Designing the Ultimate Stablecoin Credit Card

Stablecoins were meant to be used for payments; however, almost all attempts to create a stablecoin-based payment system have (almost) failed. This is because:

• Merchants need to accept the stablecoins, and for this they have to:
  • File taxes,
  • Perform KYC,
  • Offramp stablecoins to their banks.
• All crypto transactions are taxable events for merchants who accept stablecoins as a payment method. So, this creates extra accounting efforts for those companies.

This is why stablecoin cards are gaining momentum. Instead of creating a new payment rail, they integrate into the existing system. And now it is time not only to join card networks like Visa and Mastercard but also to improve the system.

What we have today: Stablecoin Debit Cards

Before diving into stablecoin cards, let’s first look at the card network’s economics:

• Consumer: uses the card to pay.
• Issuer is the bank or fintech that issued the card. The consumer may pay fees or interest to the issuer.
• Merchant sells the product or service.
• Acquirer is the merchant’s bank. The merchant pays a small fee (merchant discount fee) to the acquirer.
• Card Network (Visa, Mastercard) connects everything. It moves the transaction between issuer and acquirer.
• Interchange fee: the acquirer pays the issuer.
• Assessment fee: issuers and acquirers pay the card network.

So:

• Issuer earns from consumer fees + interchange.
• Acquirer earns from the merchant discount fee (minus interchange).
• Card network earns from assessments.
• Merchant pays the fees.
• Consumer pays fees and interest if it is a credit card.

Stablecoin debit card providers are card issuers; they allow people to spend their stablecoins and sell their card issuance capability to fintechs. They handle StableUSD → USD conversion and settlement for payments. Most of them require the stablecoin to leave the original wallet and function as a debit card. So, they are actually just “wrappers” in most cases

Card products are basically two types (ignoring less popular ones):

• Debit Card: people deposit money and spend everywhere (this is what we have today with stablecoin cards).
• Credit Card: people buy goods now and pay later. This is the missing innovation today in card networks.

Stablecoin card issuers don’t issue credit cards because credit requires trust in the consumer, and the crypto market is not regulated (or able to be regulated). This is why additional efforts are required to enable credit opportunities for the unbanked.

Creating the Stablecoin Credit Card: An Untapped Opportunity

We are seeing significant efforts to create onchain neobanks, and some successful attempts already. They try to provide everything a neobank does, but onchain 🙂: cards, credit, earning opportunities, stocks, index funds, etc. Their common feature is “Earn,” where they use lending pools to deposit money and generate yield for users.

As a former founding member of Clave, I can confirm that “earn” products are gaining momentum, and people are holding their idle balances in lending pools. As users start using earn products (wrappers around lending pools), it also creates almost risk-free credit opportunities. Fintechs can utilize balances inside lending pools as collateral and issue credit using those decentralized lending pools.

But how can this be applied to credit cards?

The UX would be extremely simple: you deposit your money into a lending pool and give up custody of the assets (similar to the stablecoin debit card experience). Then you start using your credit card with the available balance that comes from the lending pool’s available debt capacity.

When a user spends money with a stablecoin credit card, the card should issue credit from its own balance sheet. The user can repay after one month, with the rate determined by the lending pool the fintech is using.

So the card issuer actually does not need to trust anyone. Yes, this is not entirely new and has been tried before (asset-backed credit mechanisms), but it can be very useful for new types of onchain neobanks to issue credit cards for their customers.

You might question whether collateralized credit cards defeat the purpose of traditional credit cards. Let's examine what the data tells us.

With credit cards, there are two main user types:

• A "revolver" carries balances from month to month. This term comes from "revolving debt," which refers to debt accrued on an open credit line like a credit card.
• A "transactor" pays off their balance in full every month.

According to the American Bankers Association, a U.S. banking industry trade association, revolvers make up 40.3% of credit card holders, while transactors account for 36.1%, and the remaining 23.6% are inactive users. This reveals that "collateralized credit" products already have significant market adoption, with transactors representing over a third of credit card users—demonstrating clear product-market fit.

Furthermore, AAVE v3 alone has $30B worth of idle credit available. This suggests the onchain credit economy is substantial enough to support building a card network on top of it.

Several challenges remain to making this approach a reality:

• Smart contract and liquidity risks are still high.
• Regulations around obtaining credit using consumers' assets remain unclear.
• Daily yield fluctuations create instability in the issuer's economics.
• Consumer education is still necessary.

I don’t want to make this blog complex, but I outlined how a PoC would work with some minor technical details on this page:

If you are building a solution for stablecoin credit cards, please reach us out!

If you want to see a PoC documentation for this product, you can check this link