People opened crypto savings accounts that paid higher interest rates and applied for crypto loans, and there were even stories of crypto-backed home loans. Crypto credit cards that paid rewards in crypto currencies attracted hundreds of thousands of customers.
Unfortunately, the events of 2022 have raised questions about how these platforms handle people’s money and whether your funds are safe.
The dangers of using credit cards in crypto-currencies
Crypto-currency prices have struggled this year, but many crypto-currency investors are optimistic that prices will recover. Crypto credit card customers often treat their rewards as a form of investment, and hope that they are acquiring assets that will eventually appreciate. But there are several risks to this approach.
The most obvious risk, considering the fallout from the FTX crypto exchange collapse, is that your crypto credit card company may go bankrupt. If this is the case, any rewards you have on the platform could be locked up in a bankruptcy proceeding.
This is a relatively new and unregulated industry, and we don’t know if prices will rise again. It is risky to collect credit card rewards in what is a volatile asset. With the potential upside comes the risk of a massive drop in value.
Since there isn’t much regulatory clarity or user protection in the crypto space, much depends on the individual policies of each crypto exchange. Some platforms allow riskier activities like margin trading, and it’s not always clear what they do with user funds. In the case of FTX, it appears that the exchange may have lent customer assets to trading firm Alameda Research without their knowledge.
Crypto-currencies held on crypto platforms do not have the same protections as those that can be obtained from a bank. Money in a bank account is protected by FDIC insurance up to $250,000 in case the bank fails. Some crypto-currency platforms, such as Coinbase and Gemini, offer FDIC protections on U.S. dollars, but this does not cover crypto-currencies held with them.
What to do if you have a BlockFi or FTX credit card
On November 11, FTX announced that it was entering bankruptcy proceedings, along with 130 affiliated companies. These include the leading international exchange, its trading company Alameda Research and its U.S. subsidiary, FTX.US. If you have a balance on an FTX or BlockFi card, it is not yet known what will happen to it.
For FTX and FTX.US customers
Visa and Plaid have both terminated their agreements with FTX and FTX.US, and all credit or debit card products will be discontinued. FTX withdrawals have been frozen, which means that any crypto-currency rewards you had on the FTX platform will remain locked there.
Customers may eventually be able to recover some of their rewards or deposited funds, but it’s not a done deal. Ordinary customers often end up being treated as “unsecured creditors” in these cases, which puts them at the end of the queue. The FTX bankruptcy filing suggests that there may be more than a million creditors affected by the proceedings.
For BlockFi customers
BlockFi ran into trouble in July and entered into a partnership with FTX.US. The deal included a $400 million revolving credit facility and was a lifeline for the company at the time. However, that lifeline could now sink the company. This week, BlockFi paused activity on its platform and said it “could no longer operate as usual.” Withdrawals can no longer be made.
That could mean trouble if you kept your crypto credit card rewards on the BlockFi platform and not in a crypto wallet you control. But there is still a glimmer of hope. Unlike FTX, BlockFi is still looking for a way to avoid bankruptcy and says it still has enough cash to explore all options. Pay attention to any communication from the platform and be prepared to withdraw your funds to a crypto wallet if the opportunity arises.
BlockFi cards are managed by Evolve Bank and Deserve. These companies may have already been in contact with you about your credit card, but if not, try contacting them to see where you stand. There are rumors that Binance.US and Curve are in the process of making a bid to acquire BlockFi’s credit card customers, but it’s not clear where this will end up or what it will mean for customers.
For other cryptocurrency credit card users
If you have a crypto credit card on another platform, check to see what protections the company has in place and how they take care of their customers’ funds. Companies that prioritize security, have third-party insurance and are transparent about what they do with your money are much safer. But the best way to protect your rewards from account failure is to move them to a wallet you control.
It takes a bit of effort to understand how external crypto wallets work, and there’s no handy button “forgotten password” to help you if you lose access. However, for many users, the risks of using a crypto-currency wallet are less important than the danger of losing your funds if your platform fails.
Are the risks worth the rewards?
There are various crypto credit cards on the market, but few of them offer anything better than what you’ll get with a regular high-end credit card. In fact, you could get a better sign-up bonus and higher rewards on your daily spending by finding a card that fits your habits.
If crypto-currencies are important to you, you can convert all or part of your regular credit card rewards into crypto-currencies. But you also have the option of using them for other purposes and – importantly – your credit card issuer is much less likely to collapse than a crypto platform. That means you’re less likely to lose the rewards you’ve earned.