Lloyds Banking Group Plc has blocked customers from buying cryptocurrencies with their credit cards, becoming the first UK bank to ban borrowing for Bitcoin.
Credit card customers of Lloyds Banking Group – including Lloyds Bank, Bank of Scotland, Halifax and MBNA – will not be individually notified about the change. Instead, attempts to use a credit card to buy cryptocurrencies, such as Bitcoin, Etherium and LiteCoin, will simply be blocked.
Payments via debit card will not be affected.
We explain what cryptocurrency is, what the risks are, and why Lloyds has taken this step.
What is cryptocurrency?
Cryptocurrencies are virtual cash systems that use cryptography to verify and record transactions. Each transfer is conducted electronically, without being facilitated by a financial institution.
Bitcoin is the largest and most well-known of these currencies. It hit headlines towards the end of last year as its value surged to nearly $20,000 (£14,465), before crashing to less than $7,000 (£6,000) today.
What are the risks of investing in cryptocurrencies?
Rapidly rising prices towards the end of last year prompted a rush to invest in Bitcoin and similar systems.
But as the graph below shows, the price of Bitcoin over the past year has fluctuated dramatically and shows no sign of stabilising. While it enjoyed a high in December, the price of Bitcoin has since crashed by around 57%.
Unlike national currencies, cryptocurrencies are not regulated by any central banks or institutions, making the market extremely unstable.
The cryptocurrency market has also attracted scammers posing as investment traders, as well as hackers targeting Bitcoin funds, so there is no guarantee your investment is secure. There is little regulation around Bitcoin transactions, so you may have no recourse if you’re ripped off.
Why has Lloyds banned customers from buying cryptocurrency on credit?
The Lloyds move to ban credit card payments comes amid concerns that customers would not be able to repay their debts if Bitcoin’s value falls further.
By making a purchase with a credit card, you are borrowing money from the bank. If customers are unable to repay their credit card bill, the bank must carry this loss.
In addition, banning credit card payments may protect the bank from potential Section 75 claims relating to Bitcoin.
What is Section 75 of the Consumer Credit Act?
Legislation brought in under Section 75 of the Consumer Credit Act 1974 states that if you buy goods or services on your credit card, your credit card company is jointly and severally liable for any breach of contract or misrepresentation.
This means if something goes wrong with a purchase, the responsibility of reimbursing you for any loss lies both with the retailer or trader who sold you the goods or services and your credit card company.
This also applies to foreign transactions and goods bought online. In the case of buying cryptocurrencies, banks providing credit cards could be liable if your cryptocurrency trader goes bust or was acting fraudulently, for instance.
- Find out more: Read the full outline of Section 75 of the Consumer Credit Act
Are other banks likely to ban purchasing cryptocurrency on credit card?
Which? asked Barclays and Santander what their plans were in the wake of the Lloyds Bank announcement.
Barclays customers can continue to purchase cryptocurrency on both debit and credit card, but the company is keeping the matter under ‘close review’. It assures Which? there are ‘precautions to assess affordability before extending credit, flag and prevent any suspicious transactions’.
Similarly, Santander ‘will continue to monitor cryptocurrencies as we do with any other factors that could impact our customers’.
A number of US credit card issuers have already taken the step to ban such credit card purchases, including Bank of America, JP Morgan, Citigroup, Capital One and Discover.
Should you ever borrow in order to invest?
If you’re looking to invest your money, Which? suggests getting your debts under control first. The cost of repaying your debt, plus interest, is likely to outweigh the returns you’ll receive from investments.
If you use a credit card to invest and lose your money, you could end up having to pay that money back plus the credit card interest, making your loss even greater.
While investing in cryptocurrencies may seem to offer big rewards, the unstable market means there is no guarantee you’ll get your money back. If you do decide to invest, you should make sure you could afford to lose the money you put down.
What about third-party payments?
There are still outstanding questions about whether Lloyds will be able to police its customers’ spending, particularly if they use third party-payment companies, such as PayPal.
Which? asked Lloyds what would happen if someone were to buy cryptocurrency on Ebay (where several currencies are available) with a Lloyds credit card connected to PayPal.
At the time of posting, we had not received a response from Lloyds.
What other investment alternatives are there?
If you’re looking to invest your savings, there are plenty of more reliable ways to do it.
Among the most popular options are:
- Stocks and shares Isas
- Peer-to-peer investing
- Investing directly in shares
- Investment trusts
- Exchange traded funds (ETFs)
You can try the Which? investment portfolio tool, which assesses the level of risk you’re comfortable with to reveal how much return you can expect. But remember, there is an element of risk involved in any financial investment.