Will the Bitcoin Credit Card Fly or Flop?

Bitcoin. It’s the most popular community-backed currency on the Internet. Beloved by tech gurus and black-market vendors alike, it gives people a truly secure way to spend their money off-the-grid and away from the prying eyes of banks and regulatory agencies. And now, apparently, it’s coming to a credit card near you.

This week, the popular Bitcoin exchange service BitInstant announced that it would be partnering with two major banks to release a Bitcoin-funded credit card within the next two months. According to BitInstant’s founder Charlie Shrem, the card will function as a standard debit and credit card that instantly converts its Bitcoin reserve to the appropriate currency when used. Each card will feature a QR code on the front and a printed address on the back for funding, and each deposit will charge a 1% service fee.

This move should help Bitcoin break through to a much larger market segment. The convenience of being able to spend the currency like federal dollars is sure to win over many consumers who have been unwilling or unable to understand how Bitcoins are currently exchanged.

At the moment, Bitcoins can be obtained in one of two ways. They can be purchased from vendors or “mined” by using a computer to solve complex algorithms designed to slowly introduce more Bitcoins into the economy, much like the way gold is mined. To spend them, consumers must type a special address (provided by a merchant) into a downloaded Bitcoin client. It’s not rocket science, but it’s not exactly easy for someone who isn’t good with computers. Consequently, merchants have been slow to adopt the currency. The instant-conversion credit card, of course, should change that.

“People are always asking, ‘Well, what can I spend Bitcoins on?” said Erik Voorhees, BitInstant’s head of communications in an interview with CNN. “You can finally just say, ‘Everything.”

But this convenience will come at a price. The privacy and security that made Bitcoin so popular will vanish once the currency is put onto plastic. When you apply for a credit card through global banks (such as the institutions BitInstant intends to work with) you’ll have to provide some form of legitimate identification. When an ID is linked to your Bitcoin address, buying drugs and other illegal goodies online is out of the question.

There are other issues with linking Bitcoins to banks as well. When spending with credit cards, Bitcoin users could possibly subject themselves to chargebacks, identity theft and other hassles.

It may be a better idea for the industry to focus on developing a Bitcoin network for mobile phones. The QR code technology already exists, and phones would provide a safer, yet equally accessible platform for all consumers. While a Bitcoin-funded credit card is great, the system needs to stay out of the banks if it’s going to reach its true potential.

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