The number of financial institutions that won’t allow members to buy virtual currencies with credit is rapidly growing.
Last year was something truly incredible for cryptocurrency investors. Having begun the year with a combined market value of less than $18 billion, the aggregate market cap of digital currencies soared by nearly $600 billion, ending the year higher by more than 3,300% from where it began. That probably marks the best year in history for a single asset class.
Unfortunately, big gains often lead to equally big volatility. For example, bitcoin, the world’s largest cryptocurrency by market cap, surged to about $20,000 per token on Dec. 17. That’s after it was valued at less than $0.01 per coin in March 2010. However, it proceeded to lose about 70% of its value over the next month and change, falling to nearly $6,000 on Feb. 6. Two weeks later, on Feb. 20, bitcoin was knocking on the door of $12,000. Just five days after that, it was struggling to hang on to the $9,500 level.
These global banks just say “nay” to credit card purchases of virtual currencies
Bitcoin’s nauseating volatility isn’t an isolated case, either. Practically all virtual currencies are just as volatile as, if not more volatile than, bitcoin — and global banking giants are taking notice. To date, seven global banks have now banned their members from using bank-issued credit cards (some debit cards still work, depending on the bank) to purchase any cryptocurrencies. In no particular order, these banks are:
- Bank of America (NYSE:BAC)
- JPMorgan Chase (NYSE:JPM)
- Citigroup (NYSE:C)
- Discover Financial Services (NYSE:DFS)
- Capital One Financial (NYSE:COF)
- Lloyds Banking Group (NYSE:LYG)
- Toronto-Dominion Bank (NYSE:TD)
The latest to join was Toronto-Dominion (more commonly known as TD Bank) as of last week. The Canadian banking giant sent an email to customers this past Friday announcing that it was banning cryptocurrency purchases with bank-issued credit cards. Bank of America, JPMorgan Chase, Citigroup, and Lloyds Banking Group did the same roughly three weeks ago, with Discover and Capital One having had a ban in place for a considerably longer amount of time.
Why global banks are banning credit card purchases of cryptocurrencies
Why the ban? Primarily, banks are protecting their own behinds — and who can blame them? They’re clearly worried that consumers will purchase more in cryptocurrency than they can afford to pay back, especially given the wild volatility we’ve seen over the past couple of months. If a consumer can’t pay, banks won’t want to take possession of digital currencies, nor do they believe they’d be able to liquidate them at a fair price that would satisfy the delinquent loan.
What’s more, a stronger-growing U.S. economy could coerce the Federal Reserve to get more aggressive with monetary tightening. As economic growth picks up, the Fed may attempt to stay ahead of rising inflation by boosting lending rates. In doing so, it’ll increase the variable borrowing costs that credit card users pay on their outstanding balance. That could be a recipe for higher delinquency rates, and it’s an added worry for banks with customers who’ve purchased cryptocurrencies on credit.
Bank of America, JPMorgan Chase, and Citigroup, have also expressed concern about the possibility that hackers will be able to steal credit cards and purchase digital currencies with them. Credit-card theft happens all the time in the U.S., but these banks have certain protocols and protections that work in their and their customers’ favor. However, cryptocurrencies are extremely difficult to track, mainly because a lot of purchases happen outside the United States. In essence, banks would have little hope of getting their money back.
And, just as icing on the cake, popular cryptocurrency exchange Coinbase tacks on a 3.99% transaction fee when members use a credit or debit card to buy or sell digital currencies. This fee could be even higher to the consumer, depending on their bank. Ouch!
his is even scarier
In theory, these purchasing bans aren’t that big of a deal as long as credit card purchases make up a small percentage of overall cryptocurrency volume. Unfortunately, that may not be the case, although data is tough to come by.
According to a survey from personal loan research firm LendEDU, over 18% of bitcoin investors have used borrowed money to buy tokens. But the scary part was that 22.1% of those users didn’t pay off their credit card balances after purchasing bitcoin. This would imply that a non-negligible percentage of U.S. trading volume in bitcoin and other cryptocurrencies may be derived from credit-based transactions. Therefore, banks banning the use of credit cards for virtual currency purchases may very well have a net negative impact on the cryptocurrency market, which has relied on new investment money to push higher.
In other words, chalk up banking worries as just another reason digital currency valuations may be in a bubble.
Read more at:
www.fool.com
