Banks in Britain and the US have responded to a precipitous fall in Bitcoin values by banning customers from using credit cards to buy digital currency. In the short term, the restrictions are seen as a sensible measure to prevent bank customers from running up large debts, but as digital currencies edge into the mainstream, industry figures see public education as the best protection for consumers.
In December of last year, an investor would have needed almost $20,000 (£14,442) to buy a single bitcoin when the currency was at its peak. And while some commentators warned that this was a bubble on the verge of bursting, others predicted that the poster child of cryptocurrencies could climb far higher. Investors who were willing to take the risk continued to buy into the currency in the hope of ringing up significant gains.
Fast forward to February and by the fourth day of the month, a bitcoin was worth around $8,000, prompting Lloyds Bank to impose its credit card restrictions.
“Across Lloyds Bank, Bank of Scotland, Halifax and MBNA, we do not accept credit card transactions involving cryptocurrencies,”
a spokesman said bluntly.
A day later Virgin Money followed suit, while the currency itself dipped to $7,200. Across the Atlantic, Bank of America, Citigroup, JP Morgan and Capital One are among those to have taken similar action. Others may follow.
Buying on Credit
The credit card clampdown should probably come as no surprise. As investors rushed to buy Bitcoin, the chances are that a significant percentage made the purchase using credit cards, either because they didn’t have the money available in their bank accounts or because they didn’t want to dip into their own cash reserves. While Bitcoin values were on the rise, this might have seemed like a sensible approach. Now that the value of a single unit is almost two thirds down from its peak, there is a real risk that significant numbers of bank customers will be left with large debts.
As Ian Bradbury, Chief Technical Officer at Financial Services at IT company Fujitsu UK & Ireland explains, banks are acting to protect themselves.
“Most banks have limited their ban to credit cards. If debt is run up on a credit card – which is really a bank’s money on loan to an individual – and then lost, the bank is at risk of not being able to recover its money. This is what is driving the ban for bitcoin debt. Banks are not trying to stop you spending your own money on cryptocurrencies like Bitcoin, just theirs!” he says.
Into the Mainstream
But that raises the question of whether the recent rush to buy Bitcoins represents anything more than a marginal problem for credit card providers. In the bigger scheme of things, credit card users ‘are free to map out across an enormous range of goods and services and may spend many thousands of pounds on products (such as holidays) that have no recovery value. So why are banks particularly concerned about cryptocurrencies?
As Thomas Bertani, CEO of cryptocurrency wallet provider and exchange Eidoo sees it, lenders are assessing the risks associated with a new-found enthusiasm for digital currencies on the part of a broadening base of consumers.
“Cryptocurrencies have without a doubt spread onto the consumer’s radar screen,” he says. “There will be a period where institutions pause for thought in terms of how they deal with the cryptocurrency market – and rightly so.”
One real risk is that cryptocurrencies – and there are numerous alternatives – are now relatively easy to purchase while being poorly understood by at least some investors. Bertani says banks should be cautious, for the sake of their customers.
“The speed at which crypto is growing makes it necessary for legacy systems to play catch up, and in the case of banks they need to protect themselves and their customers, who potentially are not as well versed in crypto trends nor as well prepared for the wild swings in the market,” he adds.
What Goes Up
The problem for an investor taking a ‘punt’ on Bitcoin is that the underlying reasons for those wild swings are not always apparent. When the currency was approaching its December peak, one theory for its rapid rise was the imminent creation of a legitimate ‘futures’ market for digital currencies, opening the door for huge sums of institutional money to pour in. Added to that was the snowball effect. Potential investors watched early adopters get rich. This pushed up demand for Bitcoin, which in turn propelled values higher.
The possible reasons for Bitcoin’s sudden decline are equally esoteric. For one thing, cryptocurrencies are navigating their way through some choppy regulatory waters. India has announced it won’t recognise cybercash as legal tender and China has announced plans to shut down digital currency trading platforms. In the US, the Commodity Trading Futures Commission is said to be investigating whether market manipulation was responsible for December’s surge in Bitcoin value. Meanwhile, just as market sentiment drove Bitcoin values higher, a changed mood is feeding into a sell-off.
According to Francesco Nazari Fusetti, Founder & CEO of AidCoin, a platform established to enable donations using cryptocurrency/blockchain technology, it is now vitally important to educate the public at large about the opportunities and risks associated with cryptocurrencies.
“Education has to be a priority and many in the crypto sector are working hard to ensure that information is out there and available for people to get up to speed on the blockchain,” he says.
Once the public is more knowledgeable, he argues, the credit card bans that we are seeing today, won’t be necessary.
The Longer View
The long view suggests that the Bitcoin has actually done OK. In January 19, 2017, an investor would pay just $900 for a single unit, so today’s $7,000 plus figure represents significant growth.
And according to Fujitsu’s Ian Bradbury, some of the turbulence that we are currently seeing in the Bitcoin marketplace will dissipate as understanding grows. “With time, however, cryptocurrencies will continue to evolve, and stabilise, and become more useful to mainstream firms and investors,” he says.
But if Bitcoin – and the practice of holding Bitcoins and other forms of digital currency as an investment – is to become truly mainstream, a degree of regulation will be required. “Regulation is needed to ensure that cryptocurrencies are not used to deliberately defraud investors and to educate investors on the risks involved – just as with any other traded investment,” says Bradbury.