Coinbase, the most popular cryptocurrency trading platform most associated with recent speculation by retail investors, sent an email to some customers as early as February 1, alerting them that credit card networks had begun treating cryptocurrency purchases as cash advances, leading to the imposition of Higher fees and interest rates on these transactions.
Coinbase did not specify which companies it was referring to, and a request for comment sent to the exchange was not immediately returned.
A Mastercard spokesperson told Investopedia via email, “Over the past few weeks, we have made it clear to buyers – the merchant bank – the appropriate transaction code or merchant class to use for this type of transaction (cryptocurrency purchases). This provides a consistent view of these purchases for each of the merchants. and exporters.
A Visa spokeswoman said via voicemail, “It will be up to the individual issuer, the financial institution that issued the card, to determine any fees they might charge for certain types of purchases, so it’s not Visa. We don’t issue cards.”
A post on reddit claiming to be written by a “major credit card/bank employee” in late January said that Visa and Mastercard customers in the US and Canada have already been affected by the changes. (See also, Coinbase: What is it and how do I use it?)
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Cash Advance Fee
“Recently, a number of major credit card networks have changed the MCC token for crypto purchases by a number of major credit card networks,” the Coinbase email said. The new code will allow banks and card issuers to charge additional fees for ‘cash advance’. These fees are not charged or collected by Coinbase.(emphasis on original.)
Card companies use MCCs or merchant class codes to distinguish between types of sellers, such as hotels or gas stations. Credit card issuers typically charge extra fees for cash advances and higher than usual interest rates. For example, one of the popular Visa cards charges the top $10 or 5% of the transaction. The annual interest rate is 26.24%, compared to a range of 16.24% to 24.99% for other purchases.
A combination of factors likely prompted card companies and issuers to take this step. First, they may be concerned that a downturn in the crypto markets (Bitcoin has already fallen more than 50% from its all-time high in late 2017) could trigger a wave of defaults. Reports that people are mortgaging their homes to buy bitcoin are just the most extreme example of recent debt-fueled speculation in cryptocurrencies. Higher fees would discourage unfunded purchases and mitigate potential defaults. On the other hand, card issuers could see an opportunity to extract higher fees from a FOMO-paid purchase.
Cryptocurrency exchange clients should consider using other payment methods. As its latest announcement states, Coinbase accepts debit cards and linked bank accounts, but purchases using these methods can take days to complete. (See also, How does bitcoin work.)
Investing in cryptocurrency and other initial coin offerings (“ICOs”) is fraught with risks and speculation, and this article is not a recommendation by Investopedia or the author for investing in cryptocurrencies or other ICOs. Because each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author has no position in any cryptocurrency.