13 Feb 2018 · 3 min read

The Curious Case Against Bitcoin on Credit Cards

Recently, a number of banks in the US and the UK that offer credit cards have halted all transactions being sent to known cryptocurrency dealers. However, for those who wish to purchase bitcoin on a credit card, there are still a multitude of options available that as of yet are not being affected by the declarations of these banks.

For instance, alternative credit card providers, online only banks, and credit unions appear to still be supporting bitcoin purchases with credit cards without any major issue.

Further, the three banks in the US –– J.P. Morgan Chase, Bank of America, and Citigroup –– did again say that debit card purchases as well as direct bank transfer or ACH (Automated Clearing House) debit purchases would not be affected.

Moving past banks and credit cards, there will be a number of new cryptocurrency onramps that will come to exist this year. For instance, OmiseGo, which will launch later this year, is designed to allow for exchanges of fiat currency to cryptocurrency with no intermediary. Other services like Gems are launching a plan to offer cryptocurrency assets paid in exchange for completing tasks on a computer.

While these won’t replace the traditional fiat to crypto route, they could help mitigate the losses until a more long-term solution becomes available.

Reasons for the ban

While banks are preventing transactions made from debit cards, they are doing so with credit cards for several reasons. According to an article that appeared on Bloomberg, the banks fear that bitcoin is an unreliable asset. Therefore, if large amounts of customers are financing the purchase of bitcoin through credit cards and bitcoin continues to drop in value, then the banks could be left with large amounts of bad debt.

Also in recent news, several credit card processors have been changing the way cryptocurrency purchases are coded. Specifically, purchases made on Coinbase have been changed from a purchase to a cash advance. Generally speaking, a cash advance is when an account holder uses an ATM to withdraw cash from their credit card. At many banks, cash advances come with additional fees or higher interest rates. This is presumably because banks do not want customers to withdraw cash from the credit card, and then use that cash to repay the credit card itself.

While it's easy to say that the banks are being selfish or acting against the new technologies, it is conceivable that their complaints do have some degree of sense to them. If someone buys bitcoin on a credit card, and then sells that bitcoin shortly after, the result is essentially the same as getting a cash advance. The difference being that the fees paid to the credit card are different.

However, it's not quite that simple. For instance, if someone were to use a credit card to purchase gold, diamonds, or other physical assets, then this is essentially the same as a bitcoin purchase. The difference being that bitcoin was designed to be a currency, whereas precious metals or gems were not.

The main issue

While some additional claims were laid out, such as a fear that stolen credit cards could be used to purchase cryptocurrencies, in which credit card providers would have essentially no recourse to recover lost funds, such claims were likely just secondary to the main issue. That being the case, banks simply don't want to be involved with bitcoin. To them, bitcoin is bad news.

The CEO David Nelms said in a phone interview with Bloomberg that when it comes to bitcoin, "it's crooks that are trying to get money out of China or wherever", and later he added "Or if someone steals our credit card numbers they’re going to ask for payments in Bitcoin. Those are the only use cases I’m actually seeing today.”

The banks are not completely saying no to cryptocurrencies, however, as Citigroup spokesperson Jennifer Bombardier said "we will continue to review our policy as this market evolves". In other words, the door for crypto could reopen again sometime in the future.