The News: Mastercard’s acquisition of CipherTrace, a leading cryptocurrency intelligence company with insight into more than 900 cryptocurrencies, will extend its capabilities into the field of digital assets. Read the press release from Mastercard here.
Mastercard’s Acquisition of CipherTrace Will Bolster Crypto Capabilities
Analyst Take: Mastercard’s acquisition of CipherTrace is evidence the worlds of traditional finance, DeFI, and cryptocurrencies are starting to collide. As nation states start to adopt Bitcoin, the legacy financial services world is being faced with the task of how to process, administer, and provide custodial services for cryptocurrencies. When you couple this trend with the fact that well-financed start-ups have their eyes locked on the TAM for financial services, disruption is inevitable.
The Legacy Credit Card Space is Ripe for Disruption
The legacy credit card space is ripe for disruption within the legacy financial services sector. Four major players in Visa, Mastercard, American Express, and Diners Club dominate the global credit and charge sector and merchants pay hefty fees to process transactions. For a detailed breakdown on how the legacy system works today, Jared at Fat Tailed Thoughts wrote a very thorough overview here: Fat Tailed Thoughts: Credit Card Payments that’s well worth your time checking out when you have a few moments to dive deeper.
It is of course not at all surprising that the Bitcoin, Ethereum, and wider DeFi community see the centralized nature of credit/charge card processors as a hangover from a bygone era and are focused on disrupting the status quo — which very much needs shaking up.
How do traditional players react? In what is sure to be a future Harvard Business School case study, the legacy financial services are faced with the innovator’s dilemma written large. Do they double down on the traditional model and largely ignore the DeFi and crypto space or try to get in on the action and be active participants in the disruption? The announcement by Mastercard of the planned acquisition of CipherTrace is a firm indication that they intend to adopt the latter approach.
Nation States Adopting Bitcoin Spurs a Need for Quick Pivots for Retailers
The corollary of nation states adopting bitcoin as legal tender is that retailers and high street chains are pulled into the world of crypto and need ways to handle these still nascent payment methods. Since El Salvador’s adoption of bitcoin as legal tender earlier this week, crypto Twitter has been awash with images of how the likes of Starbucks, Pizza Hut, and McDonalds are now accepting the cryptocurrency in El Salvador for everyday transactions. While El Salvador is a country of only three million people, the transaction volumes are not inconsequential for these multi-national organisations — they still have to implement the front and back end systems to accept a new digital only currency. These multinational chains are partnering with crypto specialist providers in order to onboard bitcoin payments. For instance, McDonalds is partnering with OpenNode to facilitate the use of bitcoin at its 19 restaurants in El Salvador. However, as Panama and other countries start to hint that they will look to become a more crypto native nation and many other nations are exploring Central Bank Digital Currencies, what are the legacy players both on the retail and financial services side to do?
For the Financial Services Sector, Security and Traceability Are Key
In the highly regulated financial services space, security and traceability are key. Know Your Customer (KYC) and Anti Money Laundering (AML) are foundational building blocks of how the overall system works. As anyone who has opened a bank account recently can attest, the bank understandably wants to know who you are before they will provide you with services. A key concern with bitcoin and other cryptocurrencies is that the people transacting them are anonymous or at least pseudonymous. This lack of KYC transparency has made digital assets the currency of choice in recent high-profile ransomware and other hacking incidents. However, the blockchain is a public ledger of all digital currency transactions, and services like CipherTrace’s analyze movements of funds and increasingly, the sophistication of these on-chain analytical tools is closing this loophole, as was the case in the recent Poly Network hack where the funds stolen were ultimately returned.
As the world of digital assets, cryptocurrencies, tokens, smart contracts, and non-fungible tokens (NFTs), become more interconnected with everyday activities, the challenges for the existing financial services players become apparent. The fundamental basis for how people pay and get paid, and how they invest is changing. As a result, trust and security will either become critical enablers or a barrier to broad adoption and wide scale use. It is very clear that the DeFi and cryptocurrency space requires new technologies and new solutions — and ones that deliver more powerful intelligence to ensure that the crypto economy is instilled with the same trust and peace of mind that consumers and retailers currently experience with legacy payment methods.
With the CipherTrace Acquisition, Mastercard Signals Crypto Will Become a Large Part of Future Operations
Against this backdrop, Mastercard’s acquisition of CipherTrace makes perfect sense. With the acquisition, Mastercard is both acknowledging that crypto will become an increasingly large part of their future operations, but also acknowledging that it is better to buy rather than build in this still nascent space. CipherTrace has firmly established itself as one of the top three players in the on-chain analytics space, and the company’s competitors include New York-based Chainalysis and London start-up Elliptic. The CipherTrace platform helps customers enhance their security and fraud monitoring activities for crypto-related programs — and was recently involved in tracing the stolen cryptocurrencies in the Poly Network hack. CipherTraces provide solutions for some of the largest banks, exchanges, and other financial institutions in the world due to their focus on data analytics and algorithms to help customers across 7,000+ cryptocurrency entities.
With Mastercard’s acquisition of CipherTrace, I envision that Mastercard will look to build on CipherTrace’s suite of digital assets tracking and analysis tools and combine it with their own cybersecurity solutions to provide businesses with greater transparency to help identify and understand their risks, as well as to help manage their digital asset regulatory and compliance obligations. According to the press release “the deal enables Mastercard to combine the technology, AI and cyber capabilities of both companies to differentiate its card and real-time payments infrastructure, allowing customers and stakeholders globally to build upon and benefit from the solutions to protect their consumers and comply with regulations, as they build their own virtual asset offerings.”
While details of how this integration will take place in reality and what new services Mastercard plans to offer as a result of the acquisition, are not yet clear, I will be tracking this space closely in the months ahead and have already reached out to Mastercard to get a further briefing on their plans. Net net, watch this space.
Bringing Transparency and Trust to Digital Assets
As a recent purchaser of two NFTs via Nifty Gateway using my Mastercard, I am personally interested and encouraged that major players with decades of credibility are starting to enter the crypto and DeFi space. The crypto and DeFi space need the guiding presence of large established players that have a strong heritage of working with regulatory guidelines. I am a massive fan of new entrants being disruptive and innovating to drive new business models, but this needs to be tempered with a focus on trust and traceability when people’s hard-earned money is involved.
Regardless of what happens in El Salvador, we are on the cusp of mainstream adoption for digital assets and Mastercard’s acquisition of CipherTrace is another positive step on this journey. I see Mastercard’s acquisition of CipherTrace as part of Mastercard’s strategy in the digital assets space to help provide their customers, merchants, and businesses with more choice in how they ultimately deploy new use cases and digital assets. The acquisition follows a number of investments the company has made, including partnerships with Uphold, Gemini, and BitPay to create crypto cards, the creation of new platforms to test and support Central Bank Digital Currencies, programs to support the broader use of blockchain technology and NFTs, and the potential to support select stablecoins directly on its network.
I firmly believe this won’t be the last acquisition of a crypto startup by a legacy player in the financial services market. As these legacy players look to retool their operations and handle these new asset classes and currencies, it will oftentimes be faster to acquire the solution than to build it themselves. In addition, they will get access to the right skills and talent through these acquisitions which would be hard to acquire through traditional recruitment practices.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.