Photo: iStock
Photo: iStock

Wave of crypto scams, bitcoin crash spook card firms

America's largest banks have started to ban customers from using credit cards to buy cryptocurrencies citing the risk that borrowers might not repay

America’s largest banks had myriad worries in mind when they rushed this week to ban customers from using credit cards to buy cryptocurrencies. Bitcoin’s gut-wrenching slide was just one of the threats.

JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. started to decline purchases as industry executives zeroed in on a variety of ways they could get burned, according to people briefed on the decisions. Publicly, JPMorgan cited the risk that borrowers might not repay. Behind the scenes, card issuers were also concerned about the protections they offer shoppers and their vulnerability to thieves.

Near the top of many lists were initial coin offerings. ICOs drew $3.7 billion last year, but in many cases companies have struggled to make good on obligations or revealed themselves as scams.

Card executives saw a few dangers, said the people, who asked not to be identified. It can take days for buyers to receive their tokens, and if the instruments turn out to be fraudulent or illegal, cardholders may dispute the charges. Major crypto exchanges such as Coinbase eschew most tokens, but some ICOs and smaller venues enable card purchases. In December, US regulators sued a Quebec man and his firm, claiming they raised $15 million in a fraudulent ICO that found workarounds to accept cards.

Another worry is that a thief could open a credit-card account with a stolen or fake identity, or just poach someone else’s number. The fraudster would then be able to convert the credit line into a hoard of digital cash that would be almost impossible to trace.

Of course, Bitcoin’s plunge also creates a classic problem for any banks providing financing. Consumers who lean on credit lines to speculate—and bet wrong—may struggle to repay. The danger wasn’t so acute last year when cryptocurrencies kept climbing. But since briefly exceeding $19,000 in late December, Bitcoin has plunged.

One Reddit user, going by bitconnected1369, drew a mix of pity, disbelief and scorn over the weekend after writing in a forum about loading up on Bitcoin at $17,000.

“Am I worried? No," the user wrote. “I bought it on my credit card through Coinbase and had planned the repayments would be paid out of Bitcoin profits. First payment due in a couple of weeks and I believe we will start to rise up before then." Short of that, the user might sell a portion of the investment to keep up with initial card payments.

What could possibily go wrong? Bitcoin dipped below $6,000 this week after authorities continued to speak out against speculation. Coinbase said people using credit cards are starting to get stung by “cash advance" fees. Customers began noticing the costs in their card statements after payment networks told banks it’s okay to classify crypto exchanges as buying a currency. “You’ve got people that are eschewing their mortgage to buy Bitcoin to get rich quick," said Kristina Yee, an Aite Group analyst who studies cryptocurrencies and blockchain. The banks are “worried that people are over leveraging themselves and they won’t be able to pay back the debt."