Quontic Bank and the fintech NYDIG have partnered to launch a bitcoin rewards card to Quontic’s customers.
The new bitcoin rewards program pays 1.5% back in bitcoin rewards for every debit card transaction.
“The overarching goal is to enable Quontic to grow a deeply engaged base of demand deposit account customers who will choose our debit card over others in order to earn bitcoin,” said Steven Schnall, founder and CEO of Quontic. “We have found that the opportunity to be rewarded in bitcoin resonates with both the bitcoin enthusiast and bitcoin beginners.”
In surveys Quontic conducted over the past two years, more than 20% of respondents said they would be willing to move their checking account to a bank that would pay them rewards in bitcoin, Schnall said.
Quontic presented its regulators with the concept of a bitcoin rewards checking account nearly two years ago.
“It was met with receptivity, but it was clear that we had to make a strong case and demonstrate that we had fully addressed all areas of risk, security, disclosures, processes, vendor diligence and so on,” Schnall said. “We engaged outside counsel and also had the assistance of our fulfillment partner, NYDIG. It wasn’t until we got our regulators comfortable that we pushed forward with the technology build out.”
The technology lift was a heavy one, Schnall said. The bank had to build an integration between its core system and NYDIG. Then it developed a user interface with the core-systems vendor FIS. Quontic and FIS are collaborating on a mobile app with bitcoin rewards tracking and reporting that is set to launch in the second quarter.
The bank and NYDIG got the Office of the Comptroller of the Currency’s approval on the new product.
This is how it works: The customer opens a bitcoin-rewards checking account through the usual process at Quontic. The bank handles onboarding, know-your-customer compliance and identity verification. At the same time, NYDIG opens a mirrored bitcoin wallet that’s on NYDIG’s balance sheet. If a customer spends $200, earning $3.00 in bitcoin rewards, Quontic Bank sends $3.00 to NYDIG and asks it to buy $3.00 of bitcoin and put it in that customer’s wallet.
“The bank never owns bitcoin on its balance sheet, so there's no risk to it,” Sells said.
If the price of bitcoin goes up, the customer’s rewards become more valuable. If the price of bitcoin drops, the rewards depreciate.
“We did a lot of studying around this,” Sells said. “Most people, if their Amex points become less valuable, don't feel like they've suffered a loss.”
Sells also points out that bitcoin can be sold for cash, unlike most reward points.
Quontic Bank appears to be the first to offer this product. BlockFi has announced plans to offer a bitcoin rewards credit card with Evolve Bank & Trust and Visa that will launch in the spring and will be sold directly to consumers. Visa and Fold have partnered on a bitcoin rewards debit card that is in waiting-list mode.
NYDIG is creating a stable of white-labeled bitcoin-related products banks can sell as their own. The bitcoin rewards debit card that Quontic is pioneering is one example. Others include a bitcoin rewards credit card, a high-yield savings account that pays interest in bitcoin instead of dollars and an ability to let customers buy bitcoin through a bank, without the bank having to hold the cryptocurrency on its balance sheet. NYDIG can also provide sub-custody relationships. It offers wholesale financing relationships where it enables banks to lend against bitcoin.
“Think of us like the Stripe for bitcoin banking,” Sells said. “You can embed bitcoin into almost any type of product. That's what we leave up to our partner, the bank or credit union, to decide.”
Banks have been slow to embrace cryptocurrency services because they’re uncertain how their regulators will react and because they lack the expertise and the technology required.
On the regulatory compliance front, NYDIG has an advantage over competitors like Kraken, Avanti, BlockFi, Gemini and Coinbase: It has hired Benjamin Lawsky, a former superintendent for financial services in New York state.
Lawsky authored the Bitlicense, a rigorous set of hurdles companies have to clear before they could get approval to offer cryptocurrency services in New York.
“I think strong compliance is a bedrock of innovation,” said Lawsky, who is now head of regulatory affairs at NYDIG. “I view the work we did at DFS and the work we're doing now at NYDIG as two sides of the same coin, which is, you can have innovation in financial services, but it's always going to be tightly regulated because it's financial services. And the question is, is that regulation done wisely so that you allow the innovation to occur, but you put guardrails up to prevent bad things from happening.”
NYDIG emerged out of Stone Ridge Asset Management, a New York firm that manages about $10 billion across 100 institutional investor relationships. NYDIG Chief Executive Robert Gutmann was a co-founder of Stone Ridge
Stone Ridge's founders got interested in bitcoin in the wake of the financial crisis. They began accumulating bitcoin on the firm's balance sheet and working out the issues around storing, managing and doing the accounting for it.
“We worked with regulators to develop a system that worked for our balance sheet, that was the very beginning of the intellectual property that ultimately became NYDIG,” Gutmann said. “As we were accumulating that position in our asset management business, we began speaking with our clients about it. Something like 10% to 15% of the clients wanted to express the same investment thesis that we were expressing, which is the long-term growth of digital currency as a compliment to existing fiat monetary systems.”
Then the founders decided to create a separate subsidiary of Stone Ridge to make the infrastructure available to third parties. That required getting a license from the New York State Department of Financial Services. Lawsky was already working with Stone Ridge to consult on its marketplace lending business and he helped guide the company through getting the licenses it needed to offer crypto-focused services in New York.
“There were a few years of crickets,” Gutmann acknowledged. “Institutional investors were just not doing this.”
Today, institutional investors are far more interested. MassMutual, the insurance company based in Springfield, Mass., recently made a $5 million equity investment in NYDIG and purchased $100 million in bitcoin through the company.
