, asking for increased regulation of digital currencies. Credit card companies have continued to struggle in an effort to adapt to a rapidly changing payments industry.
MasterCard's complaints with cryptocurrencies
While an increasing segment of the population has come to recognize the benefits offered by cryptocurrencies, such as bitcoin, MasterCard has been quick to point out that digital currencies are rife with risk.
According to MasterCard, in a letter asking the UK government to implement increased cryptocurrency regulation, "In the current environment we feel that the risks of digital currencies outweigh the benefits." The letter was sent in response to a call from the UK Treasury last year for information, indicating that bitcoin and other cryptocurrencies are being taken more seriously.
In the letter sent to the UK government, MasterCard stated that the claim regarding the safety and speed of digital currencies "does not hold up." The letter went on to indicate that it would take at least 10 minutes for block verification and further stated that cryptocurrencies are more vulnerable to attacks from hackers. MasterCard also claimed that the reason transaction costs for digital currencies are lower are because digital currency services providers are not responsible for any compliance costs.
How much of what MasterCard has claimed is true and how much of it is perhaps the credit card company simply trying to defend a business model that has rapidly become outdated? In developing an understanding of exactly where the truth lies in what has become somewhat murky waters, it is important to understand how both digital currencies and credit card payments work.
The contrast between credit cards and cryptocurrencies
Bitcoin payments are not dissimilar to a cash transaction or even a wire transfer, in that payments are transferred directly from one party to another party. With such payments, there is no need for the payment to make its way through a third-party financial institution. Payments are processed via a private network, with each transaction recorded in the public blockchain. Bitcoin is secured by peer-to-peer technology, cryptography, and the blockchain, which negates the need for third-party oversight.
By comparison, credit card transactions involve the buyer authorizing the seller to remove the payment from their account. The payment must then pass through multiple financial intermediaries.
When a bitcoin transaction is made, there is no need for the individuals involved to provide personal identification information. Instead, bitcoin transactions are completely anonymous and use alphanumeric addresses that change with each transaction alone with a private key. Yet another element that sets bitcoin transactions apart from other forms of electronic payments is that they are not reversible. By contrast, credit card transactions can be canceled even after the transaction has been concluded.
The fact that bitcoin transactions are irreversible eliminates charge-backs for merchants. In accepting credit card payments, merchants must always be concerned about the potential for credit card providers to demand retailers to cover losses on disputed or fraudulent transactions.
Additionally, merchants are able to save on the fees charged for every credit card transaction processed. Such fees can range anywhere from 0.5% to 5% of every purchase, plus up to 30 cents for each transaction made. Bitcoin payments can be processed at either a much lower cost or no cost at all.
Clearly, merchants are able to take advantage of a number of benefits by opting to accept bitcoin over credit cards. Shoppers are also able to benefit, by taking advantage of simpler transactions, low transaction fees, and user anonymity. Additionally, consumers do not have to worry about their account being frozen due to a fraud alert, as is the case with a credit card.
Ultimately, as much as credit card companies such as MasterCard may lobby against cryptocurrencies, the reality is that virtual currencies provide the benefits of direct cash transactions along with the speed and anonymity of digital technology. As such, credit card companies are fighting a losing battle against innovation and progress - and good riddance to you!