Cryptocurrency burst into the mainstream last fall when Bitcoin's rapid rise to nearly $20,000 per coin spurred a massive proliferation of digital currencies and widespread interest in the blockchain-supported technologies. Since then, Bitcoin has leveled off at roughly $7,000 per coin, but interest in cryptocurrency remains.
But is cryptocurrency right for small businesses? There are several serious considerations to take into account – both technical and pragmatic – before announcing you'll accept cryptocurrency. Business News Daily looked at what small businesses need to know about cryptocurrency and how some blockchain startups are trying to push the space forward.
What is cryptocurrency?
Cryptocurrency relies on peer-to-peer (P2P) technology, and as such, it is decentralized in nature. In other words, no central bank or government regulates or backs it. Buyers transfer funds directly to sellers, without a third party to process payments.
"Cryptocurrencies cut out the middleman in a transaction," said Chris Poelma, president and general manager small business of NCR Silver. "Rather than store your money somewhere where you're dependent on an organization to safeguard it, you hold on to it through an encryption only you have a key to. As we hear more stories of data breaches and hackers becoming more sophisticated, cryptocurrencies sound more appealing to consumers looking for a safer way to do business."
Small businesses might choose to accept cryptocurrency for many reasons, such as being at the forefront of technology, attracting customers who use crypto or eliminating certain kinds of fraud. But is it right for your business?
Benefits of accepting cryptocurrency
Cryptocurrencies offer several primary benefits that small businesses may want to consider:
Lower transaction fees. The lack of a central intermediary dramatically reduces transaction fees. Small businesses accepting credit card payments often face fees of around 25 cents for each card swipe, plus 2 to 4 percent of the transaction total. These costs add up, which is why smaller stores often have credit card purchase minimums.
Merchant protection. Crypto's decentralized setup also protects merchants from fraudulent chargebacks. The transactions, like cash, are final, because no third party can reverse charges.
Increased sales. Crypto's decentralized nature enables small businesses to expand and open their doors to international buyers for whom their products and services were once inaccessible. For example, a small electronics retailer reported selling $300,000 worth of merchandise to nearly 40 countries by accepting cryptocurrency.
- Catering to consumer preferences. Accepting cryptocurrency offers another advantage by giving customers an additional way to pay while providing an extra layer of protection for their information.
Risks of accepting cryptocurrency
Accepting cryptocurrency means setting up a digital wallet on a digital currency exchange, which could be technically prohibitive for small business owners unfamiliar with the technology. Cryptocurrency is an information-dense field with a relatively high learning curve, which can present a significant obstacle when you're also trying to run a business.
"As it stands now, small businesses, in particular, would find it difficult to accept cryptocurrency," said Serge Beck, CEO of the blockchain ecosystem company Optherium. "And even without the technical obstacles, the volatility of crypto values still creates a disincentive for entrepreneurs to hold digital currencies."
Optherium, which will be launching its initial coin offering (ICO) in June, has already built a platform that mitigates those problems. The Optherium B2C platform, as it is called, enables buyers to pay in their preferred cryptocurrency while sellers accept any currency they choose, whether digital or fiat.
"What Optherium's B2C platform does is allows buyers to pay with whatever currency they want, while sellers to accept any other," Beck said. "We will initially support 50 cryptocurrencies and a wide array of fiat currencies, and we can near-instantaneously complete 100,000 transactions per second in this way."
Optherium maintains its own token, but it's not a requirement to use the platform. Instead, holders of Optherium's own token will enjoy even lower fees when transacting on the platform.
The highest risk of digital currencies is price volatility, which makes value extremely unpredictable. To illustrate, Bitcoin was first valued in pennies when introduced in 2009 but rose to $19,172 per coin in December 2017. Today, one Bitcoin is worth about $7,000.
"You will have to make some form of arrangement for translating your cryptocurrency back into your currency of record," said Areiel Wolanow, managing director of consulting firm Finserv Experts. "Cryptocurrencies are volatile, [so] you will want to do this quickly and regularly."
Using a merchant service company such as BitPay or Coinbase helps insulate small businesses against that volatility by immediately exchanging digital currency for its cash value. Through these services, cryptocurrency payments are made in real time for the currency's current value. The only reason for a business to hold on to cryptocurrency would be as a speculative investment, said Wolanow, but doing so essentially amounts to gambling with your revenue stream.
Although cryptocurrency transactions eliminate cyberthreats like stolen credit card numbers, the currency still isn't 100 percent safe. So far, there is no way to completely prevent cybercriminals from getting their hands on users' wallets. This is particularly dangerous because, unlike fiat currencies like the U.S. dollar and the Euro, cryptocurrencies are not backed or insured.
However, some cryptocurrency companies are working to change that. Coinbase, for example, holds less than 2 percent of customers' digital currency online, and in the event of a breach, the company fully insures losses. All fiat currency maintained on Coinbase is subject to FDIC insurance, up to $250,000, just like conventional banks. However, these protections don't apply if your personal wallet is hacked; it is still your responsibility to secure your personal account, but you can rest easy knowing that if the company suffers an attack, your funds are safe.
To better protect your accounts, you can enable multifactor authentication on your accounts, secure and maintain your private keys, and regularly back up your data. And companies are also working on solutions to address wallet security as well. According to Beck, Optherium employs a biometric verification method that identifies a user based on their facial structure to grant wallet access, greatly reducing a thief's ability to successfully steal someone's assets. This method also helps users reconstitute their wallet when access is lost.
Another issue with accepting cryptocurrency is that the regulatory landscape is subject to changes in the near future. Lawmakers are still crafting regulations to govern it. Once regulations are in place, they are likely to evolve further, meaning business owners will have to be adaptable.
"Because cryptocurrencies are relatively new, there's much uncertainty around how the government will work out kinks in its regulation," Poelma said. "Indeed, new regulations could be passed by the time you read this. [Cryptocurrency] won't be universally accepted until businesses are certain they know how to report gains and pay proper taxes on cryptocurrency transactions."
Any entrepreneur who chooses to accept cryptocurrency should be prepared to pivot and adapt to periodic changes in the law as a result. These changes could continue into the foreseeable future as cryptocurrency adoption expands and new problems and difficulties arise.