Cryptocurrency Basics for Business

Cryptocurrency Basics for Business

 

Source: Fifth Third Bank.

At the most basic level, digital currency is simply another way for people or organizations to pay each other—and it is catching on fast: Coin Market Cap reported that all cryptocurrencies in circulation reached a $700-billion-plus market capitalization early in the New Year.

The sheer number of virtual currencies is itself staggering: While Bitcoin, Dash, Ethereum, Litecoin, Monero, Ripple, Stellar, and Zcash are among the better-known names, there are well over 1,000 available cryptocurrencies.

With so much momentum, a growing number of entrepreneurs and managers find themselves grappling with the potentially profound implications digital currency may have for businesses and consumers alike.

The Value of Digital Currency

Much of the behind the scenes value of digital currency lies in the blockchain distributed ledger technology which, absent an established middleman to facilitate a financial transaction, engenders trust in most digital currency platforms by ensuring an exchange of money, goods, property or anything else between parties is approved by all computers in a chain and then verified—with the transaction permanently, immutably, securely and publicly recorded and stored.

Bitcoin, for example, wasn’t the first digital currency to appear on the virtual world stage, but it was the most revolutionary because it represented the first reference application of blockchain technology.

One significant benefit for participants in a blockchain network is the ability to create and embed a smart contract code which specifies the parameters of an agreement between parties—that is, its rules and penalties—and carries it out automatically, thereby enabling a more efficient full lifecycle of any domestic or international transaction. This removes the need to engage in time-consuming efforts such as manual accounting reconciliations, and lowers costs by reducing the number of human intermediaries involved in processes.

A U.S. company and its manufacturing partner in China, for example, might leverage smart contract code to specify that a percentage of the total digital currency payment for a PO will electronically transfer from the buyer to the supplier at various stages—say, at shipping upon confirmation of product quality and again upon receipt at final destinations. Technologies such as RFID that can monitor the location of goods at points in the supply chain may be part of the deal, too, triggering alerts to send payments at the agreed-upon points in the process.

Easing cross-border business-to-business and multinational company remittances is a potential blockchain boon as well: Organizations that today might pay significant transaction fees to each bank involved in routing the payments—and also have to deal with the fact that transactions can take days to settle—could appreciate a lower-cost, faster alternative.

Another upside: In an age when many consumers prefer to make their purchases with anything but cold, hard cash, businesses should be aware that crytpocurrency transactions will be free of the interchange fees that accompany debit and credit card payments. It’s possible retailers and others may reap the benefits of reduced Payment Card Industry (PCI) Data Security Standard compliance burdens as more of their customers turn to digital cash. Companies from Expedia and Microsoft to Overstock and Zynga already accept Bitcoins for some or all of their consumer offerings.   

Prepping to Support Digital Currency 

Which digital currency platforms will become market leaders?

There is no clear frontrunner yet—each has its own unique characteristics and virtues. Bitcoin, for example, made its mark as a peer-to-peer electronic cash platform, while Ripple focused on becoming a cross-border payments solution for large financial institutions. Ethereum, meanwhile, was built largely as a smart contracts creation platform.     

Businesses will have to determine which digital currency or currencies to embrace—and then take some important steps to successfully leverage cryptocurrency and blockchain technology.

For many enterprises the smart contract will be the most important piece of the puzzle. Fortunately, there is an emerging infrastructure of tools, templates and tutorials for the task. At Ethereum.org, for example, staffers can walk through building a smart contract using the Solidity high-level smart contract language.

Organizations shouldn’t ignore the elements of risk involved in digital currencies. Though it has since rallied back, Bitcoin offered a stark illustration of these potential risks when its investors endured a substantial price drop at the end of December.

In order to avoid potentially significant swings in digital currency value that could affect transaction clearings, it’s useful for businesses to consider contracting with wallet providers and merchant processors. Coinbase, for example, provides merchant tools that enable businesses to instantly sell the bitcoins received from customers back to it. Merchant processors not only deal with managing the risk in the actual currency, but also generally take on any regulatory and money transmission licensing burdens for businesses as well.

Additionally, it’s critical to store the organization’s private blockchain key—which must be validated against the public key to unlock transactional value—in protected places. Luckily, there is an increasing number of options for this: One of them is BitGo, which specializes in making digital currencies usable for businesses, combines its multi-signature enterprise wallet with Ledger’s hardware-based key storage to secure signature keys in an offline hardware device.

Businesses should also be aware of other potential pitfalls beyond digital currency market volatility and key losses. Bugs in smart contract code, for example, are not necessarily easy for developers to address and if mistakes are made in transactions not governed by smart contracts, funds may not be recoverable. Further: While traditional cross-border payments may be costly and slow, the processes are largely well-regulated, consistent and secure—not quite the case yet in the digital currency realm.

Companies do need to keep their finger on the pulse of digital currency’s rapid evolution and subsequent government regulation, with an eye toward reaping the potential rewards and mitigating potential costs and risks. The future of money is here—make the most of it.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.