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Who’s banking whom in cryptoland?

On Monday, we brought you the story of TokenCard, the Ethereum-based venture set to revolutionise the world of payments by bringing crypto folk the, errr, power of the Visa network.

Yes, you’re wondering, what’s so special about that? Doesn’t every above-board payment facilitator offer Visa access? You’re right. They do. And a card processed by Visa is hardly a breakthrough innovation worth shouting about here in the real world.

But, you see, while access to the Visa network is taken as a given by us compliant statists, in crypto land it’s a rarity. Here users sit locked into paper profits that are very hard to liquidate in day-to-day convenient “spending” circumstances.

The holy grail in cryptoland has thus for a long time been turning these coins into usable currency, the sort that doesn’t suffer the associated headache of exchange fees, liquidity constraints or price variation.

Don’t take it from us that that’s the case, take it from TokenCard’s own white paper which ironically spells out everything that’s wrong with the crypto space as it stands today (due mostly to the fact that it’s not a banking system and doesn’t have access to the banking system):

1. Security, storing assets is cumbersome and inevitably people choose to store their assets under a third party’s control, like an exchange. This defeats one of the greatest properties of cryptocurrency, and exposes them to risks that have consistently proven to be catastrophic. A system is needed that can securely store assets without compromise on usability.*

2. Usability, numerous steps are often involved in seeing real use of ones digital assets. A user needs wallets, exchanges and accounts on various services. They are required to withdraw, deposit, do KYC and even become amateur traders. A system is needed that eliminates these steps, and offers a seamless plug-and-play experience for the uninitiated that can be integrated across platforms.**

3. Volatility, forcing people to use a volatile asset like Bitcoin is a no-go. The people have spoken, and it deters more than it attracts leaving only a risk-taking fringe. A stable, more diverse asset class is needed.

For some strange reason — who knows why — the regulated sector is reluctant to open its door to this amazing source of (impossible-to-verify from an origination point of view) funds.

But cryptoland is full of innovators, as we well know. Their solution to the problem thus far has been the creation of Visa and Mastercard-enabled prepaid cards (the sort usually issued to the unbanked or impossible to credit check). Problem solved, eh?

Well, not quite. What’s actively under promoted in the related marketing is that these prepaid cards operate exclusively in fiat currency. They do not magically liquidize crypto holdings or allow you to spend bitcoin. To the contrary, users are first required to exchange their crypto funds for regular currency at prevailing market rates and use this as a source of revenue to top their prepaid balances up. The innovation, if any, is that the cards allow those handling the crypto exchange to transfer the fiat proceeds into something other than a standard bank account, namely a non-bank client account which still has access to the payments networks of the real world.

The businesses offering these cards often claim that all this can be achieved in an instant and low-cost manner, equivalent to the real-time processing of crypto payments as and when they’re spent in the real world. That may well be the case. But if it is, it’s only because these businesses themselves are bearing the exchange and liquidity risk on the Crypto/FX component of the trade.

Nor does it change the fact that what’s really facilitating the service isn’t the crypto business itself, but rather the third-party agent which has the e-money license and the Visa access relationship. That third party, however, will always be subject to Visa’s own terms of service. In the case of prepaid cards, those terms can be pretty draconian with respect to their limitations — especially from a source of funds perspective.

For example, there may be requirements that only proceeds originating from employers to employees qualify for such transfers. Accordingly, the third parties in question will be held accountable if ever such conditions are taken out of context or breached. Indeed, chances are if they want to retain their good relationship with network providers, they will err on the side of caution — and on the side of friction — when doing their checks.

* A system commonly known as a regulated banking system per chance?

** Another system commonly known as a regulated banking system per chance?

Related link:
Introducing truly outlandish ICO claims, TokenCard edition – FT Alphaville

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