Pros & cons of using cryptocurrency in business transactions

Apr 05, 2024

Cryptocurrency is undoubtedly one of the hottest and most sought-after online payment methods in the 21st century.

Cryptocurrencies are online currencies protected by advanced cryptography systems to ensure extremely secured payments across the Internet.

Immune from counterfeit attempts and the error of double-debit, cryptocurrencies such as Bitcoin are a desired digital asset due to their exponential rise in value.

Owing to its volatile nature, many companies are apprehensive about its usage, while many more are using Bitcoin and its likes as a payment option, thereby giving rise to cryptocurrency accounting.

As a formidable albeit tad unreliable investment and operational asset, companies all over the world are rapidly acquiring Bitcoin to plant their feet in this relatively uncharted territory.

Companies can use cryptocurrency for business purposes such as purchasing goods and services, remunerating employees, investing in other cryptocurrencies, and issuing them as dividends to their shareholders.

Cryptocurrency reignited the barter economy in the digital age without a centralized government authority monitoring its flow, unlike fiat currencies. 

With the introduction of new virtual currencies, companies also require a solid foundation of cryptocurrency accounting to help make sense of this exciting yet uncertain opportunity.

How is cryptocurrency used in business transactions?

To ensure smooth business operations, companies can choose to use cryptocurrency for business in two ways – either to hold off crypto from being reflected in your company’s balance sheet or to fully adopt crypto into the company’s payment systems.

Let's see how these two choices affect your business:

Keeping crypto off the books

Companies can use cryptocurrencies to process payments only.

This means that cryptocurrency can be transported to a digital wallet and converted from crypto to fiat currency and vice-versa, without it ever showing up as a crypto-enabled payment in the books.

This allows companies to make faster transactions using crypto without actually touching it.

This is the easiest and fastest way to use cryptocurrency for business. Utilizing crypto in this way allows for the least changes made within the company in terms of enabling cryptocurrency use.

In this approach, companies rely on a third-party vendor that acts as an agent between the company and the other entity.

They do the real conversion from crypto to fiat currency and charge a fee for the services offered.

The third-party vendor also oversees any risk and compliance procedures associated with each payment, while the company keeps a stringent check on anti-money laundering (AML) and know your customer (KYC) issues.

Integrating crypto into company systems

Under this approach, companies intend to adopt crypto into their operations and directly use cryptocurrency for business.

More than just crypto-enabled payments, this direct approach allows companies to broaden the reach of cryptocurrency within their own systems.

They can do it by using a third-party vendor to oversee the status of the crypto on the blockchain whilst providing a digital wallet to efficiently track and process transactions.

Another “daring” way is to completely self-adopt crypto onto their own and manages their private keys (which act as a password and digital signature for your crypto funds).

While the first approach to crypto-integration using a third-party vendor is the preferred method by most companies, the latter self-management of cryptocurrency using private keys is risky and may require legal licenses to be put in effect. Legal consultation is advised.

Challenges of using cryptocurrencies for business

With the rewarding yet volatile nature of the crypto market, using cryptocurrency for business related payments should not be a decision exercised without caution.

Since cryptocurrencies are not backed by a centralized authority like fiat currency is, its dysregulated characteristic is prone to sudden changes in value.

Bitcoin's highest value ever in November 2021, was around 70% higher than the value in July 2022 — all that within the span of less than a year!

Another risk factor associated with using cryptocurrency for business is the vagueness of blockchain security.

There have been cases of hacking wherein hackers have penetrated the blockchain’s security and gained illegal access to digital wallets, stealing and spending cryptocurrencies worth millions.

Since blockchain technology is new, there is a lack of proper tax and legal codes as well as accounting for cryptocurrency. The unregulated, unpredictable nature and penetrable security make cryptocurrency for business a genuine challenge.

Advantages of accepting payments in cryptocurrency

1. Transaction fees

Owing to its decentralized, cryptocurrency is non-regulated and therefore incurs no banking fee.

The online exchange fee within cryptocurrency trading is nominal when compared to banking institutions, with fees as low as 0.40% to 1% only.

2. No chargebacks for merchants

Cryptocurrency for business is ideal for companies that sell goods and services in exchange for it since there is no option to do chargebacks once the purchase has been made.

Since the encryption on crypto is really advanced, making the transaction is an irreversible process.

3. Broader market reach

Unlike fiat currency which solely works within the geographical borders of a country and levies foreign exchange fees on every international transaction, cryptocurrency can be used across the world wherever it is accepted. No forex is necessary.

Disadvantages of accepting payments in cryptocurrency

1. Price volatility

The rampant bullish and bearish patterns of the cryptocurrency market make it an unpredictable currency. The rogue price volatility makes cryptocurrency for business a dicey decision since the price fluctuation can happen every hour.

2. Security

There is a constant imminent risk of getting your digital wallets hacked or a crypto exchange platform permanently closing shop. If your digital wallet or coins are being used in illegal activities by hackers, it can even end up in all your cryptocurrency being seized.

3. Regulatory uncertainty

Due to cryptocurrency being a new technology, many countries across the world haven’t come up with proper taxation, legal regulations, and accounting for cryptocurrency. This makes cryptocurrency an ideal place for tax evasion.

How does cryptocurrency affect accounting?

Since cryptocurrencies are wildly fluctuating intangible currencies, there is a lot of grey area when it comes to cryptocurrency accounting.

Unlike fiat currencies, cryptocurrencies is involved in barter trading, which makes accounting for cryptocurrency all the more perplexing.

Cryptocurrencies are viewed as intangible assets of the property category. Therefore, it is subject to the rules of barter transactions. 

Owing to this, there are new cryptocurrency accounting principles set in place. First and foremost, cryptocurrency is not treated to the same rules as fiat currency.

Secondly, in order for taxpayers to generate the fair market value of cryptocurrency in order to include it as taxable income, accounting for cryptocurrency is treated as being virtually exchanged to fiat currency.

Finally, the most crucial cryptocurrency accounting rule is to record the value of your cryptocurrency both when you receive it and when you spend it to accurately measure your profit and loss.

Why efficient expense management systems are vital for cryptocurrency accounting?

Using cryptocurrency for business is a highly complicated process as it requires your finance and treasury teams to reimagine the way businesses deal with finance.

With the introduction of crypto, having an expense management solution especially catered around crypto can be a huge aid for your finance team.

A virtual currency that is accounted for and taxed as property can impact your cash flow considerably, and cryptocurrency does exactly that.

Cryptocurrency for business, especially where it doesn’t show up on the balance sheet, can mess up your corpus and overall business operations.

Even when cryptocurrency is achieved by converting real cash into crypto, its non-cash status results in companies adjusting cash flow statements, which can show a glaring gap in your company’s finances.

In this high-pressure situation, an expense management system designed around the elusive nature of cryptocurrency can prove to be extremely beneficial. 

Expense management systems that are crypto-driven are designed to account for crypto to make auto-adjustments and balance out your cash flow statements as well as record crypto values at the date of receiving and disbursement.

Not only that, efficient expense management systems can streamline your high-volume transactions and track them from end to end.

In order to simplify cryptocurrency accounting, crypto-enabled expense management solutions come equipped with the accurate documentation needed to ensure your crypto funds are tax and audit compliant.

Manage all your expenses on a single platform for better visibility & control