Xapo's Bitcoin Card Adds Debit Interchange to Digital Currency

Xapo says its Bitcoin debit card will start rolling out by the end of June, and it will be accepted anywhere by using the rails of a card network, interchange fees included.

"The Xapo debit card will be accepted by any business in the world that accepts debit or credit cards from our bank's card network partner," says Wences Casares, payments industry veteran and founder of Xapo. He would not identify the company's bank partner or its card network.

Bitcoin has been hard to use for consumers outside the tech-savvy early adopter category, and a debit product could increase adoption, Casares says. Many digital payment systems have issued plastic cards as a way to appeal to more consumers.

Since transactions will go over a card network's rails, merchants won't benefit from Bitcoin's near-free transfers. They'll have to pay the same interchange fees they pay for other debit card transactions.

The money saved by accepting digital currency is one of the more common reasons merchants use currencies Bitcoin, Litecoin and Dogecoin.

When a customer swipes Xapo Debit, Xapo will convert the user's bitcoin funds to a local currency in real time to pay the merchant, says Casares.

"While some Bitcoin enthusiasts may want to see the cryptocurrency go mainstream, many others feel that routing Bitcoin transactions through a credit card network defeats the purpose of using Bitcoin," says Nathalie Reinelt, retail banking analyst at the Aite Group. 

But this could be the least of Xapo's challenges in launching a Bitcoin debit card.

To offer a debit card, Xapo will need to go through a meticulous screening process from its bank partner to make sure it abides by its requirements those of its card network, says Madeline Aufseeser, senior analyst in retail banking at the Aite Group.

The major card networks would highly scrutinize any potential connections with Bitcoin so that they do not jeopardize the network's brand reputation, since many people still associate digital currency with nefarious activities and the regulatory environment is still unclear in many countries, Aufseeser says.

This year, MasterCard added Bitcoin to its list of topics for its lobbyists to discuss with lawmakers. "It's pretty straightforward. We were gathering information in connection with recent congressional hearings to better understand the policy issues around virtual and anonymous currencies," said Seth Eisen, a MasterCard spokesman, in response to an inquiry in April.

But in 2012, Charlie Shrem, who has been indicted for allegedly trying to launder money through his now-defunct Bitcoin transfer business BitInstant, developed his own Bitcoin MasterCard. However, MasterCard denied it knew anything about the product, which was never formally released.

MasterCard declined to comment. Visa did not respond to inquiries concerning this topic.

Xapo could also use independent debit network rails, such as Pulse, MAC or Star, which allows a retailer to accept a debit transaction even if they are not affiliated with the customer's bank.

But to work with a debit network of any kind, Xapo would need an issuer for its card, and only banks can issue cards, says Aufseeser.

"Could they operate a debit card [tied to a consumer's] bitcoin currency…in theory yes but in practice I don't know how that would work," Aufseeser says. "Most non-financial institutions don't realize the extent of due diligence and requirements of becoming a licensed issuer."

Bitcoin has come a long way, building momentum as a payment method with merchants and merchant service providers. Dish Network Corp., a satellite-TV company that has 14 million subscribers, recently announced it would accept Bitcoin in the third quarter. In March, Square Inc. began enabling merchants who sell on Square Market to accept Bitcoin, and Stripe is conducting a Bitcoin pilot for its merchants.

"The challenges are related to the technological infrastructure [and] banking [and] strategic partnerships necessary to execute this type of payment product," says Casares.  "There have been few institutions that have the experience to execute a product that is essentially a blend of traditional banking and the digital currency. At Xapo we are fortunate to have a seasoned team that has decades of experience developing financial services products."

Xapo, which is incorporated under laws in Hong Kong, has been allowing consumers to pre-order the card since it was announced in April. Casares would not say how many people have pre-ordered the card, which costs $15.

Other companies have marketed Bitcoin payment cards, but these have been either prepaid or gift card products. Bitcoin Ventures Inc.'s CoinTap prepaid card service allows consumers to obtain bitcoins by purchasing a stored-value card in retail stores. The product launched in Canada in January.

"This is where customers must plan ahead, manually convert bitcoin before purchases themselves, and use the card to spend their local currency," Casares says. "With Xapo, a customer only deals in bitcoin and the debit card is the seamless extension of their Xapo Wallet."

Gift card initiatives include Pock.io, which allows consumers in the U.K. to purchase gift cards from large merchants like Apple with Bitcoin, and Gyft, which allows users to purchase mobile gift cards from more than 50,000 retail locations with Bitcoin. Gyft offers bigger rewards to users who choose to fund their purchase with Bitcoin or PayPal.   

Casares has been involved in earlier ventures in the payments industry for many years.

Casares founded Bling Nation in 2007. The company created payment stickers that could be adhered to a user's phone to enable contactless payments. The product was well-received by community banks and local merchants before Bling Nation added a mandatory loyalty program, which its clients objected to. Bling Nation shut down its service in 2011.

Casares next founded Lemon Inc., the company behind Lemon Wallet, a digital storage system with light mobile payment capabilities. In December, Lemon was acquired by identity theft protection provider LifeLock Inc., which rebranded its product as the LifeLock Wallet. In May, LifeLock pulled the app over PCI compliance concerns, though LifeLock's CEO promises the app's return and emphasizes that there was no data breach or other compromise.