Considering the benefits of cryptocurrencies
More and more companies around the world are using bitcoin and other digital assets for various investment, operational and transactional purposes. As with all borders, there are unknown dangers, but also strong incentives. Discover the questions and insights businesses should consider when deciding if and how to use digital assets.
Why consider using cryptocurrencies?
According to an estimate in late 2020, more than 2,300 US businesses accept bitcoin, not including bitcoin ATMs. More and more companies around the world are using bitcoin and other digital assets for various investment, operational and transactional purposes.
Using cryptocurrencies in business presents a number of opportunities and challenges. As with all boundaries, there are both unknown dangers and strong incentives. Therefore, companies that dare to use cryptocurrencies in their business should have two things: a clear understanding of why they are taking this action and a list of many questions to consider.
This article aims to provide you and your business with an overview of the questions and insights businesses should consider when deciding whether and how to use cryptocurrencies. So if your business is going to be involved in cryptocurrency, it is important to think ahead, prepare and act wisely. (On aspects related to investments in cryptocurrencies and digital assets.
What can cryptocurrencies do for your business?
Here are some reasons why some companies are currently using cryptocurrencies to make your business think about cryptocurrencies:
- Cryptocurrencies can provide access to new demographics. Users often represent a high-end customer base who value transparency in their transactions. A recent study found that up to 40% of customers who pay with crypto payments are new customers of the company and their purchase amount is double that of credit card users.
- Using encryption now can increase your company’s internal awareness of this new technology. It can also help position the company in this important area of the future, which may include central bank digital currencies.
- Cryptocurrencies could enable access to new pools of capital and liquidity through traditional tokenized investments, as well as new asset classes.
- Crypto offers some options that are simply not available with fiat currency. For example, programmable money can enable accurate, real-time distribution of revenue while increasing transparency to facilitate back-office reconciliation.
- More and more businesses are noticing that key customers and vendors want to commit to using cryptocurrencies. Because of this, your business may need to accept and pay crypto payments to keep the exchange with key stakeholders running smoothly.
Crypto offers a new way to enhance many other traditional Treasury functions, such as:
- It allows simple, real-time and secure money transfers
- Help strengthen the company’s capital management
- Manage the risks and opportunities of digital investments
- Cryptocurrencies can serve as a powerful alternative or counterweight to cash, which can depreciate over time due to inflation. Cryptocurrencies are an asset to invest in and some like bitcoin have done very well over the past five years. Of course, there are obvious volatility risks that should be carefully considered.
Two main paths for using encryption
The first question to ask when considering the use of cryptocurrencies in your company’s operations is: are we keeping cryptocurrencies on our balance sheet or are we just acquiring cryptographic capabilities? To determine the right path for your business, carefully determine what best fits your business goals. The following sections provide general considerations for two different paths as your business embarks on its crypto journey.
Introduction to Payments: “Hands Off”
Some companies use encryption just to facilitate payments. One way to make payments easier is to simply convert cryptocurrency and fiat currency to receive or make payments without touching them. In other words, the company takes a “hands off” approach that keeps cryptocurrencies off its books.
Allowing payments in cryptocurrencies such as bitcoin without entering them into a company’s balance sheet could be the fastest and easiest way to access digital assets. It may require the fewest adjustments in your entire business and can serve immediate goals like reaching a new customer base and increasing sales. Businesses adopting this limited use of cryptocurrency usually rely on third-party vendors.
A third-party vendor, acting as an agent of the company, accepts or completes payments in cryptocurrencies by converting fiat currency and fiat currency. This is perhaps the simplest option. And most likely, it can cause relatively little disruption to the company’s internal operations, as the “hands off” approach keeps cryptocurrencies off the company’s balance sheet.
A third-party vendor who charges a fee for this service handles most technical issues and handles more risk, compliance, and oversight on behalf of the business. However, this does not mean that the company is necessarily relieved of all risk, compliance and internal control responsibilities. Companies still need to pay close attention to things like anti-money laundering and knowing customer requirements (AML and KYC). And, of course, they must also comply with the restrictions imposed by the Office of Foreign Assets Control (OFAC). It is a body that administers and enforces economic and trade sanctions imposed by the United States government.
Payment execution: “Hands-on”
If a company is willing to go beyond simply enabling cryptocurrency payments and has plans to expand the adoption of cryptocurrencies in its operations and treasury function – in other words, move to the “practical side” – it can potentially achieve significant benefits, such as the number of technical problems to solve.
There are two paths that a business can take as it begins broader “hands-on” adoption of cryptocurrencies:
- Use a third-party vendor or custodian to maintain cryptographic control over the blockchain and provide portfolio management services that facilitate the monitoring and valuation of crypto assets.
- Integrate encryption into company systems and manage your own private keys. (Discuss with your attorney whether a license is required to send cryptocurrencies.)
- Most companies that currently “practically” use encryption use a third-party custodian. Because of this trend, let’s take a closer look at this path.
The second approach, self-care, is more complex and requires more experience. Also, if a company goes this route, it is likely to have more responsibility for the work that supports its company. However, most, if not most, of the following also apply to asset management companies.