WHITE PAPER BITCOIN DEBIT CARDS: THE BRIDGE TO MASS ADOPTION

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1 WHITE PAPER BITCOIN DEBIT CARDS: THE BRIDGE TO MASS ADOPTION October 2015 Authors: Ed Boyle, Chief Executive Office, Blade Daniel Delshad, Chief Strategy Officer, Blade 1

2 Table of Contents Page Bitcoin Adoption: Not What it Could Be. 3 The Problem: A lack of Bitcoin Utility. 3 Solving for Spend. 5 Ancillary Benefits. 7 Where are the Bitcoin Cards?... 8 What Type of Debit Cards are Available Today?... 9 Regulation Risks 12 Card Providers.. 13 Summary. 13 About

3 Bitcoin Adoption: Not What It Could Be The number of bitcoin wallets and the average number of daily transactions are each up 2x over the past year but, most people have never used bitcoin (nor have plans to, per a recent Goldman Sachs survey). While the bitcoin adoption curve is arguably better than that of the internet, it is slower than that for the cell phone. The internet was under the radar for years and didn t really take off until a network started to develop and the network effect kicked in. Cell phone adoption was quicker and steeper, largely because it didn t need to build a new network of users in order to be useful, as cell phones were, from the beginning, interoperable with legacy telecom rails (ie: landlines). The Problem: Lack of Utility To date, the bitcoin industry has focused efforts on creating a new, distributed network for bitcoin applications such as mining, storage and exchange of bitcoins, as well as merchant commerce. Arguably, the industry has fallen short in its efforts to enable bitcoin to be spent like sovereign money. Not one of the top 100 global merchants accept bitcoin. In fact, only 0.3% of merchants that accept 3

4 credit cards accept bitcoin, and the rate of new merchant acquisition is not increasing, despite an extremely small baseline and a number of funded merchant processors pursuing them. In such a world, bitcoin might be useful for trading, for transporting value internationally, and perhaps even for tokenizing smart contracts and other services but, its not yet broadly useful for payments. Source: State of Bitcoin Q Coindesk We believe that, without the ability to spend bitcoins at a preponderance of merchants, it will never reach mass adoption as a currency--because it pales in comparison to fiat money in terms of general utility--specifically the ability to spend it where people spend money. American Express, Discover Card and PayPal each still battle the perception of their lack of merchant acceptance, despite being accepted at 100x 250X the number of merchants as bitcoin. The reality is that 99.9% of the world s population does not own bitcoin and why should they? You simply can t spend it anywhere you spend money today. 4

5 To cross the chasm from early adopters to mass adoption, merchant acceptance has to be the norm, not the exception. When bitcoin can be used to buy groceries, gas and pay bills where people live and work, it will start to have utility for the masses. Until then, it is a niche application of arguably the most impactful technology since the creation of the Internet. Perhaps its time to consider interoperability; time to connect bitcoin to existing payment networks. Solving for Spend You can certainly argue that the traditional payment processes are antiquated. Over 5 decades old, they rely on a series of trusted parties passing data and funds through a sequential chain of legacy systems. Further, while the data moves at massive scale in milliseconds, the funds typically take days to settle. But, there is a massive installed based of merchants already on a payments protocol that consumers know and apparently love. Source: The Nilson Report May 2015 Growth of debit card usage is expected to more than double in the 10 years leading up to and through

6 What s more, the traditional payment rails can be relatively low cost, thanks in large part to recent legislation around the world. Whereas a bitcoin transaction may cost around $8 in hardware depreciation and energy usage and be priced to merchants by processors at 0.5% to 1% of the sale, debit card transactions can be as low as $0.21 in the USA and considerably lower in Europe. Source: Federal Reserve The cost to accept debit cards in the USA is a fraction of the cost of the oftencited costs to accept credit cards. Change may be constant but it isn t always easy or fast. By linking bitcoin to the debit card networks, consumers get immediate access to over 28 million merchants in over 200 countries worldwide. User s don t need to adopt a new app or change behavior at point of sale and there is no need for merchants to be sold into a new program. A lot of complexity and friction can be completely done away with simple interoperability with the traditional payment rails. 6

7 The classic chicken and egg problem just stops applying. Give bitcoin users the ability to spend their bitcoin whenever and wherever they want and watch the adoption curve steepen greatly. Then, as adoption grows, so to does the likelihood of leveraging the blockchain to process the transaction settlement payments, relying on the legacy rails for movement of data and less for the movement of funds. Ancillary Benefits Not only do bitcoin-linked debit cards level the playing field for consumer utility, but in much the same way that virtually all banks, airlines, and large retailers offer payment cards to their customers, bitcoin companies could reap ancillary benefits by offering bitcoin payment cards. " Exchanges: Today, successful bitcoin traders make repeated wire transfer withdrawals from exchanges. Typically, they have to pay fees and wait days to get to their earnings (typically from abroad). Exchanges that enable low-cost immediate access to earnings will see an increase in user engagement, retention, and switching costs, while at the same time, giving the trader more reason to replenish their trading principal at the exchange. In addition, the extent that the card automatically triggers a trade on the exchange will drive more volume and liquidity to their platform. 7

8 " Wallets/Vaults: Wallet and vault providers are the banks of the future but, like banks of the present, they need to provide tools to their users beyond private-key storage. It s hard to imagine a bank without a debit card; so, while loans and lines of credit secured by bitcoin collateral may be something for wallet/vaults to consider, the place to start would be debit/payment cards. " Mining: While this is the epicenter of wealth creation in bitcoin, members of mining pools are often heavily taxed when withdrawing their earnings, potentially making a marginal investment a bad investment. The easier and more efficient it is for miners to extract and spend their funds, the more transactions will be processed (and bitcoins mined), the more appealing such mining pools will be, and the more distributed mining becomes. Where are the Bitcoin Cards? The fact of the matter is that issuing debit cards is not easy. Virtually all banks outsource the production and management of their card programs to specialists. Further, there are ever-changing regulations that vary from state to state and country to country. For that reason, you rarely see a bank or card program in more than one regulatory region. So, for bitcoin companies, which are generally multinational by nature, it s quite risky to deploy a card program. Many attempts have been shut-down for lack of compliance with network rules and some wellfunded companies have made high-profile mistakes getting a card program to market. In much the same way you might not expect to see bankers setting up wallets and mining operations, we should not expect bitcoin companies to build card programs in-house. While there are a few startups targeting the bitcoin spending card space, few seem to have actual card payments experience and necessary banking and network relationships; they too are trying to figure it out as they go. 8

9 Types of Debit Cards Available Pre-funded Fiat Debit Card: This card type requires a two-step loading process. Not unlike a traditional prepaid card (at essence, that is what it is), this type of program entails the consumer first selling their bitcoins to generate fiat and then transferring the money to the affiliated card program. Arguably, this is not much better than simply transferring funds to a bank account with an associated debit card. Fortunately, this product type typically does not require a large amount of tech integration and can be used for those that want to offer an entry-level product to their customers. And, it can be useful for those that want to hedge their spending budget s exposure to bitcoin s volatility. Pre-funded Process The downside here is the user experience can be clunky as there are typically two or three separate accounts and companies to deal with. Also, importantly for those that believe in the potential value of bitcoin, the user doesn t own and hold bitcoin until ready to spend them. Instead, they need to plan in advance and transfer funds from one (bitcoin) account to another (fiat) account. This last point is crucial for users and to help bring liquidity to the marketplace. If you need to plan ahead and log into a financial account to transfer funds well before going shopping or out to dinner, then that asset is simply not liquid currency. It s a best, a (highly volatile) store of value that might be more liquid than equity stocks but is certainly less liquid than real money. 9

10 Real-Time Crypto-Currency Debit Card: This type of spending card represents a true innovation for the first time enabling non-fiat asset to be spent like money at the point of sale. With this product, the company links a user s bitcoin account to a payment card, typically via an API integration. Real-Time Process Here, the consumer holds bitcoins until they actually use them with the card because the card triggers an automated trading of the bitcoin into the exact amount of fiat needed to pay the merchant. What s key is that because this would appear to be a regular fiat-based networkbranded payment card, no merchant adoption needed. So, rather than solving the problem at millions of nodes by convincing the merchant to accept bitcoins at point-of-sale and have a bitcoin payment processing company convert the bitcoin into to fiat after the (rare) customer visits the (rare) bitcoin-accepting merchant, the transaction is instead facilitated at the network level. It s a faster and more reliable way to scale. 10

11 Regulation In today s global economy, many companies have a diverse, multinational customer base. This is especially true in the digital currency space where many of the mining, wallets, and exchanges have clients located throughout the globe. These companies must be careful when attempting to provide their customer base a debit card program as regulations change regularly (and inconsistently). Another challenge is that banking is a regional business. Banks and bank cards are licensed regionally so, to provide a card program to a global client base requires multiple bank and processor relationships. Direct Model Aggregator Model 11

12 Risks As discussed earlier, issuing debit cards can be complicated and is subject to numerous regulations. Because of this, it makes sense to leverage outsourcing professionals with experience in the payments and debit card space that can expertly manage systemic risks, such as: a. Chargebacks - Depending on local law, funds may be debited or held while provider, issuer, merchant and the network research a user s complaint regarding a charge. Chargebacks occur on fewer than 1% of transactions and typically its the merchant or customer at fault. b. Refunds - The issue to be managed here is how to handle the difference in bitcoin value, due to exchange rate volatility, between the time of purchase and the time of refund, ie. how is that volatility mitigated and which party ultimately owns that risk. c. Fraud While rare it is real and the program provider, Issuer, Network, Merchant, and program sponsor need to work together to assign the cost, which is typically less than 1/4th of 1% of total program volume. d. KYC - For better or worse, the card is a product of a bank and the cardholder becomes a customer of the bank so the bank will require users to undergo KYC (Know Your Customer) review, even if they ve just been KYC d by a bitcoin company. 12

13 e. AML - All parties involved in a money service product like payment cards will need to have and follow rigorous Anti-Money Laundering policies and procedures. f. Velocity Limits - Given the unique nature of bitcoin usage, it makes sense to develop and implement custom limits on card transactions, loads and withdrawals. g. Risk Management Modules - Because fraud occurs, its important that your card provider have risk management tools in place to ward off and catch fraud attempts. 13

14 Card Providers Bitcoin debit cards are still uncommon and many programs have been unsanctioned and short-lived, often cobbled together by companies with little or no experience in this (regulated and conservative) space. Cards can become a key enabler for bitcoin companies, especially if they become long-standing offerings but not all programs and program providers are equal. Warning signs to look for: 1. Your provider doesn t ask or care about KYC or AML 2. The card on the site doesn t match the card they send out 3. They don t have services for managing tipping and tolerances at different merchant categories 4. They claim to have a non-us bank willing to ship cards to US citizens 5. They state they don t need Network approvals for your card program or card design 6. They don t have platform services to manage business rules, encryption, tokenization, risk models and reconciliation 7. They are not PCI-DSS compliant (or know what that is) 8. They don t manage the bitcoin-price of the transaction in real-time (ie: subsecond) 9. They don t have a plan for managing BTC/fiat volatility risk 10.They lack platform services for data encryption, card number tokenization and automated reconciliation. Summary Bitcoin and the blockchain both have the potential to be one of the greatest financial and technological break-through ever. As history shows with the Internet, it takes years for major technology shifts to reach mass adoption and for the benefits to affect our daily lives. While mass adoption of bitcoin and the blockchain may still be years away, enabling near-ubiquitous payments acceptance will greatly improve the utility of bitcoin and, therefore, increase its underlying value and accelerate its proliferation. While numerous companies are 14

15 working on developing end-to-end solutions for the blockchain and bitcoin, debit cards will have an immediate impact on accelerating adoption to mass adoption. About Blade Blade is the leading payments processing platform company specializing in enabling the spend of digital currencies via traditional card network products. Blade works with companies in the crypto-currency business to provision card program solutions for the companies to market to their user base. Blade was the innovator of the Real-Time Crypto-Currency Card and its Blade Engine is the of the most innovative and secure API driven platform that allows for easy integration between client and their customers. The founders and executives of Blade come from the credit card, payment processing, and online gaming industries, from companies such as American Express, IMI Exchange, Xfire, TSYS, Trefoil Prepaid, Clarity Payments and Morgan Stanley. The combined team has launched over 30 card programs worldwide with over $1B in annual transactions. For more information on Blade visit online at Contact Authors: 15