Wednesday, June 25, 2014, 5:36am MDT, reprinted with permission from the Denver Business Journal
Strategies: Bitcoin and other crypto-currencies and the international payments dilemma
There is a rage about the “para currencies” (known as crypto currencies) that have developed and their impact on business. Bitcoin is the newsworthy currency, and much controversy surrounds this payment option. Other major players include Namecoin, Litecoin, Dogecoin, Peercoin and Mastercoin.
Crypto-currencies work with one main ingredient: faith. Users of Bitcoin, for example, download the app (Bitcoin Wallet) and purchase the virtual currency online. There are numerous exchanges for people to buy and sell this currency. The transactions are ostensibly secure and encrypted. This enables a user to trade currency through an exchange, or make purchases online with any merchant that will accept Bitcoin. The user may or may not know the buyer of the currency. All the information is kept in an available digital ledger, which handles clearing and settlement of transactions.
Thus, the buyers or merchant that accepts Bitcoins could be a legitimate business, or a drug dealer. One might never know.
Because the currency is virtual and not backed by a name-brand bank or government, it is inherently controversial.
There are several virtual currencies already in existence. We have been using e-commerce for two decades. Companies such as PayPal take approved credit cards, but the user’s bank account resides in the cloud. Only recently has PayPal issued physical credit cards. And because PayPal resides in the United States, the company must share all information with the government. But one PayPal bank account can be used to make purchases from other PayPal account holders. It becomes difficult to track purchases when virtual accounts pay virtual accounts.
Before PayPal, however, stores and companies were using virtual currency with gift cards. This was a faith-based system as well. When holding a gift card, we are betting that the store will be around when we wish to use it. However, many of us have gift cards for stores that have since gone out of business.
Europe has been using stored-value telephone cards for decades. In the United States, we often purchase calling cards as well. We hand over the funds and have an allotment of minutes that can be used only after we have paid.
Frequent-flyer miles are also a virtual currency. Again, many of us have held mileage awards only to find out that the airline went bankrupt, the miles had a time limit, or the number of miles needed for a given trip has changed. Are air miles taxable? What happens when we sell them? If we work for a firm and accumulate the miles from business trips, who owns them: the traveler or the company the traveler works for?
The U.S. dollar relies on a faith-based system as well. There was a time when one could take a dollar, walk into a bank and exchange it for gold or silver. Those times have ended and we take a leap of faith that the United States will back those dollars. But how often do we hear about the dollar depreciating or appreciating? And what is the dollar worth in France? The relative value of these currencies vary and firms without an International payment strategy can lose everything.
There are pros and cons with crypto-currencies. On the pro side, there is convenience. Desktop and mobile payments are made in seconds. It is far easier than going to a bank and having a letter of credit drawn.
Some other pros?
Lower transaction costs. It can cost several thousand dollars for some of the bank drafts and international payment mechanisms. Crypto-currencies offer a low cost of doing business.
Currency controls are bypassed. There are countries that are difficult to move money from. Crypto-currencies have no governmental controls.
These currencies can evade the tax man. If no government can really monitor these currencies, how can they tax the transaction?
However, for every pro there is a con. There are things to really worry about when using crypto-currencies: virtual is, by nature, scary.
The warning for business is that the recipients of funds are often unknown. This means that we can use a crypto-currencies to purchase a wristwatch and the currency can end up with drug dealers, terrorists, or in countries that can trigger a U.S. government inquiry.
There seems to be no real mechanism in place to make claims, or get refunds. Once the crypto-currencies are released from the buyer, he or she has little recourse.
Is the crypto-currency value stable? A quick Google search for Bitcoin shows that the value fluctuates. An entity receiving these currencies may take a loss.
What is the after market for crypto-currencies? How can you turn them into dollars or Euros? This is still somewhat unclear and left to the domain of various exchanges, none of which are regulated.
Will the use of crypto-currencies stand up to an audit? What other governments might harass you you when you use crypto-currencies?
As you can see, there are two sides of the Bitcoin.