Credit cards and crypto: Rewards reimagined

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  Quantumrun Foresight
• June 12, 2024

Insight summary

Cryptocurrency is blending traditional finance and digital assets. With Bitcoin ATMs and innovative credit cards rewarding purchases with crypto, people have new ways to engage with digital currencies. These developments are prompting a reevaluation of financial literacy, regulatory frameworks, and the environmental impact of digital asset acquisition and management.

Credit cards and crypto context

Cryptocurrency straddles the line between being a currency and an investment vehicle, introducing options for investors and consumers. Bitcoin, recognized as the pioneer and most prominent among its peers, demonstrates the sector's rapid rise from a niche interest to a mainstream financial phenomenon. This transition can be seen in the intersection of cryptocurrency with traditional financial instruments, such as credit cards. This convergence is resulting in innovative methods for accessing cryptocurrencies, including credit card transactions at select exchanges and Bitcoin ATMs.

As of December 2023, the US alone hosts over 27,000 such kiosks, allowing users to purchase Bitcoin and other cryptocurrencies using cash, debit, or credit cards. However, these machines primarily facilitate the purchase of cryptocurrencies without offering cash withdrawal services. In addition, users need to navigate considerations, such as transaction fees and purchase limits.

In December 2020, BlockFi, a cryptocurrency-based lender, launched a credit card that rewards purchases with Bitcoin, setting a precedent for similar products in the financial market. 
For example, a credit card can offer a 3% cash back in Bitcoin when the user buys gas. Additionally, turning these rewards into Bitcoin doesn’t cost extra fees. However, such cards can also expose users to the market's volatility, contrasting with the stability typically associated with traditional cash back or travel rewards cards. 

Disruptive impact

By integrating cryptocurrency rewards into everyday transactions, individuals can gain a low-effort entry point into the crypto market, which can diversify their investment portfolios and increase their exposure to new forms of asset appreciation. However, the volatile nature of cryptocurrencies means that the value of rewards can fluctuate widely, leading to unpredictability in the actual benefits received. Individuals may need to become more financially literate in cryptocurrency markets to manage these assets effectively, highlighting a shift towards more complex personal finance management.

By embracing payments and rewards in cryptocurrency, e-commerce and retail companies can reduce transaction fees associated with traditional credit card payments and mitigate the risk of chargebacks. This trend can also prompt businesses to innovate their product and service offerings to cater to crypto-savvy consumers. On the downside, companies may face challenges adapting to the regulatory and tax implications of transacting in cryptocurrencies, requiring updates to their financial systems and processes.

Governments are keenly interested in the rise of crypto credit cards due to their implications for monetary policy, taxation, and financial regulation. The increasing use of digital currencies challenges the traditional economic system and may lead to shifts in how financial transactions are monitored and taxed. As a result, governments may need to update regulations and possibly develop new infrastructures to accommodate the growing digital economy. Furthermore, the global nature of cryptocurrencies poses challenges for international policy coordination, requiring countries to work together to establish standards and prevent financial crimes such as money laundering and tax evasion.

Implications of credit cards and crypto

Wider implications of crypto credit cards may include: 

• A shift in consumer spending habits towards crypto transactions, resulting in a reduction of transaction fees and increased savings for users.
• The introduction of crypto credit cards sparking a rise in digital literacy programs to help consumers navigate the complexities of cryptocurrency.
• Governments enacting stricter regulations on crypto transactions to safeguard against fraud and money laundering, enhancing the security of digital financial transactions.
• Companies integrating crypto payments into their business models, leading to more diverse and inclusive financial ecosystems.
• The expansion of crypto credit card rewards programs encouraging more people to invest in cryptocurrencies.
• Retailers adopting crypto payments to meet customer demand, resulting in faster and more efficient checkout processes.
• The environmental impact of increased crypto mining activities prompting governments to invest in renewable energy sources.
• The development of new financial products around crypto assets, leading to more personalized investment opportunities for individuals.
• Central banks considering digital currencies in response to the popularity of crypto credit cards, potentially leading to the introduction of government-backed digital currencies.

Questions to consider

• How could incorporating cryptocurrency into your daily spending change your approach to saving and investing?
• What implications might the widespread use of crypto credit cards have on the privacy and security of your financial transactions?