Are Crypto Credit Cards Safe?

Here's what the implosion of FTX could mean for your crypto credit card and rewards.

In the crypto frenzy of 2020 and 2021, many Americans warmed to the idea that blockchain platforms could replace traditional bank services. People opened crypto savings accounts that paid higher rates of interest and applied for crypto loans, and there were even stories of crypto-backed mortgages. Crypto credit cards that paid rewards in cryptocurrency attracted hundreds of thousands of customers.

Unfortunately, the events of 2022 have raised questions about how these platforms manage people's money and whether your funds are safe.

The dangers of using crypto credit cards

Crypto prices have struggled this year, but many crypto 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 with this approach.

The clearest risk, as we look at the fallout from the collapse of the FTX crypto exchange, is that your crypto credit card company could fail. If it does, any rewards you have on the platform could get tied up in bankruptcy proceedings.

This is a relatively new and unregulated industry, and we don't know whether prices will recover. Collecting credit card rewards in what is a volatile asset is risky. The potential upside is accompanied by a risk of a massive drop in value.

As there isn't a lot of regulatory clarity or user protection in the crypto space, a lot depends on the individual policies of each crypto exchange. Some platforms allow riskier activities such as margin trading, and it isn't always clear what they do with user funds. In the case of FTX, it looks like the exchange may have lent customer assets to trading firm Alameda Research without their knowledge.

Cryptocurrencies kept on crypto platforms do not have the same protections as you might get with a bank. Money in a bank account is protected by FDIC insurance for up to $250,000 against bank failure. Some crypto platforms, such as Coinbase and Gemini, offer FDIC protections on U.S. dollars, but this does not cover cryptocurrencies held with them.

What to do if you have a BlockFi or FTX credit card

On Nov. 11, FTX announced that it, along with 130 affiliated companies, would enter bankruptcy proceedings. This includes the main international exchange, its trading firm Alameda Research, and its American subsidiary, FTX.US. If you carry a balance on an FTX or BlockFi card, it isn't yet clear 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 any credit or debit card products will be wound down. FTX withdrawals have been frozen, meaning any crypto rewards you had on the FTX platform will be stuck there.

Customers may eventually be able to recover some of their rewards or deposited funds, but it isn't a done deal. Ordinary customers often end up treated as "unsecured creditors" in these cases, which puts them at the back of the queue. FTX's bankruptcy filing suggests there could be over 1 million creditors involved in the proceedings.

For BlockFi customers

BlockFi ran into difficulties 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 pull the company under. This week, BlockFi paused activity on its platform and said it "could no longer operate our business as usual." It is no longer possible to make withdrawals.

This could mean trouble if you kept your credit card crypto rewards on the BlockFi platform and not in a crypto wallet that you control. But a glimmer of hope remains. Unlike FTX, BlockFi is still looking for a way to avoid bankruptcy and it says it still has enough liquidity to explore all options. Pay attention to any communications from the platform and be ready to withdraw your funds to a crypto wallet if the opportunity arises.

BlockFi cards are operated by Evolve Bank and Deserve. These companies may have already been in touch with you about your credit card, but if not, try reaching out to see where you stand. There are rumors that both Binance.US and Curve are bidding to acquire BlockFi's credit card customers, but it isn't clear where that will end up or what it will mean for customers.

For other crypto credit card users

If you have a crypto credit card with a different platform, check what protections the company has in place and how it cares for customer 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 against 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 convenient "forgotten password" button to help if you lose access. However, for many users, any risks of using a crypto wallet are smaller than the danger of losing your funds if your platform fails.

Are the risks worth the rewards?

There are some different crypto credit cards on the market, but few of them offer anything better than what you'll get with an ordinary top credit card. In fact, you might be able to earn a better sign-up bonus and higher rewards on your everyday spending by finding a card that matches your habits.

If crypto is important to you, you could convert some or all of your ordinary credit card rewards into cryptocurrency. But you also have the flexibility to use them for other purposes and -- importantly -- your credit card issuer is much less likely to collapse than a crypto platform. This means you are less likely to lose any rewards you've earned.