All “fiat” or currency-based credit cards are underwritten by banks or financial institutions in the U.S., for obvious reasons: capital liquidity. Regardless of the money being “charged” merchants still want “fiat” to pay for their goods. Even department store cards are backed by financial companies. For instance, Best Buy’s own store credit card was backed by GE Capital at one point in the past, as well as Citi Consumer Credit, and Beneficial Consumer Credit.
Pre-paid debit cards are also underwritten by banks and consumer credit companies. All of these entities are “on-network” with Visa, MasterCard, AMEX. and Discover (Novus).
The “crypto” aspect of debit cards is really no different than as Coinbase operates. The “crypto account” is linked to an MSB that converts the crypto to the then dollar (or Euro) value on the exchanges, less a processing fee, and that fiat is then shown on the network as a “validation” of existing funds. The process is a bit time consuming, but fast enough that it is not much slower than existing or traditional CC and DC card transactions. However, there has to be an “on-network” bank involved to handle the transaction, and Coinbase is not a bank, in this example, so they have to rely on their existing bank as an additional layer of verification.
American banks are not very thrilled doing business with any entity that is involved with the crypto industry based on one major point: they are unable to fully comply with KYC and AML rules when the client is not a direct banking participant with the bank. So, when I go to Coinbase, without a verified account, and I want to link bank accounts or apply for a debit card, they require me to comply with their various levels of KYC. In turn, Coinbase is guaranteeing their bank that all of the services being used of the bank will be by those who have fully complied with KYC registration requirements.
Owning a bank is a major hurdle being overcome in the current banking environment, which has led to many businesses having their accounts closed by their own partner banks. If you own the bank, you can conduct compliance as simply a single layer of KYC/AML, because there are no additional relationships or layers in the process. You also have access to on-network CC and DC processing, and can better control the conversion processes of crypto to fiat, in a much more timely fashion. The software used to value the current crypto account, based against then market pricing conditions, is a one step process, versus a multi-step process under traditional banking arrangement (KYC/AML concerns).
On the regulatory front, banks are still held responsible for KYC/AML compliance of any of their account users/holders. Even though they may have compliance with the account holder, they have no control over the clients of the account holder, nor whether the account holder has been properly diligent to ensure KYC/AML compliance of their own clients.
This is where the “sticky wicket” comes into play… The risk factors to the bank are by proxy, through their own clients who deal in the crypto industry. Again, this is why we often see crypto company accounts frozen or closed by their partner banks. They deem that the risk to non-compliance has increased, based on account activity or volume. The higher the volume, the higher the risk that nefarious transactions are occurring that could bring regulators to the bank over KYC/AML compliance lapses “of their clients,” not directly by the bank itself necessarily. You are guilty by association in this regard, not guilty by direct negligence of the bank.