How Stablecoin Card Issuance Works

Stablecoin card issuance lets a cardholder spend their stablecoin balance by initiating a Mastercard or Visa transaction. However, the stablecoin will have to be converted to fiat money somewhere in that spending transaction.

This kind of card is different from cards that offer rewards for cryptocurrency purchases or those that allow for cryptocurrency purchases with a card. The stablecoin is the source of funding for the cardholder with this kind of stablecoin card.

The core mechanics of converting stablecoins to card spend

Converting stablecoins to spend on a card happens through four stages: funding the account, authorising the transaction, converting the stablecoin to fiat money, and finally, paying the merchant for the products purchased.

Funding the account

The stablecoin funds are deposited into a wallet for the cardholder, usually held in USDC or USDT since both are dollar-pegged and carry the deep market liquidity needed to convert quickly at the moment of a purchase. These can be custodial and non-custodial wallets. With a custodial wallet, a regulated entity will hold the tokens for the user. With non-custodial wallets, the user has control of the wallet.

The custodial wallet is the more common of the two funding options.

Authorising the transaction

When the user decides to purchase something with the stablecoin card, the authorisation protocol for the Mastercard or Visa will initiate. The response to the request will need to take place in real time, in a matter of seconds, regardless of the type of currency that the user's stablecoin is valued in.

The user will not see the stablecoin conversion during this phase.

Converting the stablecoin

The stablecoin can convert to fiat money at three different phases: at the authorisation of the transaction, from a pre-funded pool of the card company's fiat money, or at the settlement of the transaction.

How the merchant gets paid

The merchant will not interact with the stablecoin. When the transaction is authorised between the merchant and the stablecoin card company, the acquirer, the card company, and the stablecoin will be settled and paid in fiat money.

The merchant will not see any stablecoin transactions in their software.

Real-time conversion vs pre-funded cards

Risks of using crypto-backed debit cards

Crypto-backed debit cards have three main risks: depeg risk, conversion risk, and counterparty risk. Each of these risks will be explored in detail.

Depeg risk

A stablecoin is supposed to hold the value of its reference currency, such as the US dollar. However, if the stablecoin departs from its value for the reference currency, the user's spending power will decrease while the stablecoin is in that depeg phase.

Conversion risk

Any time between the confirmation of the stablecoin transaction on the blockchain and the settlement of the fiat money corresponds to a period of risk where the transaction can change.

Counterparty risk

This risk occurs if a user's stablecoin is held by a custodian. If that custodian goes under or is breached in some way, the user will not be able to access their stablecoin balance.

Regulatory frameworks require that any stablecoin exchange or card company hold a percentage of their stablecoin in reserves that can be exchanged for the reference currency of the stablecoin. This will limit counterparty risk for users of stablecoin cards.

Regulatory status of stablecoin payment cards

The stablecoin payment card's regulatory status will depend on where the company that creates the stablecoin and the card is licensed. Fiat money and stablecoin tokens that are backed by fiat money are supervised in most countries where stablecoin companies want to roll out their products.

European Union

The Markets in Crypto-Assets Regulation, or MiCA, classifies fiat-backed stablecoins under the category of e-money tokens (EMTs). Any company that wishes to issue or redeem these tokens must be an electronic money institution (EMI) or a credit institution. These institutions must have 100% of their issued EMTs represented by fiat money reserves and be redeemable at par value in the reference currency at all times.

EMTs cannot be issued or redeemed by a crypto-asset service provider, meaning that a stablecoin card under MiCA will be issued and managed by an EMI.

United States

The United States has established the GENIUS Act, also known as Title 12 USC 5903, which provides federal guidelines for stablecoins that are referenced to fiat money. The regulations for these stablecoins will be rolled out on the federal level, but individual states will have their own regulations.

For example, New York requires that every stablecoin company be chartered or have a license for its stablecoins. The licensed entities must hold segregated, liquid reserves of their stablecoin in fiat money that back the right of holders to redeem their tokens.

The United States will likely use its banking system to support the stablecoin and card company; a bank will hold the fiat money and manage the relationship with the card company to ensure that transactions go through smoothly.

Hong Kong

Hong Kong has its own regulations regarding stablecoin companies. Under the Stablecoins Ordinance, stablecoin companies that are focused on fiat money will be licensed in Hong Kong by the Hong Kong Monetary Authority (HKMA).

Any stablecoin cards that use these stablecoins will have to work with licensed payment service providers in Hong Kong that are under the rules that currently govern stored-value facilities in the area.

Card network rules layered on top

In addition to meeting the regulations for stablecoins, the stablecoin payment card will have to meet the terms and conditions established by the card networks, such as Visa and Mastercard.

In addition to having their own regulations for stablecoin companies, the two card networks have also published guidelines regarding stablecoin cards. Both Visa and Mastercard have stated that any stablecoin cards will work the same as traditional cards in terms of their KYC, fraud monitoring, and chargeback policies.

Compliance and risk screening behind the scenes

The biggest difference between a stablecoin and a regular payment card is in the risk screening that occurs behind the scenes before any transaction is authorised.

Any stablecoin that is used to purchase something will have its wallet address screened for risk factors before being allowed to fund the purchase. The screening software will review the transaction history of the stablecoin wallet and compare it to other wallets with a history of engaging in transactions with sanctioned or high-risk addresses.

The same decision will be made when authorising the transaction by the stablecoin and card company. If the stablecoin wallet passes the screening, the purchase can be authorised. If the stablecoin wallet fails the screening, the transaction will be declined.

In addition to the screening of the stablecoin wallet, regulations require that whenever a stablecoin moves between a hosted wallet and an external wallet, information will have to be shared between the two wallets with every transaction. This is referred to as the travel rule and is required by the FATF Recommendation 16 on the anti-money laundering efforts of wallet companies.