CRYPTOCURRENCY OVERVIEW
Bitcoin, Monero, Dogecoin, Ethereum, Solana – I know, it sounds like a bunch of gibberish. Random names aside, these are all actually different types of cryptocurrencies. Even though Bitcoin was the first major cryptocurrency to come to fruition, there are many different altcoins (alternatives to Bitcoin) that exist. In short, cryptocurrency is a digital currency secured by cryptography, which provides secure communication in the presence of malicious third parties. A large majority of cryptocurrencies are decentralized networks based on blockchain technology – a publicly distributed database or ledger that stores information electronically. A big draw of cryptocurrencies is that they enable peer-to-peer transactions outside the control of governments and central authorities (for now). Outside of trading cryptocurrencies as a form of speculation, do people actually use them as a form of payment? And do mainstream places accept this form of payment?
A BREAKDOWN OF THE DIFFERENT TYPES OF CRYPTO
Cryptocurrency typically falls into one of two categories. The first category is coins. Coins include Bitcoin and altcoins – pretty much all cryptocurrencies besides Bitcoin. And there are tokens which are programmable assets that live in the blockchain. Coins and tokens are not interchangeable. The big difference between the two is that coins are created on their own blockchain and function very similarly to fiat money. Tokens are created on an existing blockchain and can function in more ways than as a currency. Tokens are programmable assets that can be created by an individual and executed for smart contracts or digital contracts – programs that are stored on a blockchain that run when predetermined criteria are met. Tokens can represent units of value (money, points, digital assets) or be used as a part of a software application (granting access to an app). As the popularity grew in recent years, there was a proliferation of new coins flooding the market, each hoping to capture exponential growth in value. As of now, over 19,000 cryptocurrencies exist – with that number always being in flux.
IS CRYPTO ACCEPTED FOR PURCHASES?
With cryptocurrency gaining so much traction, many large organizations are starting to hop on the trend and accept crypto as a form of payment. A large draw to accepting cryptocurrency payments is that they have significantly lower fees than credit cards or in some cases, no fees at all. The most common way for organizations to accept cryptocurrency is through crypto-specific payment processing services for merchants such as BitPay, PayPal, or Coinbase. There is a large range of businesses that accept cryptocurrencies from tech giants like Microsoft to youth fashion retailers like Pacsun.
BUSINESSES THAT ACCEPT CRYPTO
A sampling of some of the mainstream merchants accepting crypto:
- Microsoft started accepting crypto as far back as 2014 which enabled users to buy apps and games for the Windows Phone, Xbox, or Windows operating system.
- Gucci launched a pilot program earlier this year to accept crypto as payment in select stores. Customers get sent a QR code that can be used through crypto wallets and accepts over 10 cryptocurrencies.
- Pacsun is the first youth fashion retailer to accept cryptocurrency through BitPay. They support 11 different cryptocurrencies.
- Overstock was one of the first online stores to accept Bitcoin and accepts multiple types of cryptocurrencies. Overstock even launched a blockchain-focused investment company called Medici Ventures.
- AMC Theaters announced in November of last year that customers can purchase movie theater tickets through their mobile app with a variety of different cryptocurrencies thanks to Bitpay.
Although a lot of big businesses are slowly starting to accept cryptocurrency as a form of payment, only 3% of U.S. adults used crypto as a form of payment in 2021 according to the economic well-being of U.S. households report.
PROS AND CONS FOR MERCHANTS ACCEPTING CRYPTOCURRENCY
Like most things, there are significant pros and cons to accepting crypto as a form of payment. Since crypto is starting to become more mainstream, many businesses are feeling pressure to keep up with current trends and serve the needs of all their customers.
ADVANTAGES OF ACCEPTING CRYPTO:
Broader market - accepting crypto gives customers additional ways to pay and provides an extra layer of protecting personal information. For now, it is still a niche market, but appealing to an audience that has fully embraced crypto will bring businesses a new customer base. Things happen, credit cards don’t go through, and people don’t always carry cash, so giving customers more options will ensure that they can follow through with a transaction. This is also a currency that works worldwide and can help businesses avoid expensive foreign transaction fees or unfavorable exchange rates.
Lower transaction fees - merchants are responsible for paying transaction fees and setup fees for most payment processors. Cryptocurrencies charge much lower fees, some under 1%, compared to as much as 4% for credit card processing fees.
Reduce the risk of fraud - Cryptocurrency's decentralized setup helps protect merchants from fraudulent chargebacks (when consumers try to dispute legitimate charges to get refunded). Transactions with crypto are final because there is no third party that can reverse the charges.
Faster money transfer - Unlike traditional transactions, crypto transactions happen almost instantaneously. There are no additional hoops to jump through and the currency will be in your wallet with a very minimal delay.
DISADVANTAGES OF ACCEPTING CRYPTO:
Volatility - There can be major price volatility with cryptocurrencies. The prices change so rapidly that profits could be up one day, and plummet the next. This year alone Bitcoin’s value fluctuated by 8% over three months, and was down 59% YTD through October 2022. This type of bet could be too risky for some businesses.
Tax Implications - The IRS classifies cryptocurrency as ‘property’ for tax purposes. If a business accepts cryptocurrency, it must report it as gross income based on its fair market value when it was received. Each time crypto is sold or bought, a person is subject to capital gains tax. A business must also keep track of the value of each cryptocurrency on the day it was received and sold, which can be an administrative burden. All transactions would be recorded in the blockchain, but this could be a headache to a business if the volume of transactions is high.
Scams - Cryptocurrency exchanges have lost billions of dollars to hacks. While blockchain technology makes it nearly impossible to hack into a blockchain, this doesn’t transfer to cryptocurrency wallets. Hackers can gain access to cryptocurrency owners’ wallets and exchange accounts, or the exchanges themselves, and steal everything that is in their wallets. Since cryptocurrency payments are not backed by a government, they do not come with legal protection making it nearly impossible to retrieve what was lost.
Energy consumption - According to a press release from The White House, as of August of 2022, the total global electricity usage for crypto-assets is between 120 and 240 billion kilowatt-hours per year, a range that exceeds the total annual electricity usage of many individual countries (like Argentina or Australia). Crypto-asset mining operations can cause noise and water impacts, electronic waste, air and other pollution from any direct usage of fossil-fired electricity, and additional air, water, and waste implications associated with all grid electricity usage.
LOOKING FORWARD
In March of this year, President Joe Biden signed an executive order on cryptocurrency. Biden’s administration is preparing to regulate cryptocurrency and the order directs government agencies to begin coordinating a regulatory framework for digital currencies. This executive order is helping push the U.S. government to conduct a serious analysis of cryptocurrency which will ultimately lead to laws and regulations that establish some ground rules for the industry. In turn, this could make cryptocurrency a more viable option for businesses to accept crypto and for consumers to feel comfortable using this form of payment.
SOURCES:
Bankrate
Big Commerce
CBS News
Investopedia
Nasdaq
Retail Dive
Reuters
Sofi
US Chamber
The White House
