If consumers want to participate in commerce across multiple blockchains — including public blockchains — their only option lies in private forms of cryptocurrency.
Mastercard has demonstrated capabilities for a new solution that tokenises central bank digital currencies (CBDCs) onto different blockchains, enabling more consumers to participate in crypto ecosystems using reputable forms of money.
As part of a Reserve Bank of Australia (RBA) and Digital Finance Cooperative Research Centre research project, CBDC holders could purchase non-fungible tokens (NFT) listed on the Ethereum blockchain.
The pilot process locked the required amount of a CBDC on the RBA’s CBDC platform and minted an equivalent amount of wrapped CBDC tokens on Ethereum.
Opportunities for financial services
As new forms of using tokenised assets come to fruition, Raj Dhamodharan, head of digital assets at Mastercard, foresees applications emerging initially for institutional, cross-border and corporate trade. Whether these applications refer to tokenised bank deposits or CBDCs, the use cases remain the same.
Mr Dhamodharan expects a “new breed of financial applications”, together with new business models, coming to the fore with new optimisation use cases including trade finance and real estate applications. “Fundamentally, new business models and use cases could emerge if you had programmable money at your disposal,” he adds.
For trade finance, Mr Dhamodharan says tokenising a trade invoice would enable parties to track the process better and potentially raise money from different financiers. “This is especially useful where new parties may not have bilateral agreements with each other,” he adds.
In the UK, Mastercard is working on a use case for tokenised forms of bank deposits in real estate. It would enable money to be held in place and moved only once conditions have been met. “There’s many benefits: buyers get to keep the money longer, the seller has the assurance of getting the money and lenders don’t have to prepay,” Mr Dhamodharan says.
Its other tested use cases include CBDCs being used as a settlement asset to improve the efficiency of the corporate bond market, as well as being traded for foreign currency stablecoins to counter foreign exchange market inefficiencies and settlement risks.
As central banks develop digital currencies, Mr Dhamodharan looks to their use “behind the scenes” to improve cross border transfers. “Between the UK and Australia for example — if there are CBDCs on both sides — it will allow for quicker settlement of those currencies and faster cross-border transactions.”
Using digital assets to purchase NFTs
Linking digital currencies and NFTs, the solution was developed in partnership with Cuscal and Mintable.
Zach Burks, CEO and founder of Mintable, says the pilot project not only opens up commerce opportunities, but can reduce fraud and theft, and end the loss of documentation and records.
In the pilot, it was not possible to transfer wrapped CBDC to any Ethereum wallet or smart contract that was not ‘allow-listed’, demonstrating the ability to implement controls even on public blockchains.
While digital currencies are in their infancy, NFTs are already being used for gamification, digital identities, loyalty programs, ticketing, authentication and certification, Mr Burks says.
One of the challenges is ensuring consumers understand digital money — especially with regards to its separation from cryptocurrency, Mr Dhamodharan says. “This is about technology applied to regulated finance in a compliant way.”
Whether this is tokenised assets, digitalised currencies or the use of NFTs, Mr Dhamodharan says Mastercard looks to lead with use cases rather than the product. An adoption curve can be expected — and worked through — he says, but consumers’ understanding and trust is paramount.
“It’s about demonstrating how this solves problems in the corporate and consumer world, in the business-to-business landscape and for cross-border trade,” he explains. “It’s not just celebrating technology for technology’s sake.”
