On Feb. 19, Coinbase announced that it has become a principal member of Visa. In an apparent first for the cryptocurrency industry, the firm is now able to issue debit cards without having to involve third parties. Prior to that, Coinbase had been releasing its physical cards in collaboration with authorized intermediaries, similarly to dozens of other crypto companies that offer such options to their clients.
While Coinbase didn’t share its strategy, technically, the new status grants it the possibility to issue cards to fellow cryptocurrency firms. In any case, this development marks an important milestone for the crypto payments sector.
Seamless and instant: A brief introduction to crypto cards
Cryptocurrency cards are in many ways similar to conventional bank cards used by millions of people around the globe for day-to-day purchases. The main difference is that the former allows users to deposit and convert cryptocurrencies instead of fiat money.
So, what makes them comparable? Crypto cards also leverage the existing Visa/Mastercard infrastructure widely used across the world, thereby enabling its holders to pay in crypto for any product or service that can be purchased via a cashless payment, either in-store or online. To achieve that, crypto card-issuing companies either convert digital assets seamlessly for each payment (debit cards) or enable the user to transfer them into a dedicated fiat account, which can, in turn, be used for day-to-day purchases (prepaid cards).
That breaks one of the largest barriers to widespread cryptocurrency adoption. Most merchants are still reluctant to accept crypto due to a variety of reasons including the general stigma that is still attached to digital assets, while many cryptocurrencies continue to face scalability issues that drastically hinder their performance capabilities.
Moreover, many exchanges offer only crypto-to-crypto trading possibilities, and converting tokens to fiat is still a complicated and often lengthy process. Crypto debit cards, meanwhile, present a convenient middle ground for both merchants and holders: The former are not required to update their payment infrastructure while the latter don’t have to manually convert their crypto savings each time they buy a cup of coffee.
Although crypto cards convert digital assets in real time, crypto’s infamous volatility is not a concern, Juan Villaverde, Weiss Ratings’ lead cryptocurrency specialist, argued in an email to CryptoX:
“I definitely would not consider volatility to be a concern — not when the industry is being flooded with stablecoins, which users can seamlessly park their money on with just a few clicks. We’re quickly entering a stage in the crypto industry where, if a user wants to eliminate all volatility from their portfolio, there is a wide array of options to pick from, including fiat money and gold-backed assets.”
As for the actual drawbacks of crypto debit cards, Villaverde says: “There are usually higher fees involved with their use,” however, “that’s likely just a consequence of how difficult it is for a user to get their hands on one.”
One of the first crypto debit cards in the industry was introduced back in April 2014 by cryptocurrency wallet provider Xapo. At the time, the firm announced “a major improvement to cards already on the market,” arguing that they were essentially “prepaid” cards that required the customer to manually convert their crypto assets into their local currency before making a purchase. Xapo’s card, on the other hand, was allegedly the first to allow users to automatically convert cryptocurrencies for each purchase in real time.
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In the following years, the sector continued to grow, as companies like Bitstamp, Coinbase and CoinCard rolled out their crypto cards solutions. Notably, Coinbase’s card, developed in collaboration with payments platform Shift, was the first physical crypto card to be released on the United States market and is available in 25 states. The card itself was issued by the Metropolitan Commercial Bank and supported both Visa and Mastercard payment networks.
Prior to the latest Coinbase announcement, all crypto cards had been overseen by the so-called BIN sponsors — companies that effectively act as middlemen, charging crypto firms for providing them access to the Visa or Mastercard networks. Unlike most crypto firms, they are licensed as principal partners of the payment giants and are thereby authorized to issue debit cards on their behalf. So far, it has arguably been the most problematic area in the sector.
Real problems: Dependence on BIN sponsors
While the crypto cards market has continued to expand since its inception in 2014, in early 2018, it entered a turbulent period. In January of that year, Visa abruptly ended its relationship with a major BIN sponsor, a Gibraltar-registered company called WaveCrest, citing “continued non-compliance with our operating rules.” As a result, a number of widely marketed European-based crypto cards — including those developed by companies like TenX, Wirex, Xapo, Bitpay (only the non-U.S. cards), Bitwala and Cryptopay — stopped working overnight.
The spokesperson added, however, that Visa has other approved card programs that use fiat funds converted from cryptocurrency in a number of jurisdictions. “The termination of WaveCrest’s Visa membership does not affect these other products,” the company’s representative clarified. In a statement shared with CNBC, the financial services giant stated:
“Our actions were not specific to cryptocurrency but rather reflect the issuer’s failure to comply with Visa’s policies that ensure the safety and integrity of our payment system.”
The incident dealt a lot of damage to the industry. For instance, Dmitry Lazarichev, a co-founder of Wirex, told CNBC that his company had shipped as many as 500,000 cryptocurrency debit cards to people across the world (excluding the U.S.), all of whom were instantly blocked as a result of the incident.
Wirex was one of the first companies to recover from the unforeseen event, as the startup soon partnered with Contis — a United Kingdom-authorized payments solutions company and principal member of Visa Europe — to relaunch their debit card offering. As Pavel Matveev, another Wirex co-founder, told Russian business media outlet Kommersant, Visa had tightened its compliance requirements in the wake of the WaveCrest incident, namely its Know Your Customer and Anti-Money Laundering procedures.
Consequently, many remaining crypto firms that previously issued their cards via WaveCrest had to narrow their scope of operation, crossing out Europe from the list of supported regions or stopping the release of cards altogether. An October 2018 media report suggesting that Mastercard and Visa were going to move cryptocurrency to a new “high risk” category reinforced the fears that crypto cards might cease to exist altogether, although the payment giants have not confirmed any of this information.
Meanwhile, the U.S. crypto card market has also taken a hit. In April 2018, Coinbase’s Shift Bitcoin debit card shut down without giving any reason. A number of social media commentators suggested that the Swift card was discontinued due to low demand, although this information has not been verified.
On the other hand, BitPay continues to operate in the U.S., although the company offers only prepaid cards. The company’s spokesperson told CryptoX: “BitPay works closely with Visa and the Metropolitan Commercial Bank to ensure we are meeting applicable regulatory requirements,” adding that the company’s product is subject to standard U.S. financial regulations and identity verification requirements.
When asked why BitPay chose Visa and not Mastercard, the representative said that “at the time, we launched the BitPay card in 2016, Visa was more receptive and more interested in partnering with a leading crypto company like BitPay.”
Meanwhile, some crypto companies picked the third option. Estonia-based startup Crypterium offers crypto debit cards processed by UnionPay, a Chinese financial services corporation. Crypterium’s chief operating officer, Austin Kimm, told CryptoX that UnionPay allows for a wider geographical presence:
“Both Visa and Mastercard allow you to develop cards for particular regions like the United States, South America, Europe, etc. UnionPay, on the contrary, divides the world in two regions: China and the rest of the world. This model is aligned with our commitment to serve clients from every corner of the world.”
“It’s been difficult so far for crypto companies in general to issue crypto debit cards,” as Juan Villaverde of Weiss Ratings summarized in an email to CryptoX, referring to the fact that the industry has to largely rely on middlemen.
Hugh Kingdon, an advisor at BCB Group, who has previously worked at both Visa and Mastercard, confirmed to CryptoX that “most crypto organisations have experienced being let down by their banking partners at some point in time,” clarifying that the process is complex for all parties involved:
“Many of the bin sponsors have a difficult life, needing to keep good relations with a wide range of regulators and, therefore, being a touch conservative.”
Coinbase card’s European comeback
Having abandoned the U.S. crypto card market, a year later, Coinbase debuted a U.K. crypto card, which was released in collaboration with a U.K.-regulated electronic money institution Paysafe Financial Services Limited, a principal Visa partner. In the following months, the firm extended the list of supported countries, making the card available to users in Spain, Germany, France, Italy, Ireland and the Netherlands.
In February 2020, Coinbase revealed that it has itself become a principal member of Visa, meaning that the crypto firm is now its own BIN sponsor and does not need a third-party financial company to issue its Visa cards. According to Forbes, the payments giant partnered with Coinbase back in December, but the development has only recently been made public.
As Villaverde observes, the fact that Coinbase — an entirely crypto-focused company — is now able to issue Visa cards directly and could “transform it into a middleman of sorts”:
“Other crypto companies could potentially go to Coinbase to issue their own cards, rather than having to rely on more traditional financial companies. Typically, the latter are much more reluctant to deal with crypto companies. This would create new opportunities for many other assets.”
While Coinbase has not returned CryptoX’s requests for comment, the firm reportedly told Forbes that it is not considering issuing cards to other companies “anytime soon.” Nonetheless, as the Forbes reporter argued, the principal membership status “marks a potentially important new revenue stream for the company,” which, according to the publication’s estimations, experienced a sharp 40% decline in earnings in 2019.
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The card-issuing industry is a widely burgeoning sector due to the declining popularity of cash. It generated $107 billion in revenue last year in the U.S. alone, according to an IBISWorld report.
The new Coinbase card, which will be released later this year, will reportedly be available in 29 countries including Denmark, Estonia, Norway, Portugal, Sweden, in addition to the aforementioned European jurisdictions whose residents are already using Coinbase debit cards that were issued last year. Notably, the new Visa card will not be available to U.S. users — which may be due to tax issues — as Andrew Mount, a litigation associate at Bressler, Amery & Ross, P.C., explained to CryptoX:
“The tax implications of transacting in Bitcoin in the United States could make using the Coinbase card impractical. The IRS treats Bitcoin as property that is subject to capital gains tax. Therefore, in the United States, each transaction with a card like this could be a taxable event.”
The event is still likely to cause a chain of positive events within the industry, experts suggest. “Not only is Coinbase the first company to issue a crypto card directly, it’s also the first major exchange to do so,” Villaverde told CryptoX. He went on to explain why the news is crucial for the crypto card sector, speculating that Binance — another crypto juggernaut — could soon follow suit:
“The fact that they are a Visa Partner is a big deal because it may pave the way for other companies to do the same. Binance is probably next in line, as they tend to not want to ‘fall behind’ on any new development taking place in the crypto industry.”
Indeed, on Feb. 21, Cuy Sheffield, head of crypto at Visa, called on any digital wallets interested in issuing Visa cards to apply to the company’s Fintech Fast Track program. Although the program avoids mentioning cryptocurrencies directly, it states that Visa-enabled digital wallets are suitable for a “startup in an emerging market seeking to leapfrog a physical card program” — meaning that many cryptocurrency companies might start providing Visa-powered digital cards for their customers in the near future.
Notably, just three crypto firms that work with cards — Crypto.com, Cryptopay and Crypterium — told CryptoX that they are considering becoming principal partners of payment giants, while other firms have either avoided the question or replied negatively.
“Becoming a principal member is a long journey, which requires obtaining an EMI license, having PCI-DSS certification and a lot of funding,” George Basiladze, co-founder of Cryptopay, told CryptoX, adding that his firm has only just started the process.
As for now, only one crypto company has been licensed as a full participant of Visa’s network, meaning that there is still a long way to go — and the fact that both Visa and Mastercard have ignored numerous emails sent by CryptoX requesting additional comment for this story seems to confirm that the industry is still on the sidelines.
