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One of the issues that have deterred cryptocurrencies in their bid to achieve mainstream adoption has been the absence of ways through which they can be used daily. The creation of crypto payment processors is one of the critical areas which will propel digital assets into the hands of the majority.
With this challenge in mind, a financial startup named Nexo has launched a crypto card with a line of credit which is backed by the owner’s cryptocurrency holdings. The crypto card has been launched in partnership with an unnamed company. According to Nexo’s Antoni Trenchev, the card allows users to spend the value of their crypto holdings without actually spending it. Nexo is a startup which is capital backed by Arrington XRP. One can buy XRP on the hope that the card will be successful and hence boost the value of Arrington XRP.
How does the card work?
Most of the crypto cards that have existed before convert a user’s crypto holdings into fiat currency for every transaction. Nexo’s crypto card uses a user’s crypto holdings as collateral and issues the user with a fiat currency loan equivalent to the crypto holdings. The fiat loans are what users can use to make purchases at any merchant that accepts MasterCard.
When a user swipes their card, an oracle confirms that the user has enough crypto collateral to cover the purchase they intend to make. A loan is issued immediately, and the transaction is settled in fiat currency.
According to Trenchev, the card’s issuer is licensed within the European Economic Area. The Financial startup plans to extend its reach into Asia and the US by the end of the year through additional partnerships. Since its inception, Nexo has issued out $700 million worth of crypto-backed loans to over 200,000 clients. If the startup manages to penetrate other markets such as Asia where crypto trading is popular, these numbers can expand exponentially.
How are the cards issued, and what are the terms?
Unlike traditional credit cards, which are issued according to how much credit one has, Nexo’s card is issued independent of that factor. The collateral one has reduces the default risk that comes with issuing credit cards.
The card comes with an interest rate of between 8% and 24% APR. Using Nexo’s native token reduces the interest rate to 8%. The differences in interest are a result of the differences in loan structure and local regulations. A user can opt to repay their loan in fiat currency or cryptocurrency.
One of the best parts about this credit card is that minimum payments will be eliminated as the value of Bitcoin increases. The offered credit line is dynamic, which means that if the value of one’s collateral increases relative to the market, their debit in fiat currency decreases.
An example of this is that of Brock Pierce, a crypto entrepreneur who mortgaged a house using credit from Nexo. Pierce has not made a single repayment because Bitcoin keeps rising in value since the loan was issued, according to Trenchev.
In the case that cryptocurrencies crash, a user will have to deposit more crypto, in their XRP wallet, for example, to increase their collateral. Alternatively, they can repay part of their loan to reduce exposure or sell some of the collateral in their holding to restore the loan to value ratio.