According to one estimate from late 2020, more than 2,300 businesses in the United States accept bitcoin, and this does not include bitcoin ATMs, according to another estimate from late 2020. Businesses all around the world are increasingly relying on bitcoin and other digital assets for a number of reasons, including investment, operations, and commercial transactions, according to a recent report.
The use of cryptocurrencies for business transactions opens up a plethora of opportunities while also presenting a number of challenges. As with every frontier, there are unknown dangers as well as strong reasons to investigate. This is no exception. For this reason, businesses contemplating integrating bitcoin into their operations should have two things in place: a clear understanding of why they are taking this move, as well as a list of the many questions they should consider answering.
Bringing Innovations in Payments:
Some businesses rely only on cryptocurrency to handle payments. One method of facilitating payments is to simply convert in and out of cryptocurrency to fiat money, allowing you to receive or make payments without ever touching the cryptocurrency. In other words, the business is adopting a “hands-off” attitude to cryptocurrency, ensuring that it remains off the books.
Enabling crypto payments, such as bitcoin, without putting them on the business’s balance sheet may be the quickest and most straightforward way to get a company started with the usage of virtual assets. It may require the fewest changes across the whole range of company activities and may provide rapid results, such as increasing the number of new clients served and increasing the amount of each sales transaction. Enterprises that make little use of cryptography usually depend on third-party suppliers to complete their transactions.
As an agent for the business, the third-party vendor receives or makes payments in cryptocurrency via the conversion of cryptocurrency into and out of fiat money. This may be the most straightforward course of action. Furthermore, since the “hands-off” strategy keeps cryptocurrency off the corporate balance sheet, it is likely to create only minor interruptions to a company’s internal operations.
It is the third-party vendor’s responsibility to handle the majority of the technical inquiries and to manage a number of risk, compliance, and controls problems on the business’s behalf. This service will be charged to the company. That does not imply, however, that the business is automatically relieved of all responsibility for problems relating to risk, compliance, and internal control management. AML and KYC (anti-money laundering and know your customer) regulations are still important concerns for businesses to be aware of and to adhere to. In addition, since the Office of Foreign Assets Control (OFAC) is the federal agency in charge of administering and enforcing U.S. economic, trade, and financial sanctions, they must adhere to any limitations imposed on them by Congress.
Convenience of Digital Wallets:
Digital wallets are used to store and manage cryptocurrency. A good crypto treasury function is dependent on the structure of the wallet that is used to store the funds. In many cases, organizations have chosen a multitiered structure in which “hot wallets” serve as operational accounts, as opposed to “cold wallets,” which serve as storage accounts for wealth. When dealing with large numbers of transactions, keeping track of the specifics of those transactions may become a major source of frustration.
Tracking often involves maintaining meticulous records of the date and time of purchase of the cryptocurrency, as well as its value and the basis on which it was assigned, among other things. The conversion of conventional crypto assets to stablecoins has become more popular as a means of reducing the uncertainty associated with price volatility of traditional crypto assets.
Innovations bring forth by Second Layer Protocols:
Companies should keep an eye out for “second-layer protocols,” which are a kind of innovation that has just emerged. To put it another way, they are scalable apps that are built on top of blockchain platforms. They are attempting to make cryptocurrency transactions both quicker and more affordable. Second-layer protocols are quickly developing and will most likely be able to compete with conventional payment systems in the not-too-distant future. They may also become more effective and preferred than the conventional payment methods now in use, which is a possibility.
Such platforms are common in systems that enable subscribers or players to buy minor improvements or upgrades to a system or to games that they may be playing, for example. However, when utilized in a business environment, there is a certain amount of danger involved. Due to the fact that the transaction does not appear on the blockchain right away, this is the case. Instead, a succession of smaller transactions must be aggregated in order to be recorded in a single transaction log. After all transactions have been completed, the net activity on the chain may be calculated and recorded on the ledger. If a hostile party gains access to the network, it is during the transition from execution to recording on the blockchain that there is the potential for mistake or manipulation.
Despite these dangers, there is no doubt about the benefits of using second-layer protocols. Direct settlement fees on blockchains today may often surpass the amount of the item being sold or the payment being made, even for relatively modest purchases or transfers such as a cup of coffee or a monthly wage check. Transaction costs, on the other hand, are often considerably lower using second-layer protocols, and transactions settle much more quickly.
We expect that blockchain technology will continue to evolve in terms of both scalability and fee economics in the foreseeable future. It is possible that this may result in more rivalry with conventional payment methods. Keep an eye on things.
Increasing the level of security:
As customers grow more engaged on the internet, the digital world has become a fertile environment for fraudsters to flourish. This worry may be alleviated by the use of blockchain technology based cryptocurrencies. When compared to conventional banking, payments and money transfers conducted via the blockchain are both quicker and more traceable.
The danger of information being intercepted increases when it passes through a number of different financial intermediaries, increasing the likelihood of fraud. These gaps in supervision may be addressed by the cryptographic methods built into the blockchain, which ensure that information is sent between participants in a secure manner.
How DeFi is helping SMEs
Over the years, DeFi (decentralized finance) has gained popularity among small and medium-sized enterprises (SMEs) in developing markets, where the traditional banking system has proven insufficient to fulfil their needs. When we speak about DeFi, we are referring to financial services that do not rely on conventional intermediaries such as banks.
DeFi platforms serve as an alternative system, rather than just a plug-in for current financial institutions. Transaction onboarding and market-based risk evaluations are considerably simpler to expand throughout a company’s broader system since they are not reliant on centralized processing or a previous connection. A business would have to do anti-money laundering and “know your customer” checks on every source of capital and convince its counterparts to join the same transaction banking programs before the implementation of DeFi. Apart from that, they would not be able to provide proof of performance in relation to their debt and liabilities outside of financial statements.
DeFi enables the interchange of trustworthy data across a system, thus lowering the obstacles to providing corporate financial services to customers. Because of the volatility of crypto-assets, regulatory uncertainty, and the immature technology involved, most businesses have not seriously considered DeFi as a viable alternative to their bank’s services until recently.
A leading innovation in the finance industry, blockchain technology and cryptocurrencies hold great promise in terms of decreasing fraud, ensuring swiftness in transactional processing, facilitating trades and, ultimately, assisting in the management of risk within the interconnected global financial system.
Bitcoin and other cryptocurrencies may be used for a wide range of financial applications, including but not limited to keeping track of transactions and exchanges. As our global financial system becomes increasingly interconnected in this era of digital change, investors would be well to educate themselves on how blockchain is altering the system and how to acquire and control exposure to this new technology.
In the business world, cryptocurrencies have the potential to have a significant effect since they are changing every area of the industry, from payments to taxation to investment and customer service.
Decentralized finance is also playing an important role in facilitating access to credit for small and medium-sized enterprises (SMEs) and meeting the requirements of unbanked consumers across the world.
Even if it is too soon to predict how the corporate world will integrate cryptocurrencies into its workflows, the last year has been transformative in terms of drawing more consumers and companies to the industry.