EY: Crypto card issuer Wirecard missing $2.1 billion in cash

The incident is a striking reminder of what cryptocurrency is still missing.

According to Bloomberg, auditors from Ernst & Young could not confirm the existence of €1.9 billion in cash. That's equivalent to $2.1 billion, all missing from two unnamed Asian banks.

The revelation helps cap off several months of growing suspicions around Wirecard, which has delayed publishing its most recent annual financial report multiple times.

Wirecard CEO Markus Braun has portrayed the company as a victim, saying "it is currently unclear whether fraudulent transactions to the detriment of Wirecard AG have occurred," adding that the company will file a complaint against unnamed persons.

A good number of the world's largest cryptocurrency debit card companies are among Wirecard's customers, including Crypto.com, TenX and CryptoPay. And because the loss of $2 billion leaves quite a large hole, it's possible that their cards could experience service disruptions in the near future.

Is a service disruption on the cards?

While there have been no immediate impacts for cryptocurrency card companies and it's impossible to say what will happen next, future service disruptions could be on the cards. A $2 billion hole is tough to fill. If you foresee yourself being dependent on Crypto.com, TenX or CryptoPay cards for payments, it's probably a good idea to make sure you have some alternatives available in case it stops working.

To be clear though, as far as anyone knows, cryptocurrency card companies like Crypto.com had nothing to do with this; they're just unfortunate Wirecard customers.

This is because when you're using a cryptocurrency debit card you're not actually loading cryptocurrency onto the card. Instead, you're converting your cryptocurrency to fiat currency which is then loaded onto the card. This is how you can get cryptocurrency cards usable worldwide, accepted everywhere any Visa card is accepted.

By necessity, this creates a stack of services.

Bottom

On the bottom of the pyramid, you have the card companies themselves, like Visa and MasterCard. They're in charge of the payment network itself, ensuring that everything is sufficiently standardised, that the correct data is transmitted whenever someone taps a card on a card reader. When things go wrong at this level, society itself can start falling apart.

Middle

In the middle, you have the card issuers, which includes banks and companies like Wirecard. These companies partner with Visa, ensure that money is actually being moved when someone taps a card on a card reader, and gives Visa cards to its customers. In the case of banks, you are the customer, so this is the top layer. In the case of cryptocurrency companies, there's often another layer involved to bridge the gap between cryptocurrency and fiat.

When things go wrong in this layer, as may have just occurred with Wirecard, it can present a major inconvenience to the customers of the card issuer.

Top

Here you have the companies that reach the end user such as Crypto.com, TenX and CryptoPay. Their role is typically to add some kind of extra value for the end user, such as easier online payments or various cryptocurrency services. In order to offer cards to their customers, they will sometimes use the services of companies in that middle layer.

As an end user making a card payment, you basically put money into the top layer and then that stack turns it into something that can be instantly spent almost anywhere.

State of the card technology

On 5 January 2018, right at peak crypto mania, Visa (bottom layer) suddenly terminated its relationship with cryptocurrency card issuer WaveCrest (middle layer), citing violation of Visa's terms of service. This meant the cards of TenX, CryptoPay and Bitwala (top layer, and all WaveCrest customers at the time) suddenly became unusable.

Anyone depending solely on their crypto-backed card as a means of payment was at risk. At least one person was temporarily stranded on vacation, and this being peak crypto mania there's a decent chance that someone else had just spent a solid two hours telling their bored date all about how Bitcoin is the currency of the future, only to have their cryptocurrency card declined when they tried to pay for dinner.

Now the financial inconsistencies at Wirecard serve to highlight the fact that this end-to-end cryptocurrency card payment stack is still fragile and that it's still not a basket you can put all your eggs in.

On the plus side, the stack isn't static. For example, the Coinbase card is issued by Paysafe, a middle layer company whose many subsidiaries include top layers like Skrill. But in February 2020 Coinbase became "the first pure play crypto company to receive Visa membership", positioning itself to occupy both the middle and the top layer of the Visa stack. This Wirecard incident helps drive home how important this can be, and how much safer payments can be without unreliable middle layers.

Opinion: The forest for the trees

In the bigger and more-relevant-to-crypto scheme of things, it's important to note that there are many stacks, and that at the end of the day each has two main goals:

1. Make sure a lot of people accept a specific payment method
2. Make sure a lot of people pay with a specific payment method

As the Visa Europe CEO said: "our main competition is cash."

Cash is still the biggest stack around, but in times past, Visa, MasterCard and others carved out a large market share with the power of their plastic rectangle technology, seizing on the fact that cash is inconvenient and that cards are a much easier way to extend users credit.

Then along came PayPal, Alipay and others, carving out their own space by prying open the weaknesses of card payments: the fact that Visa and MasterCard are, anecdotally, widely despised by merchants for their high fees and the fact that plastic rectangles aren't going to be the timeless pinnacle of payments technology in an age of smartphones and Internet connections.

Cryptocurrency is a new stack still, whose prime innovation of blockchain allows for purely digital currency, which in turn reduces back end costs and allows for near-complete automation of everything in that payment stack. This opens the door to international micropayments.

That's the competitive advantage that cryptocurrency will have to leverage if it wants to successfully see global mass adoption on a Visa-like scale in everyday payments. The fact that it's not fiat currency has so far been a major disadvantage rather than a benefit.

After all, the only place Bitcoin has gained even a little bit of traction in payments (online drug deals, ransom payments, etc) is where its characteristics as a payment method rather than as an asset are useful. For perspective, there are about 50 times as many mobile money transactions per day in Kenya alone as there are Bitcoin transactions worldwide.

Today's most popular current ways of using cryptocurrency for payments are those that graft it into existing stacks and convert it to fiat, the way Wirecard lets its customers slide into the Visa network. But because this doesn't really tap into the efficiency benefits of blockchain in payments, it's probably more likely to remain as something for cryptocurrency fans rather than a long term play at disrupting payments.

Put together, this makes it easier to see why central banks greeted the announcement of Facebook's Libra with a lot more excitement and fear than they awarded Bitcoin. Facebook has a lot of people in its ecosystem to accept and pay with Libra, to skip right past the problem of it not being "real money". Other cryptocurrencies have to graft themselves into stacks like Visa, but Facebook can just go ahead and kickstart its own stack. Central bank digital currencies can similarly leverage an existing network of captive users to kickstart mass adoption.

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Disclosure: The author holds BNB, BTC at the time of writing.

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