Cryptocurrency or cryptoassets have been around for a while and it has mainly been seen as an investment vehicle. In recent weeks, there has been a lot of publicity around cryptocurrencies volatility, regulation, and wider usage. Governments are looking to develop their own digital currency and this led me to not only think about it as an investment but as a business resource. Would you consider using cryptocurrency for your business? In this blog, I will be writing about the current landscape and points to consider.
What is cryptocurrency?
Cryptocurrency is a type of digital or virtual currency, a medium of exchange that has no physical equivalent. It also differs from fiat currencies (i.e., GBP, USD, ZAR, etc) in that transaction records are decentralised and kept in records or ledgers called blockchain. Multiple users (miners) maintain these blockchain databases to ensure that the transactions are accurate. For example, if a new transaction is entered, it is transmitted to a network of users who then confirm the validity of the transactions. Once the transaction has been validated it is added to a block and the block is chained to other blocks which provide a record of all the previous transactions. The transaction is then completed. Security for this process is maintained using cryptography. There are many types of cryptocurrencies, the most common include Bitcoin, Ethereum, XRP, Cardano, etc.
According to the Financial Conduct Authority (FCA), an estimated, 2.3m (4.4% of UK adults) Brits own cryptoassets in 2021, which is a 20% increase from 2020. Guardian Newspaper reported that cosmetics firm Lush and office-sharing firm WeWork have begun taking payments in cryptocurrency. In the USA, PayPal is now allowing users to invest and buy using Cryptocurrency, and Amazon recently hired a cryptocurrency specialist even though they have denied moves towards allowing customers to use it on their platform. El Salvador piloted a scheme in Bitcoin Beach a resort, where everyday transactions were carried out in Bitcoin. According to FT.com El Salvador is due to make Bitcoin a legal tender in September 2021.
On a global scale, countries around the world are moving towards developing digital currencies. The Vice President of Ghana, DR M Bawumia said he believed it was time that African countries embraced digital currencies for more efficient and enhanced trade. Tanzania which had previously banned digital currencies in 2019 plans to reverse this and Nigeria is planning to launch its own central bank digital currency in October 2021.
The main issue that Governments, large organisations, and investors had, was the lack of central governance and understanding of the underlying asset backing the cryptocurrencies. With fiat currencies, governments and central banks manage the issue of money and policies that affect the value of a currency in circulation thus reducing volatility. This is not the case with all cryptocurrencies as they are decentralised, which means Governments cannot control them and they are mainly influenced by the level of demand. As the cryptocurrency trend has continued to gain momentum regardless of the warnings issued, governments and large organisations have started developing their own cryptocurrencies which they can regulate, control, and back. For example, USD Coin (USDC) is a type of cryptocurrency which is pegged to the United States Dollar and runs on most blockchains. As it is backed by a fiat currency and this makes it more stable.
Businesses I can imagine using cryptocurrencies are businesses that have supply chains that are abroad which includes businesses that buy and sell products, businesses that manufacture products in different countries, or provide services to a global audience. Businesses that are cash-rich can also invest in cryptocurrency to maintain or increase the value of their money, however, this carries risk due to the volatility of some cryptocurrencies. As demand continues to grow and larger organisations begin to accommodate the usage of cryptocurrency, this may also filter down to SMEs as it becomes a more common mode of exchange.
As with fiat currencies, changes in value occur and this can affect your profits. Care needs to be taken to understand your hedging options, for example, matching currencies for payments to supplies with currencies requested from customers. However, this can be difficult to implement if cryptocurrencies are not widely used. It is important to understand the regulatory landscape in the countries business is being carried, for example, in the UK the Financial Conduct Authority (FCA) does not regulate cryptocurrencies primarily used as a medium of exchange like Bitcoin or Ether however, companies providing crypto exchanges in the UK, or selling other financial products derived from cryptocurrencies need to be authorised by the FCA. The main risk arises in the fact that cryptocurrency is online-based and may be susceptible to hacking. It is important to have an understanding of this and ways of mitigating the risk.
It is important to keep update with current developments with cryptocurrencies. It may not apply to your business now, but developments are being made which may affect you in the future. Unfortunately, due to media coverage, a lot of attention is given to Bitcoin and Ethereum but if on the conservative side, there are less volatile cryptocurrencies that can be considered and are being developed.
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