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Crypto Debt On Credit Cards, The Next ‘Rekt’ Cycle Looms

Crypto Debt On Credit Cards, The Next 'Rekt' Cycle Looms

Recently, leading cryptocurrency exchange Binance announced that it now allows its users to buy Bitcoin with a credit card. With the rise in debt structures across different economic sectors and also in credit card facilities, it may be a tough call to decide whether or not to purchase Bitcoin or any other cryptocurrency using a credit card; considering that cryptocurrencies are still an emerging asset class and are currently classified as unregulated and highly volatile, buying cryptocurrencies using a credit card can be a double-edged sword.

Case in point, Bitcoin had a bull-run towards the end of 2017 with price peaking to as high as USD 20,000 in December, and fell 3% in 24hrs and has since then had a retrogressed market, with many failed attempts to hold pretentious support levels. As at the time of writing, Bitcoin trades at under USD 3500 — an over 82% drop since its all-time high. This would have been a deceptive allure, had any investor been taken by the excitement of the bull run.

On the other hand, earlier that year, Bitcoin traded at average highs of USD 800 to USD 1000. Investors who got in on the action here would have made an exceeding 1900% profit at the dawn of the year’s all-time high in December. The unpredictable, speculative and highly volatile nature of the cryptocurrency market may be its special allure, however, it has in many ways proven to be its undoing as well. Given the current market trend, many players in the industry have become wary of the high-risk levels.

According to a poll by LendEDU in 2017, about 22% of investors who bought crypto using their credit cards opted to pay later, even though some of them weren’t comfortable with the decision. Although, about a year ago, banks in the US, UK, Australia, Canada, and Europe were reportedly banning the use of credit cards to purchase crypto under the guise of protecting investors. However, some banks may still allow access.

While using credit cards promotes crypto adoption on one hand as it adds to the increasing number of avenues available to acquire cryptocurrencies, the nature of associated risks far outweighs the perceived good.

According to a report, the average American credit card debt has reached new highs of 3% from the previous year, having an average of USD 6,375 per user. Further, credit card debts have reportedly amounted to over USD 1 trillion in 2017 hitting new highs ever. To be one of the 3% and add cryptocurrency debts onto the plastic card can make life unbearable if poor decisions are made.

Investors should, however, be prudent with their decisions to invest in crypto through credit cards, understanding the added risks it poses to their personal economics coupled with the already existing debt system and inherent consumer behaviors, all in the vein to avoid being rekt (wrecked).

Numerous ways to obtain cryptocurrencies continue to expand the opportunities to hold these new class of assets. BitcoinNews reported in December on how Bitcoin ATM kiosks have increased in the recent months. CoinATMRadar lists 143,399 service points accessible in over 76 countries. Each with different pros and cons, however, nothing gets closer to the US residents as the opportunity the credit card option provides. ‘Buy on credit and pay later’ would seem like a more attractive way to own these assets than having to invest hard earned money into cryptocurrency.

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Wells Fargo Bans Credit Card Crypto Purchases

Wells Fargo has announced that customers will no longer be able to purchase Bitcoin and cryptocurrency using its credit cards. A spokesperson for Wells Fargo said this decision is in line with the rest of the industry, and is due to multiple risks associated with cryptocurrency.

Wells Fargo is the third largest bank in the United States with nearly USD 2 trillion of assets, not far behind the total assets of JPMorgan Chase and Bank of America, who have already banned cryptocurrency purchases with credit cards. Citigroup, Discover, Capital One, and UK bank Lloyds also issued the same ban earlier in 2018.

The risks associated with cryptocurrency purchases via credit card weren’t detailed in the announcement of the ban, but there are a couple of well-known pitfalls that makes purchasing cryptocurrency with credit cards risky to banks and their clients.

Bitcoin and cryptocurrency transactions are immutable and irreversible, so if credit card fraud were to occur the bank would be at a complete loss. Unfortunately, cryptocurrency would be a preferred way to drain a stolen credit card, since once the money is converted to cryptocurrency it can be laundered and converted back to cash, making it difficult to trace.

Market volatility is another thing that makes purchasing cryptocurrency with credit cards risky. The price of Bitcoin has declined from a peak near USD 20,000 to less than USD 7,000 today, in only about half a year.

If someone were to buy Bitcoin with a credit card and then lose a lot of their investment they might attempt a chargeback. If the chargeback wasn’t successful, the credit card user may choose not to pay back regardless, feeling that the bank didn’t properly protect them.

Indeed the bans on purchasing Bitcoin and cryptocurrency with credit cards coincide with the market going down throughout 2018, so credit card users deciding not to pay their bill after losing money in the market could be a primary factor leading to these bans.

It is perhaps beneficial to the cryptocurrency world that credit cards are being taken out of the picture since it could reduce fraud associated with cryptocurrency, making the cryptocurrency ecosystem a healthier place to conduct business.


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MasterCard Patenting Blockchain Tech Which Would Digitize Credit Cards

MasterCard has filed a patent application with the United States Patent and Trademark Office which would digitize credit cards and store them on a blockchain. The patent application is titled ‘Method And System For Payment Card Verification Via Blockchain’. This would be a fully functional system that could replace physical credit cards. The patent was originally filed in December 2016, but became visible to the public yesterday, 7 June 2018.

The technology would encrypt the image of a credit card on a blockchain, and it would have an associated public key and private key similar to a Bitcoin wallet. Although this data would be on a public blockchain, it would be extremely secure thanks to cryptographic encryption, and credit card information would be impossible to access without the private key. Therefore, keeping the private key safe will be crucial for the system described in this patent to be successful.

When a purchase is being made, the system will use the private key to decrypt the credit card image stored on the blockchain, providing the payment details to the merchant. This will be done by displaying a machine-readable code, possibly a quick response (QR) code, to a point-of-sale device.

Essentially, this technology would allow users to swipe their phone at a cash register and complete a payment, without using any physical card. This is similar to how people use Bitcoin for in-person transactions.

The lack of having to use physical credit cards would solve the problem of lost credit cards. If credit cards are stored on the blockchain they can never be lost, a user simply has to login to their account from any online device to access them. This will save the headache of waiting a week or two for replacement cards to come in the mail.

This credit card blockchain technology would reduce fraud. Skimmers are installed at many point-of-sale devices, and these steal user credit card information for fraudulent purposes. Since there will be no physical cards, skimming devices would become obsolete. The lack of physical cards will reduce fraud in many other ways besides this since, in general, the numbers on a physical credit card are what fraudsters use to steal money. If this information is all encrypted and not displayed physically it will be much more difficult to commit credit card fraud.

If MasterCard ends up putting this blockchain technology into real-world use it could become the biggest application of blockchain technology in history since credit cards are one of the most popular forms of payment in the modern day financial system.


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