Reading through online posts and watching YouTube videos created on the topic of crypto-funded debit cards, you are likely to get the impression that every time you swipe the card, crypto is automatically deducted and spent. That is not actually how the majority of the cards work.
Understanding how the system works both on your online account dashboard and behind the scenes will help you make decisions that impact on convenience you get, fees you pay, and even the taxes expected of you.
First, though, what are crypto-funded debit cards?
Besides being a store of value and units of account, cryptocurrencies like Bitcoin are also designed to be mediums of exchange. That means you can use them to pay for goods and services like you would the dollar, Euro, or Kenyan shilling. However, merchants have to accept that type of currency for the sale.
Over the years, many online and offline merchants have included cryptocurrencies, especially Bitcoin, among the payment methods they accept. For example, you can pay for your shopping on the online retailer Overstock using Bitcoin. In February 2021, the electric car manufacturer Tesla announced plans to accept Bitcoin payments.
Nevertheless, the number of merchants that accept crypto is still negligible. You can’t yet walk into a random store and expect them to accept your crypto.
However, you can shop in hundreds of thousands of stores around the world using crypto-funded debit cards. You can go to the remotest town, where no one has ever heard of Bitcoin, and you can still spend it as long as they accept one of the major credit cards, such as Visa or Mastercard.
Crypto-funded debit cards take your crypto and pay the merchants in traditional fiat money “fiat”. A company has married crypto buy/sell to a debit card and done all the hard work instead of you. You buy your crypto at the reigning market price and provide the fiat money liquidity you need to shop.
Indeed, some of the most used crypto debit cards are issued by major crypto exchanges. Binance and Coinbase are examples in this category. Others are payment processors like BitPay and membership clubs like Club Swan.
Today there are tens of service providers in this space. They are fully regulated in the jurisdictions where they are registered as financial service providers. They also have formal working arrangements with the major global payment processors.
How do crypto-funded debit cards work?
Converting from crypto in your wallet into fiat that ordinary merchants can or will accept is often complex and elaborate. It is also not the same for every crypto-funded debit card.
With many crypto cards, you need to do the conversion manually, by yourself. That means, before you go out shopping, you need to go to your account on their mobile app or portal, sell your crypto, and then use the fiat received to top up/load “top up” the card.
A few of the cards have the process automated such that the sale of the crypto can be triggered whenever you use the card.
In general terms, though, you have first to convert your crypto into fiat, then load the fiat to the card before spending.
The transaction on your card can happen in any of the following three ways:
In this case, you sell your crypto for a stablecoin, a digital token backed by another asset such as the US dollar (fiat). You can, in turn, sell the stablecoin for fiat and then top up your card.
For example, if you are using a crypto.com card, you can sell your Bitcoin on Coinbase for USDC (a stablecoin), transfer the coins to your Crypto.com wallet, and sell it on the Crypto.com exchange to get fiat and then top up the debit card.
The option of keeping your reserves in a stablecoin is useful in protecting your value from the high volatility in the crypto market.
This is perhaps the most common way to top up your card. You sell your crypto directly to the platform’s exchange for fiat at the reigning market price. The fiat is sent to your account on the platform, and from it, you manually top up your card.
An example of a crypto-funded card with such an arrangement is ClubSwan. You can hold your crypto in a wallet within your account on their platform. When you need to top up your card, you initiate a sale transaction on the dashboard. The fiat you choose is then deposited into an account on the platform. You can then manually top up your card from that account.
In some instances, the most you need to do is convert from crypto into a stablecoin manually. The system then handles the rest of the process on your behalf. While it might seem like you are spending the stablecoin, the system deposits actual dollars into the merchant’s bank account.
An example of a debit card that allows you to convert crypto into a stablecoin you can spend is Coinbase. The exchange is among the companies behind the USD coin (USDC) stablecoin pegged to the US dollar at a 1:1 ratio.
You can use your BTC or any other crypto they support to acquire USD Coins on the exchange.
It is important to point out that you can also spend your crypto directly without converting it into a stablecoin. In fact, most debit cards will allow you to choose multiple ways of topping up your card.
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What should inform which path you decide to use?
One of the factors that should inform the path you take to top up your card is, of course, what your service provider makes possible. If you are using the ClubSwan card, for example, you are most likely going to do a direct conversion from crypto to fiat.
Your investment strategy is another factor. For example, if you are a holder, you might prefer holding your coins in crypto even when you need to spend them. That means you prefer converting only at the point of spending.
Tax implication is another factor likely to inform the path you choose. You have a tax event to record every time you spend crypto in countries where it is considered a property.
If every transaction has to be directly from crypto, you may need to keep track of numerous tax events. On the other hand, if you convert to fiat once and then make many transactions, you have a single tax event.
The fees you are expected to pay can also make you choose one path of topping up your wallet over another. Generally, the more hoops you go through, the more fees you are likely to pay.
Before you decide to use a card, you might need to understand how it works, particularly the steps you need to take to top it up and the fees that you are charged.