Most of the content online about crypto-funded debit cards is often misleading. For example, some of it creates the impression that all you need to do to use the card is to have crypto in an attached wallet, and every time you swipe, it is automatically deducted and spent.
If you don’t understand how the cards work behind the scenes, you may struggle with decisions regarding such critical issues as fees, taxes, and convenience of use.
But, what is a crypto-funded debit card, and why do you even need one?
Cryptocurrencies are money. That means they are supposed to perform the three main functions of money: a store of value, units of account, and a medium of exchange. Being a store of value and unit of account are functions easy to assign.
Millions of people around the world today have a section of their wealth in crypto. It is also the case that the value is measured in terms of the units of crypto.
It has, however, remained a challenge to assign the medium of exchange function to cryptocurrencies. That is because merchants have to accept them like they do dollars, Euros, and other government-issued currencies.
Today some merchants accept crypto. For example, Overstock, one of the largest online stores, lets you pay using Bitcoin. The electric car manufacturer Tesla has also announced that it accepts Bitcoin.
Still, more than 90% of online and offline stores do not accept crypto as payment for goods and services. This is where crypto debit cards come in to help.
A crypto debit card is issued by a service provider that takes your crypto and then pays the merchants in government-issued currency. Besides issuing the debit card, the service provider acts as an exchange. They take your crypto and give you US dollars, Euros, or other fiat currency, which becomes the liquidity you use to shop.
Besides being regulated, the entities issuing crypto debit cards have partnerships with major global payment processors, particularly Visa and Mastercard.
This arrangement allows you to shop in millions of stores globally. That includes those in the remotest towns. The only condition being that the merchant accepts Visa or Mastercard.
The most popular crypto debit cards are issued by exchanges and payment processors like Binance, Coinbase, and BitPay. Others are issued by membership clubs like ClubSwan.
The way crypto debit cards work
The main feature that separates a crypto debit card from the others is that it provides the mechanism for you to convert from crypto into the fiat you need to spend. How this is done is not the same for every brand.
Generally, you need to convert your crypto to fiat manually on a mobile or portal dashboard. You then use the fiat you receive to top up the card. It is only in very few cards that you can trigger automatic conversion at the point of shopping.
The movement of your money from crypto to fiat in the merchant’s bank account can take any of the following three paths:
Crypto-fiat
This is the most direct path. You basically sell your crypto to the card-issuing entity and then use received dollars, Euros, or other currency to load your card.
ClubSwan is an example of a crypto debit card that you can top up by selling, moving from crypto to fiat. A Clubswan membership comes with crypto wallets and bank accounts (Dollar and Euro).
When you sell crypto from your wallet, an equivalent fiat is deposited into the bank account from which you load the card.
Crypto-stablecoin-fiat
A stablecoin is a digital token on the blockchain-backed by the US dollar or other assets. Many opt to use it as a reserve because its price is more stable than that of Bitcoin or other cryptos.
Some crypto debit card issuing entities facilitate not only the acquisition and holding of stablecoins but also their conversion into fiat. You can sell the stablecoin for fiat that you need to load your card.
For example, you can exchange your Bitcoin on Coinbase for USDC (a stablecoin). You can then transfer the USDC coins to your Crypto.com wallet. Whenever you need to shop with your Crypto.com card, you can exchange the stablecoins for fiat and then top up the Crypto.com debit card.
Crypto-stablecoin
Some crypto debit cards have a created a system that allows you to spend a stablecoin directly. That means the only conversion you need to do is from crypto to stablecoin. Still, the merchant receives actual dollars. The system processes that transaction on your behalf.
Coinbase is one of the crypto debit card issuing entities that facilitate you to spend a stablecoin directly. They support the use of USD coin (USDC), pegged to the US dollar at a 1:1 ratio. It is important to point out that you can buy stablecoin using fiat or crypto like Bitcoin.
What to Consider
The following are factors to consider what path to load your card you should follow:
- What your service provider makes possible.
You can only follow the path that your service provider makes available. For example, ClubSwan supports only the direct conversion from crypto to fiat.
- Your investment strategy.
If you HODL, you might prefer keeping your assets in crypto. That means you might opt to use a path that allows you to sell only at the point of spending.
- Tax implication.
In countries where crypto is considered a property, you have to report income tax or capital gains every time you use it to shop. That means if you convert every time you swipe, you will end up with numerous taxable events to file and report.
On the other hand, if you convert a significant amount of crypto to fiat, you may end up with a single taxable event.
- Fees you are expected to pay
The more steps you need to take until you make the payment to the merchant, the more fees you will likely be charged.
Conclusion
The list of crypto-funded cards you can choose from is growing longer with time. To pick one that works for you, it is important that you understand how they work under the hood. This will help you make decisions on specific issues like convenience, tax implications, and fees.