Mastercard: Navigating Digital Borders – Unlocking the Benefits of Digital Innovation for Today’s Financial Ecosystem

The innovation unleashed by blockchain-based ecosystems over the last decade has had a profound impact on developments that are shaping how money, payments and financial markets are being reimagined. With changes in consumer demand for instant digital services being a key driver, there has been a relentless drive by both the public and private sectors towards deciphering how the advent of new technologies and emerging ecosystems can reshape the future financial system. Central banks, financial institutions, financial market infrastructures (FMIs), payment providers and fintechs are all actively exploring how the promise of new technology such as blockchain can enable efficiency gains across a range of different use cases.

The innovation that is underway across both financial and non-financial sectors, private and public, advanced and emerging economies has prompted many to consider how these disparate initiatives can be brought together. For example, new visions have emerged to unify these activities onto common platforms or ledgers.^[1] However, “quantum leaps”^[2] or hopes for a “big bang” blockchain project overlook one critical aspect for future interoperability, which is how they need to connect to the existing infrastructure that underpins the global financial system today. Critical to this discussion is therefore the need for solutions that can help to connect traditional and digital ecosystems during what will foreseeably be a decades-long process of technological transition. Navigating new digital borders between the old and the new will therefore be the key to unlocking the efficiency gains that this new technology and innovation can bring.

Let a Thousand Flowers Bloom: The Landscape of Innovations That Are Reshaping the Financial System

Technology and digital innovation are radically reshaping the provision of money, payments and financial market infrastructure. In particular, blockchain technology and digital assets are generating excitement from the way they could fundamentally transform how we process transactions and manage data. This is because unlike traditional centralised databases, blockchain offers the possibility of enabling a secure, shared database across a network of participants, where around-the-clock information is made available to all participants at the same time.^[3] As a result, they are transforming the way the financial sector is starting to think about how money, payments and market infrastructure could operate differently.

Blockchain-based tokenisation is fundamental to the real-world utility that blockchain can unlock.^[4] Tokenisation’s promise means that any type of existing asset could be brought “on-chain,” including financial assets such as equities, fixed income securities, bank deposits, or non-financial or physical assets such as real estate or gold.^[5] The potential utility of tokenisation and blockchain in financial markets is reflected in the growing number of jurisdictions that are progressively implementing regulatory frameworks and sandboxes that provide greater clarity for financial institutions. Japan, Singapore, Hong Kong, the UK and Europe have already enacted legislation to govern digital assets, with many other markets issuing new rules or in the process of enacting them.

Prominent financial institutions and payments leaders have all announced projects that are aimed at expanding their engagement with blockchain technology.^[6] Several of these global initiatives seek to unlock the power of blockchain, tokenisation and digital assets by applying them to regulated commercial bank money, which allow for real-time, 24/7 transactions and create comprehensive audit trails on immutable shared ledgers.^[7] The increasing interest and involvement of institutional investors through such newly approved products like digital asset ETFs are also driving recent momentum. By converting assets like commercial bank money, securities, commodities and real estate into digital tokens, financial institutions are exploring ways in which tokenisation can enable more efficient economic transactions across payments and capital market activities, which can unlock liquidity, improve access to investment opportunities, and widen the range of assets available for trading.

Many recent and widespread payment innovations have also been built on technological advancements to underlying existing infrastructures. Central banks around the world have instituted real-time gross settlement systems over the past decades. Globally, the proliferation of fast payments in over 100 jurisdictions now enables individuals and businesses to access near real-time transfer of funds between end users, with many more to be launched in coming years.^[8] Technological advancements and shifts in consumer habits have also led to the widespread adoption of alternative digital payment solutions, including mobile and electronic money, and alternative payment methods such as digital wallets.

The landscape of innovation underway illustrates that the financial system is in flux with promising yet disparate initiatives and communities that each solve specific pain points. It also highlights that diversity between new and existing systems, sectors and use cases is a longstanding feature of our global financial system that cannot simply be “fixed” with technology. Instead, recognising this diversity through solutions that can connect a critical mass of participants is needed to realise collective benefits for the ecosystem as a whole.

Building Bridges: New and Existing Ecosystems Must Connect to Collectively Flourish

The global financial system and broader financial markets continue to evolve into more diverse and complex ecosystems. They span a continuum from traditional, single-currency applications operated by individual banks to private or consortium-led platforms, extending to new permissionless platforms supporting multiple assets and services.^[9] While efforts are underway to understand and shape the financial architecture that will be needed to help support evolving innovation, they often fall short in addressing the inherent heterogeneity of these systems – systems involving diverse architectures, technologies and protocols that have developed over a long period of time, along with varied governance and regulatory frameworks.^[10] This has implications for market and liquidity fragmentation and interoperability between blockchains, as well as interoperability with traditional financial infrastructure.

This heterogeneity is prevalent in new digital asset ecosystems, stemming from tokenised assets being managed across a range of private permissioned to public permissionless platforms. Financial institutions have predominantly concentrated on private and permissioned platforms, primarily to ensure transaction security with known counterparties. Conversely, non-bank and fintech companies are utilising the distribution capabilities of public and permissionless platforms which provide ease of access.^[11] However, market participants are aware that as the digital platform ecosystem expands and assets are distributed over multiple platforms, there is a risk that market and liquidity fragmentation will reduce the network benefits needed to sustain their utility.

Despite the growing interest in blockchain across a range of use cases, a lack of interoperability among blockchain platforms is a key obstacle to scaling tokenisation. The expansion of asset tokenisation is contingent on trading and post-trade processes, including settlement, taking place on the same platform or within interoperable systems. Solutions to develop multilateral or shared platforms to address interoperability challenges have therefore been suggested, which could serve as “common venues” to enable different transactions involving multiple tokens.^[12] However, as noted by the FSB, such platforms would involve significant costs to develop, substantial coordination among stakeholders to transact across a shared ledger, as well as potential policy changes for jurisdictions participating in them.^[13]

The complexities arising from dispersed assets and platforms are compounded by the need for digital asset networks to not only be interoperable with each other but also with traditional financial institutions and FMIs. Tokenising conventionally issued assets still fundamentally depends on connections to and communications with traditional infrastructure and the involvement of parties that do not operate 24/7/365.^[14] As argued by the IMF, even if such shared venues could be established for tokenised ecosystems, there is a risk that they would form “islands of harmony” within a “sea of diversity” of jurisdictions, technologies and rules. Importantly, they would still need to connect and integrate with other, sometimes competing, islands or “continental-scale” legacy systems that constitute the majority of the current global system.^[15] The intrinsic decentralised qualities of blockchain are further constricted by the realities of sovereignty, geopolitics and the many legal and regulatory considerations, reinforcing silos and walled gardens.^[16]

Reflecting the realities of our global financial system, a more compelling solution is to avoid forcing market participants to choose between traditional and digital infrastructures, but to connect these two worlds of liquidity.^[17] The benefits of tokenisation and the efficiency gains that could be achieved across numerous use cases can only be realised if we can navigate across “digital borders” between traditional and new digital assets. Instead of large-scale “big bang” blockchain projects intended to reshape the entire transaction chain, emphasis is shifting towards gradual and progressive initiatives aimed at linking the discrete, individual programmes that have characterised much of the activity to date.^[18] Cross-industry collaboration and multi-party consortiums will be key to managing the two environments incrementally and to foster the network effects that are needed to enable a more efficient allocation of liquidity across the tokenised and reference asset markets.^[19]

Strength in Diversity: Solutions That Are Driving Network Connectivity Between Traditional and New Digital Assets

Diversity and the need for interoperability are not unique to today’s digital landscape. Many of the challenges related to disparate initiatives have relevant parallels to earlier innovations in payment technologies that led to the emergence of today’s global card networks. Blockchain and digital assets involve the use of radically new technologies and bring together a range of new stakeholders (including crypto exchanges, crypto-asset custodians, protocol developers, and the ‘miners’ who validate transactions). But the experience gained from creating and managing a global payments network used by billions of people – like the development of the card networks – offers directly applicable core principles and practices useful for applying this to new technology and participants.

Those skills include establishing trust, interoperability and strong governance, as well as establishing a shared set of rules between stakeholders. The resulting solution, referred to as the new Multi-Token Network (MTN), marries the payments network experience Mastercard has with the new technologies we are helping develop today. It is designed to support multiple tokens across multiple public and private blockchains, as well as connect to existing traditional systems, enabling seamlessness and secure transactions for end-users. Mastercard’s vision for the MTN is the product of embracing the new while respecting the value of experience. Transactions processed within the MTN could be settled on underlying public or private chains, alongside transactions from outside the network.

By providing this framework, the MTN would enable highly regulated financial institutions, most notably banks, to play a more active role in supporting their customers’ forays into the world of digital assets – supporting the overall safety and security of those experiences. For example, the MTN has connected with JP Morgan’s Kinexys Digital Payments,^[20] enabling mutual customers of MTN and Kinexys to settle B2B transactions through a single API integration. Rather than developing their own blockchain networks, the MTN offers banks an API-driven solution and provides interoperability with multiple blockchain networks, with Kinexys an example of one of those networks.

Similarly, Mastercard has also taken the next step towards connecting private payment network rails to tokenised assets on public blockchain networks. Specifically, Mastercard’s MTN has onboarded Ondo Finance as its first provider of tokenised real-world assets (RWAs). This integration allows MTN participants who have onboarded with Ondo to access OUSG directly on a public blockchain, settling payments through traditional banking rails without requiring additional crypto infrastructure. By bridging the gap between traditional finance and blockchain technology, this integration offers businesses a way to effortlessly integrate tokenised treasuries into their operations.

Solutions like the MTN are designed to connect financial institutions with businesses in a streamlined digital environment and enable access to digital asset innovation without having to set up additional infrastructure or accounts. It simplifies the complexities of domestic and cross-border transactions, providing a unified space where banks and businesses can interact securely and efficiently. Partnerships and cross-industry collaboration to harness the intrinsic value of blockchain among the diversity of traditional and new ecosystems remain key to unlocking interoperability between disparate networks.

Due to rapid developments in the digital asset ecosystem, Mastercard is a firm proponent of public-private collaboration on this issue, working to find an appropriate balance between the risks and opportunities of innovative technologies and novel business models. Importantly, limitations in interoperability between blockchain networks and traditional infrastructure highlight the need for trusted intermediaries that facilitate interoperability between the old and the new, with the ability to establish/enforce clear guidelines for the finality of transactions, set standards for programmable transactions and operate transparent dispute resolution processes.

The importance of getting these principles “right” is paramount to the eventual creation of governance, commercial and technical models that new technologies can be built from. Such alignment often involves complex negotiations by the jurisdictions involved, necessitating sustained political will to change existing regulations or standards. However, global efforts by both public and private actors to learn and partner, with a goal of bringing about better outcomes in financial services, will be the critical building blocks for tomorrow’s blockchain-based forms of payments, trading and settlement.

About Mastercard

Mastercard powers economies and empowers people in 200+ countries and territories worldwide. Together with our customers, we’re building a sustainable economy where everyone can prosper. We support a wide range of digital payments choices, making transactions secure, simple, smart and accessible. Our technology and innovation, partnerships and networks combine to deliver a unique set of products and services that help people, businesses and governments realise their greatest potential.