The world of cryptocurrency is an exciting one. But, for many people, it can be difficult to understand how it works and what potential benefits it might have for them. If you're running a business that uses or processes payments, or if you're thinking about starting one up yourself in the near future—or even if you just want to understand what all this Bitcoin or other crypto hype is about—then here's everything you need to know about cryptocurrencies and how they could revolutionize your industry.
The basics of cryptocurrency
To understand how cryptocurrency could revolutionize your industry, you first need to understand cryptography and the blockchain. Cryptography is the process of encrypting and decrypting messages so that only the intended recipient can read them. The encryption algorithm used by Bitcoin is called SHA-256, which stands for Secure Hash Algorithm 256 bits (64 characters). A blockchain is simply a database that uses cryptography to protect its data from being modified or manipulated in any way.
Cryptocurrencies like Bitcoin use blockchains to process transactions between two parties without a middleman. These transactions are stored in blocks on an immutable public ledger; hence "blockchain" technology.
How are companies using blockchain?
Blockchain is used to track and record transactions. The technology can be applied to any transaction that needs to be recorded, validated and authenticated in a transparent manner.
There are two types of blockchains: public and private. A public blockchain allows anyone to participate in the validation process, while a private blockchain restricts participation to those who have been invited or approved by an administrator (a company or consortium).
Companies are using blockchain for everything from tracking their supply chains to maintaining digital identities for employees and customers. In fact, according to even some experts who have been following the evolution of this technology since its inception in 2009, they're just scratching the surface when it comes to what's possible with this new way of doing business.
Supply chain tracking
Blockchain can help you trace the movement of goods. This is much easier, as it makes it possible to verify that a product come from where it should
Tracking and verification of transactions
Blockchain can track the movement of money. This is also useful for verifying transactions; if someone wants to send money but isn't sure what company will be receiving it, they can check an official ledger or database (called a "block"). This way they know that their funds reach their destination safely and securely without being stolen or mishandled along the way.
Quick and secure transactions
Both blockchain and cryptocurrencies make transactions rapid, easy and safe, which can help businesses run more efficiently. Credit or debit cards may sometimes take a day or more for transactions to be finalized and reflected in your account, but crypto transactions can be carried out instantly. Furthermore, these transactions will be kept private.
Your transaction will not be recorded by financial intermediaries such as banks. You also do not have to provide your personal details or any other source of identification such as a driver's license and government-issued IDs. As a result, both your identity and your financial data will be safeguarded.
Low transaction fees
Businesses often make hundreds of thousands of transactions each day. While Bitcoin and other crypto payments are just becoming mainstream, credit card payments are already widely accepted but they come with high transaction fees. Adopting cryptocurrency for these transactions means you'll pay significantly lower transaction costs than you would if you used credit cards or other means from banks or other financial institutions.
Because blockchain-enabled crypto transactions do not require a third party or a central authority, this opens the way for business transactions to become more decentralized. Nobody will be monitoring your information. Only the sender and receiver will be involved.
Reduced chances of fraud
Unlike traditional card payments, which can be reversed using the chargeback feature, Bitcoin and other cryptocurrency payments cannot be reversed. Because each transaction is securely recorded, there is a long-term audit trail that can be utilized to trace transactions and verify their authenticity. As a result, each transaction has greater accountability, dramatically reducing the likelihood of fraudulent transactions.
Cryptocurrencies facilitate cross-border payments and thereby reduce barriers to international trade for various businesses. As a result, businesses can accept payments in cryptocurrencies from customers in any part of the world. Not only does this improve the global prospects of a business, but this will also give a significant competitive advantage.
New sources of capital
Adopting cryptocurrency can give businesses wider access to capital and liquidity pools, thereby drastically increasing their investment options. Initial Coin Offerings (ICOs) are one of the most common ways in which businesses, especially startups, have been raising capital through cryptocurrency.
Potential inflation hedge
Even though cryptocurrencies often come with high volatility, the market is seeing much growth these days, and undoubtedly businesses can use cryptocurrency as protection against inflation during tough market and economic conditions. Bitcoin is one of the most prominent cryptocurrencies that several investors and businesses have invested in to use as a hedge against inflation and the ever-changing market dynamics.
Other opportunities given by crypto
- Blockchain can track movements of people through biometric data such as fingerprints—which means no more passport stamps.
- Blockchain can track movements through information sharing between parties: They could all have access to each other's records whenever necessary without needing physical proof like letters sent via snail mail
- Crypto could enable access to new capital and liquidity pools through traditional investments that have been tokenized, as well as to new asset classes.
- More companies are finding that important clients and vendors want to engage by using crypto. Consequently, your business may need to be positioned to receive and disburse crypto to assure smooth exchanges with key stakeholders.
Two primary paths for using crypto
The first question to ask when considering using crypto in your company's operations is: Do we hold crypto on our balance sheet or simply adopt crypto-enabled payments? To determine the right path for your business, you need to make a careful determination of the best fit for your business objectives. Consider the potential benefits, drawbacks, costs, risks, system requirements, and more. Below you can read about the two different paths when it comes to using crypto
Enabling payments: "Hands-off"
Some companies use crypto just to facilitate payments. One of the options to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a "hands-off" approach that keeps crypto off the books.
Why this solution?
Enabling crypto payments, such as bitcoin, without bringing it onto the company's balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.
The third-party vendor, acting as an agent for the company, accepts or makes payments in crypto through conversion into and out of fiat currency. This may be the simplest option to pursue. And, in all likelihood, it may cause relatively few disruptions to a company's internal functions, since the "hands-off" approach keeps crypto off the corporate balance sheet.
What does it involve?
The third-party vendor, which will charge a fee for this service, handles the bulk of the technical questions and manages a number of risk, compliance, and controls issues on behalf of the company. That does not mean, however, that the company is necessarily absolved from all responsibility for risk, compliance, and internal controls issues
Companies still need to pay careful attention to issues such as anti-money laundering and know your customer (AML and KYC) requirements. And, of course, they also need to abide by any restrictions set by the Office of Foreign Assets Control (OFAC), the agency that administers and enforces economic and trade sanctions set by the US government.
Enabling payments: "Hands-on"
If a company is ready to go beyond simply enabling crypto payments and intends to broaden crypto adoption within operations and the treasury function—in other words, to go the "hands-on" route—it may potentially find a significant increase in benefits
To ready itself, the corporate treasury might consider several preliminary issues, including:
- What does the company want to achieve by adopting the use of crypto?
- What steps has treasury taken to acquire the necessary know-how to receive, monitor, and manage a crypto payment?
- Does Treasury think the company should maintain custody of the crypto itself or outsource that to a third party?
- What measures are in place, or what thought has been given, to possibly investing in crypto as a new asset class?
- What adjustments does the treasury foresee in anticipation of the eventual issuance of digital currencies by central banks?
Treasury will be inextricably involved in these decisions, and the changes they require, since:
- Traditional treasury groups maintain the financing relationships for the company (e.g., banking groups, investment partners, third-party working capital providers).
- Treasury determines which types of banking and financial services now in a potentially broader and bolder digital asset ecosystem corporations will need.
There are two paths a company can follow when embarking on a broader "hands-on" adoption of crypto:
- Use a third-party vendor or custodian to maintain custody of the crypto on a blockchain and provide wallet management services that facilitate the tracking and valuation of the crypto assets.
- Integrate crypto into the company's own systems and manage its own private keys. (Consult your legal counsel to determine whether any license will be required to enable the transmission of crypto.)
What might the future hold for cryptocurrency?
As we enter the second decade of cryptocurrency, it's important to remember that this is still a very new technology. It's still in its infancy and has yet to reach maturity. Cryptocurrency is evolving before our eyes, with new developments occurring at an increasingly rapid rate. The future of cryptocurrency may well be right around the corner—but we won't know exactly what it looks like until we get there.
In summary, there is a lot of potential for cryptocurrency to change the way businesses operate. The blockchain technology that supports it has many benefits and applications beyond just money transactions, and there are already companies using it in creative ways. However, it is still relatively new technology with many unknowns about how it will be used in future applications or even if it will succeed at all. We can safely say that we won't know what happens next until we get there...