Crypto Cards: Driving Mass Adoption of Crypto Payments
Practical Alternatives for Using Cryptocurrencies in the Real World
This report was written by Tiger Research, examining crypto cards and their role in driving mainstream crypto asset adoption.
TL;DR
Crypto cards make cryptocurrencies easier to use in everyday life. Available as debit and credit cards, they leverage existing payment infrastructure and can be used in regulated environments.
Debit cards exchange crypto for fiat in real-time for payments. Credit cards offer loans based on crypto collateral. This allows users to use their crypto without selling it.
Crypto cards have limitations in decentralization and cost-effectiveness. The sustainability of their business model is also uncertain. Nonetheless, they can drive mass adoption and expand real-world use cases by integrating with various financial services.
1. Introduction
Cryptocurrencies are quickly becoming a new store of value. However, their use as a medium of exchange remains limited. Payments are hindered by complex transfer processes, the risk of incorrect deposits, long processing times, and the need for businesses to build separate payment systems.
Crypto-backed cards are gaining attention in this context. These cards leverage existing payment infrastructure. They aim to enhance cryptocurrencies' role as a means of value exchange. This will provide a familiar and accessible payment environment for consumers and businesses. This report analyzes the current status of crypto cards and examines their prospects.
2. What is a Crypto Card?
A crypto card is a physical or digital card used to pay for goods or services with cryptocurrency. The payment process involves an off-ramp, where the consumer’s crypto is exchanged for fiat. The payment is then settled to the business in fiat currency.
The whole process is similar to a traditional credit card with a couple more steps. The user first deposits crypto assets into a wallet linked to the crypto card. When making a payment, the crypto card service provider converts the user’s crypto to fiat through an exchange or intermediary (e.g., Triple-A). The converted fiat is then settled to the vendor via an existing card network, such as VISA or MasterCard. This is simply the integration of an off-ramp into the existing card payment system.
3. Major Crypto Cards Overview
Crypto cards are categorized into debit and credit cards, similar to card services in traditional finance. Next, we will examine the characteristics of each card type and look at key examples.
3.1. Crypto Debit Cards
Crypto debit cards charge instantly when a payment occurs. Users deposit crypto assets into a wallet linked to the crypto card. The payment amount is then taken from the wallet in real-time. Like traditional debit cards, they can only be used within the limit of the deposited assets.
Card providers vary in their off-ramp methods and timing. Cypher develops a non-custodial wallet service and offers a crypto debit card. Users off-load crypto from their Cypher wallet to top up their crypto debit card balance. This allows users to make payments easily in the real world.
Slash Card, from Japan's Slash Vision Labs, and Kast make it easy for users to pay in real life using stablecoins. Unlike Cypher, both services automatically convert stablecoins to fiat through internal off-ramp processing from wallets linked to their crypto cards. They use an exchange or intermediary. The converted fiat is then settled and paid to the vendor, just like in a traditional card payment system.
3.2. Crypto Credit Cards
A credit card is a payment method where the amount is charged over time, not immediately. Crypto credit cards are unique because they use deposited crypto as collateral, not credit. This works like a secured loan, where payments are not taken immediately but are settled according to the loan's pay-off method for each service.
Notable examples of crypto-based credit cards are the Nexo card and the upcoming Avalanche card. These services offer not only debit cards but also a credit card feature, which allows users to use crypto as collateral without selling it.
Nexo Card sets a limit based on the loan-to-value (LTV) ratio of users' crypto holdings. It supports payments within that limit. For example, if Bitcoin has an LTV of 50% and the value of Bitcoin in a user's wallet is $100K, they can use up to $50K of their Bitcoin as collateral. This gives users liquidity without selling their crypto.
Avalanche Card has a structure similar to the Nexo Card. It allows users to pay with USDC stablecoin and staked assets like sAVAX as collateral. Users can retain staking rewards while accessing liquidity. This gives them greater financial flexibility.
4. Role and Value of Crypto Cards
Crypto cards are a Web 2.5 technology that connects Web 2 and Web 3 industries. They play a crucial role in increasing the practical use of crypto assets by leveraging existing infrastructure.
For example, South Korea and Vietnam do not allow cryptocurrencies as a payment method. However, crypto cards enable users to pay with crypto. The payment is consequently processed in fiat currency through the traditional card payment system, making it possible to use them even in these countries.
This structure makes crypto cards a practical alternative. They enhance the use of crypto assets and enable legal use within existing financial and regulatory frameworks.
5. Challenges of Crypto Cards
Crypto cards have opened up new possibilities for cryptocurrency use by integrating with existing infrastructure. However, challenges remain.
The biggest limitation is that crypto cards rely on intermediaries and centralized systems, similar to traditional payment methods. This undermines decentralization and cost-effectiveness. Web3 technology aims to minimize intermediaries to lower transaction costs. Yet, crypto cards still incur off-ramp currency conversion costs, gas fees, and card network fees. These costs can be significant. To address this, it is essential to optimize transaction costs and enhance decentralization.
Crypto cards also face business model limitations. They must go beyond simple payments. Combining crypto cards with products like collateral-based lending and staking can improve sustainability. Crypto cards can also build a credit evaluation model using on-chain activities. This would allow reputation-based credit cards instead of relying on collateral. Such a system could promote financial inclusion and attract more users.
6. Closing Thoughts
Crypto cards are gaining attention for making cryptocurrencies more usable. They help realize crypto’s potential as a means of value exchange. While they provide a viable alternative in regulated environments, concerns about decentralization and cost-effectiveness remain. Still, crypto cards are expected to drive crypto payments and support the industry’s broader adoption.
Crypto cards can also go beyond payment infrastructure. By integrating with services like staking and collateral-based lending, they could create a unique ecosystem. This would offer benefits similar to traditional credit cards and increase the real-life use of crypto assets. This development could redefine the industry’s economic ecosystem.
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