This is Seth Marlowe with a Wells Fargo Treasury Insights podcast.Cryptocurrencies have quickly become a common discussion topic across the business landscape. Businesses choose to accept cryptocurrencies, for a number of reasons, such as:
- attracting new customers,
- adopting new technology, OR
- to eliminate certain kinds of fraud.
As a treasury professional, how do you know if accepting a cryptocurrency is right for your business?
Let’s first start with the basic question of – what is cryptocurrency?
There are over 1,500 cryptocurrencies in digital circulation today, the most well-known being Bitcoin. These ‘digital currencies’ do not have physical paper bills or coins to represent them. Cryptocurrencies are not backed by sovereign governments like traditional fiat currencies are. Cryptocurrency Wallet apps have become as easy to download and setup as almost any other app. And it’s easy to fund them too, linking a bank account or a debit card. However, most major banks have said NO to the use of credit cards to fund Crypto Wallets. And no U.S. bank “supports” the buying, selling, trading, or acceptance of cryptocurrencies. The regulation and legal framework, as with most technological advances, is lagging way behind. While Crypto Wallets may be “easy” for a consumer, it’s not so easy for a commercial enterprise that needs to manage and control this process.
Let’s chat about the four major considerations before accepting cryptocurrency as a form of payment for your business. They are volatility, conversion, regulation, and lastly legal and tax.
First, volatility– Cryptocurrencies are still highly volatile. In 2017 we saw price swings of 35-45% on a weekly basis. The current 10-20% swing common today indicates a slightly less volatile market. Regardless, this unpredictability is not for everyone or every company. It will require in-depth conversations around risk mitigation in balance with customer expectations for your organization.
Next, conversion– Arranging a way to translate the cryptocurrency back into US dollars or another fiat currency can have risks and requires a relationship with a centralized exchange. There are fees and changing settlement times with each exchange making this a non-standard task to integrate into your treasury department.
The third consideration is regulation. The landscape is changing as lawmakers and regulators work on how to govern cryptocurrencies and even determining whether they are currencies, securities or some other asset class. Businesses will need to be prepared to adapt to periodic changes in the law. These changes will continue into the foreseeable future as cryptocurrency adoption expands and governments refine policy.
Lastly, there is legal and tax. In 2017, the IRS determined that cryptocurrencies will be treated as property. Companies and individuals are required to record the fair market value or “basis” and if value increases, companies will have a taxable gain. If value decreases there may be offsetting losses. This may create on-going reporting and tax challenges.
So here’s a quick story… We recently spoke with an auto dealership group that specializes in high end cars. Think 2 to 3 million dollar Maseratis and Lamborghinis. They decided to accept Bitcoin as payment for some of these cars. Why? Because certain buyers were only willing to buy these cars with their Bitcoin profits. The dealership anticipated selling 5 to 6 more vehicles a year to Bitcoin-only buyers. To accommodate this, they partnered with a vendor that facilitates the buyer’s Bitcoin payment and converts it to dollars. On the surface, it sounds easy, but there are fees to be paid to the third party, and always the risk that the payment may go to the wrong Crypto address. This may work for once a month or periodic transactions. But it may not be the answer for higher levels of commerce.
So the question is – Is accepting bitcoin or other cryptocurrencies right for your business? While cryptocurrency is a ‘hot topic’ it’s worth considering what’s beyond all the hype and determining business value to your company, what the business case is, or could be in the future.
For Wells Fargo Treasury Insights, this is Seth Marlowe.