Because of financial and legal concerns, the top five U.S. credit card issuers have now banned cryptocurrency purchases using credit cards. They did this by blocking transactions attempted at all known cryptocurrency marketplaces including as Coinbase, Kraken, and Binance.
J.P. Morgan Chase’s spokesperson echoed nearly identical statements from Bank of America, Citi, Capital One, and Discover, saying “At this time, we are not processing cryptocurrency purchases using credit cards, due to the volatility and risk involved. We will review the issue as the market evolves.” Debit card cryptocurrency purchases will still be allowed by all banks.
Thousands of Americans have been using their credit cards to buy cryptocurrencies. The majority of this buying was done just prior to the recent cryptocurrency valuations crash, leaving those investors deep underwater.
The barring of cryptocurrency credit card purchases is expected to quickly expand to European and Asian credit card issuing banks.
Here are the main risks banks face with this new form of leveraged investing:
- Increased credit card default rates where banks are left on the hook when borrowers bet wrong and cannot repay.
- “Get something for nothing” chargeback attempts made after buying cryptocurrency with a credit card.
- Heightened incentivization for thieves to steal or obtain credit cards fraudulently using stolen identities and quickly turning the cards into untraceable crypto hoards.
- Regulatory and fiduciary liabilities should a large part of this new behavior be found to be related to money laundering.
The credit card ban is part of a growing array cryptocurrency investment control measures being considered and/or implemented by both lenders and regulators. This movement should help mitigate the consequences of the hype that has recently threatened to overshadow the underlying promise of blockchain technology. But many cryptocurrency investors will probably feel that another risk mitigation tactic, where banks are now blocking wire transfers to and from cryptocurrency exchanges, is going a step too far.
Though all card issuing banks will soon have in place basic barriers to buying cryptocurrency with credit cards, credit card holders determined to use their credit cards to buy cryptocurrency are already using a workaround. They buy a gift card, usually an Amazon gift card, with their credit card, then sell the gift card to one of the many online services that exchange gift cards for Bitcoin such as paxful.com.