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

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From Crypto.com to Coinbase and now MetaMask, some of crypto’s biggest players have issued crypto cards. So what explains the proliferation?

The answer lies in the crypto wallet software, or rather its shortcomings. Whether it’s an app or an extension, crypto wallets are hard to convert into cash. Crypto assets are in the custody of the end user, so there can be no hidden fees. Software wallets are a dime a dozen; there’s no product stickiness, and users can easily switch between different wallets.

Good, secure wallet apps in their current form are not yet mature enough to justify a subscription for the end user.

Uncovering self-preservation

There is an inherent image problem with self-custody in crypto. The concept of self-custody was sold on the illusion that users could hold crypto without spending money because it was similar to cash. They pay their banks to hold their money, but users pay nothing when they hold cash.

But this view is wrong on many levels. First, self-storage is not like holding cash; it is more like holding gold in a safe. Users must purchase the safe and pay for its maintenance. Second, while holding crypto is free, there are still overhead costs to manage it. For real gold, depending on its value, owners need a safe place with surveillance, insurance, and other security measures like high-energy lasers. For crypto, the overhead costs are much lower, but users still need at least a good wallet.

On a psychological level, people are more willing to pay for physical goods. When a wallet is hardware, it is a tangible item with a significant production value. However, once the user has paid the initial purchase price, we are faced with the same problem: How to charge the user a recurring fee? The answer lies in value-added services.

Value-added services as revenue generators

These are services that go beyond the basic set of services provided by a company. For a wallet, they are things that users can do without leaving the wallet app, such as buying crypto, exchanging crypto for other crypto, bridging crypto assets from one blockchain to another, or staking crypto.

These are legitimate features. The alternative is a cumbersome user experience that exposes users to vulnerabilities that hackers can easily exploit. By using these value-added services or features, the end user gets a secure user experience that is easy to use and somewhat private.

So how do providers price this? Wallet providers typically make money from slippage or FX fees, or in some cases, MEV farming. This is a fair trade-off because the wallet provider does the extra work: keeping users safe and giving them a simple way to quickly make the transactions they want.

However, charging for value-added services is not enough to generate the growth that wallet providers need to generate returns for their investors. The best way to grow this revenue-generating segment is to make it easy for people to access a product that is easy to use and can consistently make money for the issuing company.

This is where crypto cards come in handy.

Crypto cards as a source of income

Crypto cards allow users to spend their crypto assets at local stores and have two functions: loading and spending crypto. In these two functions, crypto cards generate revenue for the issuer. Even if the issuer were to forego this opportunity, they would still benefit from the exchange fees.

Crypto card adoption is growing rapidly, with Visa customers making $2.5 billion in payments with their crypto-linked cards in the first fiscal quarter of 2022.

This adoption is not due to crypto cards being compliant with the fundamental principles of crypto. Instead, it is due to crypto cards being compliant with the fundamental principles of a financial product: compliant with existing regulations, easy to understand, and most importantly, easy to use.

While there are many hurdles to realizing the reality of daily transactions with raw crypto, crypto cards are a reasonable step toward that vision. Spending does not occur on the blockchain, and currency conversion does not occur on-chain.

However, crypto cards allow users to spend their crypto in the same way they spend their fiat currency. They also follow all the good practices implemented by regulators to protect against money laundering and terrorist financing.

Crypto cards are not a perfect solution, but they are practical. And that is more than enough for all stakeholders involved at this stage.

Adam Dave

Manthan Dave is the co-founder of Palisade, a digital asset custodian backed by Ripple that provides businesses with a comprehensive solution to securely manage digital assets. Aiming to advance secure digital asset management, Manthan has pioneered a mission to provide businesses with unique solutions to safeguard their digital assets. Prior to founding Palisade, Manthan was a senior software engineer at Ava Labs, where he built innovative solutions in blockchain and EVMs. Prior to that, Manthan was a staff software engineer at Ripple, contributing to the development of cutting-edge systems such as On Demand Liquidity payment settlement orchestration and algorithmic trade execution.