Consumers should be aware that the crypto rewards that some credit cards offer will be subject to volatility and hacking risk.
As cryptocurrencies such as bitcoin gain more currency with the public, credit card issuers, too, are trying to cash in on this interest by coming out with crypto credit cards.
Such cards enable their holders to benefit from potential upswings in crypto prices, although they would also be subject to the volatility of cryptocurrency.
Bitcoin prices, notably, have been on a wild ride. In December 2017, the cryptocurrency crossed the $18,000 mark before crashing. There’s been renewed interest in bitcoin since 2020, taking its price up to higher than $50,000 in February. This came about as corporates such as Tesla and Square bought into the digital currency.
If you are looking to get on this bandwagon by opting for a crypto credit card, you should be aware of the potential risks.
What are cryptocurrencies?
Cryptocurrencies – of which there are a variety, including ethereum and litecoin, besides bitcoin – are all digital currencies that don’t have a paper form. If you want to use these currencies, the monies would be transferred online. They are stored in a so-called “digital wallet” which is online and could be hacked into.
Moreover, these currencies aren’t backed by any government authority, since they are not issued by the government, like fiat currency is. Bitcoins are put out through a process called mining, which is undertaken by private individuals, and transactions using this cryptocurrency get posted to an online ledger called a blockchain.
Issuers are coming out with crypto rewards credit cards
A number of card issuers are stepping into the crypto credit card niche. BlockFi, for one, is coming out with a credit card that enables users to earn rewards in bitcoin, rather than the garden variety points and miles or cash back rewards. The card, which comes with a $200 annual fee, offers 1.5% cash back on all purchases. The issuer will then convert these cash back rewards into bitcoin on a monthly cycle.
In a statement provided to CreditCards.com, BlockFi said, “Consumers are looking for ways to put their hard-earned savings into an appreciating asset, and many believe holding bitcoin is a smart money move. We believe that earning rewards in bitcoin is a more attractive opportunity than earning travel or hotel rewards points.”
Other issuers, such as Gemini and Crypto.com, are also testing this crypto rewards card niche. Gemini, a company founded by the Winklevoss twins (Cameron and Tyler) that describes itself as a crypto exchange and custodian, is launching a credit card that offers rewards of up to 3% back in bitcoin or other cryptocurrency on purchases consumers make with the card.
And credit cards that enable payments with cryptocurrencies are also available overseas, with one example being Mastercard’s partnership with Nexo in Bulgaria to enable consumers to make credit card purchases with their cryptocurrencies. Nexo uses cryptocurrencies as collateral and provides customers with a fiat loan to enable this.
Is a crypto credit card a good way to test cryptocurrency waters?
Liz Lasher, FICO’s vice president of fraud, financial crime and cyber risk portfolio marketing, noted that the analytics company has seen “an increased appetite from consumers to understand the cryptocurrency space – whether for speculative, diversification or even economic reasons such as a hedge against inflation.”
One benefit for consumers who try crypto credit cards is easy accessibility to cryptocurrencies. For instance, she pointed out, “the rewards structure enables consumers to dip their toes in the water and gain access to crypto in a fairly low-risk scenario in a way that does not alter their current spending behavior.”
Considering that cryptocurrencies have been on a tear recently, you too might be interested in opting for a crypto credit card. However, Ted Rossman, CreditCards.com’s industry analyst, expects that it would be a better strategy to go in for a no-annual-fee credit card that offers cash back rewards and use these rewards to purchase crypto coins. That would be a safer way to participate in any upside cryptocurrencies might offer.
See related: TomoCredit dumps crypto for cash back
Beware of cryptocurrency volatility
Cryptocurrencies certainly come with a lot of risk. For one, their values fluctuate wildly. And considering that they are not government-issued, you won’t have any recourse in case hackers get into a digital wallet and help themselves to your stash of cryptocurrency.
“As using crypto-backed cards would be a form of leveraging so-called custodial wallets, consumers should work with reputable institutions that have robust controls in place to prevent breach of their systems as they may be viewed as a ‘honeypot’ that criminals wish to target,” FICO’s Lasher said. “We have certainly seen dramatic upticks in both attempted and successful security breaches correlated to surges in cryptocurrency exchange rates.”
And if the company issuing the digital wallet goes out of business, you are out of luck. If it’s money in a bank, the government’s FDIC insurance will step in to protect you.
Chaya Hendrick, president and CEO of SmartMetric, noted that crypto cards come with “value fluctuation risk and moral and regulatory risk.” The technology company has developed systems and software for the payments and security sectors and Hendrick said it restrains itself to “government and regulatory approved stable coins and pure blockchain as an added secure communication of value method.”
A stable coin is a sort of cryptocurrency whose value is pegged to another asset, such as the U.S. dollar, so as to cut down on the potential for volatility.
Fed’s adoption of digital currency might spur crypto protections
In the meantime, central banks are looking into developing central bank digital currencies (CBDCs). The Federal Reserve is one of them. In Congressional testimony in February, Fed Chair Jerome Powell said that the digital dollar is a “high priority” project for the central bank.
And in a speech at Stanford University in February 2020, Lael Brainard, a member of the Federal Reserve Board of Governors, noted that a survey of 66 central banks by the Bank for International Settlements found that more than 80% of them were looking into some form of CBDC.
Brainard said, “While the legal framework is well-established with regard to the rights and protections for Federal Reserve notes in the current system, it is untested for new instruments such as CBDC and, more generally, other digital currencies. A different approach may be necessary to ensure that holders of CBDC have appropriate protections, including privacy rights, fraud protection, digital identity safeguards and data protection.”
Seeing growth potential in the crypto cards market, Mastercard is engaging with regulators and central banks worldwide that are looking into their own CBDCs, according to Raj Dhamodharan, executive vice president for Mastercard’s digital asset and blockchain products and partnerships.
He expects that crypto credit cards will gain more acceptance worldwide and that there will be continued growth in the CBDC and cryptocurrency niche. As this digital growth continues, Dhamodharan said, “We strongly believe that for digital currencies to become trusted payment instruments – they must offer stability, regulatory compliance and consumer protections.”