the crypto off-ramp no one is watching

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Ugh. UGH.

A new study by crypto tax software CoinLedger reveals that the retail & e-commerce sector has the highest number of companies that offer the option to purchase through cryptocurrency.

The study compiled a list of 400 major companies listed by BitPay as accepting cryptocurrency methods and categorized them into sectors, to discover which one contains the most companies offering crypto as a payment method.

Retail & e-commerce take first place with a total of 76 companies accepting crypto payments. The sector includes clothing and accessories stores like Adidas, Yankee Candle and H&M, as well as online shopping platforms such as Etsy.

Adidas and Etsy told us they don’t accept crypto payments. Yankee Candle and H&M didn’t respond to our emails.

The food & dining sector follows closely in second with 72 companies. Examples are Chipotle, Chuck E Cheese’s, Domino’s and Hard Rock Café, and delivery services such as DoorDash and Uber Eats.

Uber Eats and Domino’s UK told us they don’t accept crypto payments. Chipotle said it accepts digital payments including with crypto through Flexa-enabled apps. We’re still waiting to hear back from the others, though going by their websites we can guess their response.

What’s going on here? Mostly, it’s gift cards. H&M, Domino’s and Uber Eats are listed above because Bitpay resells their gift cards for crypto.

Prepaid cards were being used as shadow currency long before bitcoin was invented. Their current and continuing popularity in crypto (and other communities) is because prepaid offers many advantages over on-chain tokens.

Unlike crypto, an electronic retail voucher can be redeemed near-anonymously, instantly, at face value. Use will usually fall below the purview of financial regulators. Purchases and transfers are largely untraceable. Trust rests in a central counterparty, with a multinational corporation acting both as the custodian and the clearing house. Sales are VAT-exempt and the reporting of capital gains is a matter of personal conscience.

A recently released 2010 email from Satoshi Nakamoto, bitcoin’s pseudonymous chief architect, predicted that prepaid cards could be a bridge to tradfi. Crypto was easy to generate and hard to cash out, Nakamoto reasoned, but prepaid debit cards might offer the unbanked a convenient off-ramp.

That gift cards would become currency for traders unwilling or unable to buy crypto through conventional channels was a less anticipated development. An investigation published by The Intercept in 2018 described how users were swapping bitcoin for gift cards on peer-to-peer marketplaces at a premium to the market price.

Many retailers have since tightened security on card purchases, including by putting restrictions on top-ups and blocking the purchase of cards with cards. Regulatory efforts have focused on warning about consumer confidence scams and limiting opportunities for money laundering.

Meanwhile, in the thriving gift cards-for-crypto sector, know-your-customer and anti-money-laundering measures are being applied unevenly.

Other popular cards-for-crypto sites include Bitrefill of Sweden, which says unverified customers can make up to 15 purchases a day to a value of $5,000, or $10,000 a month. Coinsbee, based in Germany, says in its FAQ that it applies no KYC checks below €1,000 per transaction up to a total value of €10,000. Live On Crypto, an alt-coin issuer that says it supports food banks, bought space on CoinTelegraph last week to advertise that its gift-card shop asks for “no personal information on sign-up and checkout”.

Last week, shortly after we enquired about its KYC and AML policies, US-based Bitpay posted on its website that transaction thresholds for unverified customers were $3000 for payments and $1000 for refunds, with an additional $1000 cap applying for customers based in the European Union. At press time the company had not responded to our requests for comment.

Among big centralised crypto exchanges, only Binance offers crypto gift cards having launched a product in June 2023. (It added a customer verification requirement on sales and transfers nearly two months later.) Coinbase has stopped selling prepaid cards and no longer supports a cashout-by-card function it launched in 2018. FTX sold gift cards in select Gamestop stores as part of a partnership, but that died along with FTX.

Nevertheless, it’s still possible to buy crypto with prepaid cards. Specialist peer-to-peer marketplaces such as LocalCoinSwap offer the trade, as do sellers on forums including Reddit’s r/giftcardexchange board.

Paxful, the US-based P2P marketplace named in the Intercept article, allows crypto sellers to accept as currency up to 133 brands of gift card. A dollar in Walmart vouchers typically buys about $0.85 of bitcoin on Paxful, or $0.50 of ether, with worse rates quoted by sellers who don’t require receipts or physical delivery.

Paxful says it applies all relevant KYC requirements. Its website blocks incoming traffic by IP address to abide by US regulatory controls and applies a $1000 lifetime value cap on customers the company has verified only by phone.

While crypto is gradually being legislated into the financial mainstream, gift card law can look behind the curve.

Electronic money laws in the US, UK and EU apply only to general-use prepaid debit cards. Vouchers tied to a single retailer (known as closed-loop cards) are considered instruments of stored value, not payment instruments, so their sellers can avoid many of the reporting requirements placed on money transmitters.

And attempts at tightening regulations face strong opposition. Trade groups including the Electronic Money Association and EuroCommerce have called for the EU not to make gift card customer identification mandatory as part of an update of AML rules.

The EU proposed in February that any exemption would be “conditional to strict limits regarding the maximum value of the product, its exclusive use to purchase goods or services, and provided that the amount stored cannot be exchanged for other value.”

Tighter caps on gift-card values would be unlikely to have much effect on customers of Adidas, Chuck E Cheese’s, Yankee Candle and Hard Rock Café. How wider restrictions might affect crypto is a much more complicated question to answer.

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