What You Need to Know About Accepting Crypto in Your Daily Business
May 20, 2022
More and more businesses are expanding their payment options to include cryptocurrency; however, the complexity and regulatory uncertainty surrounding crypto presents a difficult value proposition. This article highlights potential benefits and risks of accepting cryptocurrencies in your business.
Without diving into the entire anthology of cryptocurrency, one thing to note while reading this article is that intermediaries are seen as extraneous appendages to a legacy payment system, and their value is often questioned. The intent of reducing dependance on these intermediaries is to reduce friction, fees and barriers to entry for market participants. This is where cryptocurrency payments play a role.
Why Accept Crypto?
Whether you're a local family business or a multinational corporation, crypto payments offer several advantages.
- Reduced Processing Fees. First and foremost, leveraging blockchain technology to accept crypto payments could dramatically reduce your transaction fees. In the traditional payment system, merchants typically pay credit card processors anywhere from 1.5% to 3.5% per transaction.1 In contrast, cryptocurrencies typically lack a centralized intermediary which often results in much lower transaction fees.
- Finality of Transactions. Removing a third-party payment processor also removes their ability to process customer chargebacks. This means the risk of fraudulent purchases is reduced by the fact that customers typically have to sign/approve cryptocurrency transactions using their digital wallet, adding an additional layer of security to the transaction. Near-instant finality of transactions also offers businesses the ability to access customer payments almost immediately as compared to the traditional payment settlement system, which can take days or weeks to receive funds from credit card payments.
- Employee Payments. Similar to the point above, employees paid in crypto would experience the same luxury of instantaneous payments. Employers who pay their employees in crypto could offer more regular payments, such as daily or weekly, at no additional cost.
- New Customers. Accepting cryptocurrencies can open the door to new clientele such as the young and tech-forward. A study completed by Forrester Consulting in 2020 found that 40% of customers using cryptocurrency as payment were new to the merchant.2
- Connecting with Customers. Once a purchase is made, the customer’s wallet address is inextricably linked to the vendor's wallet address. While this may seem like a privacy risk to some, others might harness this opportunity to interact with their customers (or a competitor's customers for that matter) in new and innovative ways. Vendors could leverage blockchain data to offer customers special discounts, non-fungible tokens (NFTs), or access to events, adding a new dimension to a company's marketing approach.
- Access to Alternative Investments. For those businesses seeking investments in alternative assets or an onramp to the decentralized finance (DeFi) space, accepting crypto is a perfect vehicle to acquire such assets at various price points and deploy it to worthy DeFi endeavors.
How Do You Accept Crypto Payments?
Businesses can choose to accept cryptocurrencies directly into a wallet maintained by the business or outsource responsibility to a third-party crypto payment processor. While the latter option might reduce some of the benefits listed above, it can also mitigate potential risks that we discuss in the next section. Crypto payment processors typically charge lower fees than credit card processors.
What Risks Should You Consider Before Accepting Crypto?
Accepting crypto not only adds a layer of complexity to a business's transactions, but also presents the following risks:
- Control Environment. A well thought out framework for maintaining, executing, and recording crypto transactions is crucial. This includes assessment and implementation of appropriate controls. For companies using outsourced crypto services, it also includes complimentary user controls outlined in third-party crypto payment processors’ SOC 2 reports.
- Technological Sophistication. The open-source, open-ended nature of cryptocurrency composability can present technical challenges to newcomers. Integration with existing POS systems, ease of use and return, and susceptibility to fraud are of particular concern to businesses considering accepting cryptocurrency. Technical competency is therefore a major factor in a company’s decision to implement a crypto payment system independently or to rely on an outsourced alternative.
- Privacy. Sometimes a blessing or a curse, public ledgers offer visibility into every transaction including the parties involved and their wallet balances. This could elevate exposure to hacking attempts or social engineering ploys for both vendors and their customers. To mitigate privacy concerns, companies could utilize third-party processors and/or custodians to add a layer of obscurity to a transaction.
- Custody. Even with effective controls in place, securing crypto assets in non-custodial wallets is inherently difficult due to the lack of centralized authorities on the blockchain. To combat this, companies often engage custodians to safeguard assets and ensure appropriate access and approval controls.
- Environmental, Social, and Corporate Governance (ESG). Companies should consider the potential environmental impact of transacting with cryptocurrencies. Proof of work blockchains have been criticized for the energy consumed by miners in the race to secure the next block. Exploring “greener” blockchains or carbon offsets could be a viable solution for ESG conscious companies.
- Regulation and Reporting.
- Per IRS Notice 2014-21, cryptocurrency is considered property for IRS reporting purposes, and receipt of crypto for goods or services qualifies as ordinary income. Businesses directly accepting and transacting with cryptocurrencies therefore need to maintain accurate and detailed financial records which includes the amount of crypto received, paid, or exchanged as well as its fair market value. Further, any disposal or sale of crypto will incur a gain or loss based on the fair market value on date of disposal less the company’s basis in the asset. Accurately tracking and reporting this information at scale can quickly become untenable. Due to this complexity, many third-party crypto processors offer the option to immediately liquidate any crypto received to cash before it reaches the company, which alleviates reporting burdens.
- The November 15, 2021 Infrastructure Bill increased reporting requirements for entities involved in cryptocurrency transactions as well as penalties for non-compliance. The Bill also expands the definition of IRC Sec. 6050I to include digital asset transactions, which would require any trade or business to report receipts of crypto in excess of $10,000 to the IRS via Form 8300.
While accepting crypto payments is in no way a new concept, increased consumer interest in cryptocurrency has prompted businesses to consider expanding their payment options. As in any business decision, potential risks should be considered and weighed against any benefits. Once the decision has been made to accept cryptocurrency, carefully consider the design, third-party options, and implementation of your crypto payment system before moving forward.