"Pay with Crypto Instead of Debit or Credit Cards"... What Are Crypto Cards? [Bitcoin Now]

Cumulative Transaction Volume Since March 2023 Exceeds $10 Billion
Card Funding and Asset Custody Methods Vary
Still Lacks Credit Card Features Such as Installment Payments

As payments and settlements using virtual assets such as stablecoins become more common, use of crypto cards, which allow holders to use their virtual assets for everyday purchases, is increasing. Analysts say the competitiveness of crypto cards will depend on how safely assets can be held and managed, and how broadly the cards can connect to banking networks.

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Crypto Card Transaction Volume Tops $1 Billion in a Month for the First Time This July

Crypto card transaction volume topped $1 billion in a month for the first time this July, according to PaymentScan, an online payment analytics platform. Cumulative transaction volume has exceeded $10 billion since March 2023.

A crypto card is a physical or virtual payment card that connects virtual assets to existing card payment networks. To use virtual assets held in an account for everyday purchases, users must sell them on an exchange, withdraw the proceeds to a bank account, and then pay by card or bank transfer. A crypto card allows users to pay directly with their virtual assets without going through these steps.

When customers pay with a crypto card, merchants receive payment in the local fiat currency. The transaction is processed just like a regular card payment, while settlement between the issuer and the card network is conducted in fiat currency or a stablecoin such as USDC.

Demand for crypto cards is rising as stablecoins are used for payments and settlements across a wider range of transactions. An analysis by global payments platform Stripe found that stablecoin payment volume reached $400 billion last year, doubling from the previous year. Crypto cards enable consumers to use stablecoins, whose transaction volume is growing, at existing card-accepting merchants.

Crypto cards also meet demand for storing and using dollar-denominated value, particularly in regions where opening a dollar account is difficult. With a crypto card, users can hold dollar value in stablecoins and pay local merchants as needed without selling assets on an exchange or withdrawing money from a bank.

How Crypto Cards Work and What Will Determine Their Competitiveness

Crypto cards use several methods to fund payments: conversion in advance, conversion at the time of payment, and collateralized borrowing. With advance conversion, stablecoins are converted into dollars when funds are deposited, and card purchases are deducted from that balance. With conversion at the time of payment, users hold their virtual assets until they pay, then convert only the amount needed into fiat currency. With collateralized borrowing, users pledge virtual assets as collateral and borrow an amount equal to their card spending.

Cards also differ in who holds the assets. With custodial cards, the card operator or a partner financial institution holds the assets and records each user's balance in its ledger. Self-custodial wallet cards use users' personal wallets, with only the tokens and limits available for card payments specified. Another approach is to hold assets in a smart-contract vault for each user and use them for payments or as collateral.

However, crypto cards have limitations that prevent them from replacing credit cards. They are unlikely to offer the unsecured credit limits, interest-free payment periods, and installment plans available with conventional credit cards. Users of debit-style cards must hold virtual assets that can be sold at the time of payment, while collateralized borrowing requires collateral worth more than the amount charged.

Holding stablecoins also involves risks. Stablecoins do not always maintain a value of $1. In March 2023, USDC fell below $0.90 after $3.3 billion of its reserves became tied up at Silicon Valley Bank. If funds for payments are concentrated in a particular stablecoin, a price deviation from $1 could affect the available balance. In addition, virtual assets deposited with a card service are not protected like bank deposits.

Ben Lee, a researcher at Bluelake, said, "We expect crypto cards to become an entry point to comprehensive financial services, going beyond payments with stablecoins." He added, "Going forward, competitiveness will depend on how safely a diverse range of assets can be held and managed, and how broadly providers can connect to financial infrastructure spanning banking networks and decentralized finance (DeFi)."

This content was produced with the assistance of AI translation services.