This story was updated at 9:52am PT to reflect the fact that Xapo does not have a formal relationship with MasterCard, but only that it hopes to have one through a partner bank. This is contrary to earlier claims made by Xapo to Gigaom both in person and in writing that Xapo would issue a MasterCard-branded debit card. A MasterCard representative confirmed that it has no relationship with Xapo.
Bitcoin has a long-standing problem. Despite all the hype over the digital currency, almost no one uses it in real life for day-to-day payments: the process is cryptic and cumbersome, and simply impractical compared to using credit cards or good old-fashioned cash.
Xapo, a bitcoin storage and wallet service, says it is poised to change all that. On Thursday, the company is launching a debit card that will let users spend their bitcoin anywhere in the world where MasterCard is accepted, with the same speed and ease as a credit card. The Xapo debit card can be used online or, if users want a physical card to use in shops, they can obtain one for $15.
The service is the first to overcome the long-time bottleneck in the payment space, and could ultimately lay the groundwork for bitcoin’s arrival as a mainstream form of money.
How it works
Xapo is one of many companies that offers a “digital wallet” service where users can store bitcoins, and send and receive payments using an email address or the wallet’s numeric address to identify themselves. What Xapo has done that is different is to strike a deal with MasterCard that allows it to piggy-back on the credit card provider’s widely used payment network.
In practice, it works like this: Sally spends $10 at her local coffee shop and elects to pay with her Xapo debit card. When the barista swipes her card, MasterCard will confirm over its network whether or not the funds are available. So long as Sally has $10 worth of bitcoins in her account, she will be able to have her coffee.
On the backend, what could happens is that Xapo’s partner bank will confirm to MasterCard whether or not Sally has the funds — and it will know this because it knows how many bitcoins Sally has in her wallet. And when the coffee shop transaction occurs, Xapo will immediately debit her account by selling the appropriate amount of bitcoin on the Bitstamp exchange. MasterCard will then pass on the $10 that Sally spent to the coffee shop, minus its customary commission fee of 2 or 3 percent.
Xapo later said that it is working with an undisclosed U.S. partner bank and an overseas bank, which will in turn issue Xapo-branded debit cards that will operate on the Visa or Mastercard networks. A MasterCard spokesman said that would-be card issuers must first obtain permission from MasterCard (this is why there are WalGreens pre-paid MasterCards but no such product from “Larry’s Strip Club.”) It’s unclear if Visa or MasterCard would grant an issuer permission to issue a bitcoin-related debit card.
Sally can also, of course, use the Xapo debit card online to buy songs from iTunes or place an order from Amazon.
Will anyone use it?
Until now, it’s been possible to buy things using bitcoin but, unless you’re doing transactions through an obscure online marketplace, there is no practical reason for doing so.
For starters, bitcoin is slow: it can require waiting up to an hour for the bitcoin network to receive six confirmations that a transaction has cleared. Meanwhile, some popular workarounds — like exchanging bitcoin for cash at an ATM machine or a proposed China-based debit card — are impractical because the customer has to pay a premium to use them.
In the case of the Xapo debit card, however, the customer does not incur a charge for using the service, and it’s as convenient as a credit card. But will anyone use it?
Wences Casares, CEO of Xapo, told me this week that he expects the initial users to be those people who bought a few bitcoins when they were cheap and want an easy way to spend some of their profits. He points out that most people in the world don’t have access to regular credit cards, and the Xapo card will provide them with an easy way to buy things on the internet.
Most importantly, however, Casares believes he has found a way to make bitcoin safe and easy for everyday people.