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Leading credit card issuers ban cryptocurrency purchases

Several of the largest credit card issuers in the United States have put the kibosh on cardholders using plastic to purchase cryptocurrencies, like bitcoin. On Feb. 2, 2018, Bank of America, JPMorgan Chase and Citigroup each announced bans on cryptocurrency purchases by credit cards. This follows similar moves announced by Capital One and Discover in January.

In a related development, Coinbase, one of the largest cryptocurrency exchanges, is warning customers who use credit cards to be on the lookout for new card issuer fees related to those transactions. In a Feb. 1 post to users, Coinbase said it has been informed by several processing networks that the MCC code for digital currency purchases has changed, and the purchases are now considered cash advances.

Risky business

The new credit card policies come in wake of significant volatility in cryptocurrency exchanges, which some experts warn could result in massive defaults by credit cardholders. The value of a single bitcoin, the most well-known cryptocurrency, soared by more than 2,000 percent last year, trading at close to $20,000 in December 2017. But it has been falling rapidly since the first of the year, and as of Feb. 5, bitcoin’s price was hovering at just over $7,000.

A recent poll of active bitcoin traders by Lendedu, a financial news website, revealed that 18.15 percent use credit cards to fund and purchase bitcoins. What’s more, 22.13 percent of those buyers said they did not pay off the purchase balances immediately.

Lendedu also reported that debit cards are the most popular payment method for purchasing bitcoins, used by 33.63 percent of those polled, followed by automated clearing house transfers (18.60 percent). Bank wire transfers are the payment method of choice for 13.39 percent of those polled, while 16.22 percent said they used “other” methods of payment.

Federal oversight possible

Concerns about cryptocurrencies have been voiced in many corners, including in Washington, D.C. Despite virtual currencies being championed as investments, most cryptocurrency exchanges are classified as money-transmission services, which are state regulated. No explicit federal regulations apply to these entities.

In testimony presented on Feb. 6 before the Senate Committee on Banking, Housing and Urban Affairs, Jay Clayton, Chairman of the Securities and Exchange Commission, voiced concerns that investors may not understand that differences between cryptocurrency and securities exchanges. “I am concerned that Main Street investors do not appreciate these differences and the resulting substantially heightened risk profile,” he said.

J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission, told the committee he was similarly concerned. “Virtual currencies … likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space,” he said.

In his testimony, Clayton said the SEC and CFTC “are open to exploring with Congress, as well as with other federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate.”