From bits to banks: Making the business case for crypto cards | Opinion

As a researcher deeply immersed in the dynamic world of cryptocurrencies and blockchain technology, I have witnessed the fascinating evolution of crypto cards from a curious observer’s perspective. My journey through various roles, from being a software engineer at Ava Labs and Ripple, to co-founding Palisade, a digital asset custodian, has provided me with unique insights into the intricacies of this rapidly evolving industry.

It seems that well-known figures in the cryptocurrency world, such as Crypto.com, Coinbase, and MetaMask, are now offering crypto cards. However, what’s driving this increase in availability?

The answer lies in crypto wallet software, or rather, its shortcomings. Whether it be apps or extensions, crypto wallets are difficult to monetize. Crypto assets are in the end user’s custody, so there can be no hidden fees. Software wallets are a dime-a-dozen—there is no product stickiness, and users can easily switch between different wallets.

Presently, even though wallet apps are reliable and secure, they lack sufficient advanced features that would warrant a subscription fee for the average user.

Unpacking self-custody

There is an inherent image problem with self-custody in crypto. The concept of self-custody was sold with the dream that because the crypto is akin to cash, users can hold it without spending any money. They pay their banks to hold their money, but the users pay nothing when holding cash.

However, this view is wrong on multiple levels. First, self-custody is not like holding cash; it is more similar to holding gold in a vault. Users have to buy the vault and pay for its maintenance. Second, while holding crypto might be free, there is still management (of assets) overhead. With real gold, depending on its value, holders need a secure location, coupled with surveillance, insurance, and other security measures such as high-energy lasers. For crypto, the overhead costs are much lower, but users still need a good wallet at the very least.

At a psychological level, individuals tend to prefer purchasing physical goods over intangible ones due to their tangibility and perceived production value. For example, a wallet as a hardware product is something you can hold, feel, and understand its worth. However, the challenge arises when trying to continually charge users for these products. The solution is through offering additional valuable services.

Value-added services as a revenue generator

Here are some additional features that surpass the basic offerings of a company, catering to a more comprehensive user experience within the application itself. For instance, with a digital wallet, these might include purchasing cryptocurrencies, swapping one crypto for another, transferring crypto assets between different blockchains, or earning interest through staking.

These offerings are genuine advantages. Opting for anything less could result in a complicated user journey, leaving users vulnerable to security breaches that hackers can quickly exploit. By embracing these additional benefits or functionalities, the user enjoys a secure, user-friendly, and somewhat private experience.

How do service providers determine their pricing? Generally, wallet services make money through slippage or foreign exchange fees, or occasionally by exploiting MEV opportunities. This is considered fair, as the wallet provider takes on additional responsibilities such as ensuring user safety and offering a convenient way for users to swiftly execute their desired operations.

While merely collecting fees for additional features isn’t enough to stimulate the growth needed by wallet providers to generate returns for their investors, the key lies in making it effortless for consumers to access a user-friendly product that consistently generates income for the issuing company.

And this is where crypto cards come in handy.

Crypto cards as a revenue driver

Crypto debit cards enable individuals to use their digital currencies at regular retail outlets. These cards perform dual tasks: they can be loaded with cryptocurrency and used to spend it. In performing these functions, crypto cards generate income for the providers. However, if the provider chooses not to take advantage of this revenue source, they will still gain from interchange fees.

Crypto cards are rapidly gaining popularity, as Visa users processed approximately $2.5 billion worth of transactions using their crypto-linked cards during Q1 of 2022. (Paraphrased from your original statement)

This adoption isn’t solely due to crypto cards aligning with the fundamental aspects of cryptocurrency. Instead, it’s primarily because they adhere to the essential principles of a financial product, such as compliance with current regulations, being user-friendly in terms of understanding, and most crucially, being user-friendly in practice.

Although daily transactions using raw cryptocurrency face numerous obstacles, crypto cards serve as a useful intermediate step towards that goal. Transactions themselves don’t occur on the blockchain, and neither does the process of converting one currency to another within the system.

On the other hand, cryptocurrency debit cards enable users to expend their digital assets in a manner similar to conventional money spending. Moreover, these cards adhere to the regulatory standards designed to prevent activities like money laundering and terrorism funding.

Crypto cards may not be a flawless answer, but they’re certainly useful, and that’s enough for everyone engaged right now.

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2024-09-17 14:12