For the last few years, the US crypto POV has been that of individuals investing in cryptocurrency as an exciting new asset class. In developing markets such as Africa and India, people have been using crypto for more than it was intended – an alternative to traditional banking with a peer-to-peer transparent way to buy and sell products and services.
In the business world, adopting crypto has been a slower process. Some countries like El Salvador and Slovenia push businesses into crypto from the top down. In more complex economies, business crypto adoption is moving more slowly, reflecting regulatory and mainstream friction.
As crypto slowly moves toward a regulatory safe zone, businesses are seeing more demand from some consumers to accept cryptocurrency for purchases. In the investment markets, as crypto matures, companies will consider cryptocurrency a potential source of business investing and funding.
The term “business” is a vast category; each sector and entity must decide when and how crypto fits into its strategy. This article examines the broader implications of crypto adoption for business in general.
The Impact of Decentralized Finance (DeFi) on Business
The theory of DeFi promotes anonymous transactions between parties that may cross borders and be wholly independent of government or institutional oversight.
In reality, those theoretical pillars will need to adapt and compromise to align with doing business in the real world, including powerful entrenched institutions, sovereign nations, and threats from bad actors and rogue governments.
DeFi’s inclusive nature breaks down barriers to entry, making financial services accessible to a broader demographic, including underserved populations. This accessibility fosters greater financial inclusion and empowers businesses to reach previously untapped markets.
In the fundraising sphere, if token-based fundraising regulation evolves beyond existing SEC “accredited investor” restrictions, it will open ICO potential again and new avenues of democratized investment, allowing businesses of all sizes to attract a global pool of investors.
As DeFi continues to evolve and mature, its ability to reshape financial landscapes and drive innovative business models remains a compelling prospect for forward-thinking enterprises seeking to optimize their operations in a decentralized world.
Cryptocurrency as a Payment Method for Businesses
Crypto payment apps are betting big on wider adoption this decade. Industry watchers forecast a 16.8% CAGR in the US market for crypto payment gateways between 2020 and 2030.
Cryptocurrency offers several advantages as a business payment method. Firstly, crypto is increasing in emerging economies. Accepting crypto opens doors to a broader customer base, tapping into significant market growth.
Secondly, transactions enabled by blockchain technology minimize the risk of fraud and chargebacks. Crypto transactions can enhance cost-efficiency and profitability by reducing or eliminating third-party fees like credit card processing, currency conversion, or bank transaction fees.
Businesses, from tech-savvy startups to established enterprises, have already embraced cryptocurrency payments. For instance, companies like Overstock and Shopify have integrated crypto options, expanding their global reach and attracting consumers who prefer crypto.
For smaller businesses, the ease of use of payment gateways such as PayPal and Visa will drive small business adoption.
On the back end, blockchain ledger solutions for smaller businesses could revolutionize small business finance. For small and medium businesses, tracking and verifying transactions, record keeping, and filing taxes represent a colossal headache and expense.
Blockchain-based crypto-driven solutions can increase efficiency and lower costs. Governments can benefit from more frequent, automated business tax deposits as well.
Risks and Challenges of Cryptocurrency for Businesses
Like individual investors, businesses must weigh their crypto activities and potential upside versus their capacity to absorb losses. Even though blockchain is secure in most cases, it isn’t foolproof.
We have also seen the security risks associated with centralized exchanges and hackable wallet technologies. Given these risks, risk management strategies and thorough due diligence are essential before businesses integrate cryptocurrencies.
Fundraising with Cryptocurrency
Two models are evolving for business fundraising – the Initial Coin Offering (ICO) and the Security Token Offering (STO)
Initial Coin Offering (ICO)
An ICOis a fundraising method used by cryptocurrency startups to secure capital by issuing new digital tokens or coins to investors. In ICOs, businesses raise funds by marketing their project’s potential, often through a whitepaper outlining the concept and technology. Interested investors purchase these tokens using established cryptocurrencies like Bitcoin or Ethereum.
As of the date of this post, ICO’s were still unregulated. Since 2015, ICO scams netted $16B, with spiking earnings in 2018 until the ICO bubble burst. Legitimate businesses who want to raise money via ICOs should consult with legal counsel to be sure they don’t violate any SEC regulations.
Security Token Offering (STO)
An STO involves issuing security tokens representing ownership in real-world assets such as stocks, bonds, real estate and even art.
Businesses raise money through STOs by conducting a thorough legal and financial review, issuing security tokens backed by tangible assets, and offering these tokens to accredited investors through a registered platform or exchange.
Unlike Initial Coin Offerings (ICOs), which often offer utility tokens granting access to a specific platform or service, STOs are subject to regulatory oversight and comply with securities laws. In the US, security tokens must register with the SEC.
This compliance may make STOs a more secure and legally transparent option for both businesses and investors compared to the often unregulated environment of ICOs. In a sense, STOs provide a bridge between traditional financial systems and the innovative potential of blockchain technology.
Business Investing in Cryptocurrency
When properly managed, cryptocurrencies offer companies a unique opportunity to diversify their investment portfolios beyond traditional assets, potentially enhancing overall risk management and returns.
A primary concern for business crypto investing is price volatility, which exposes enterprises to significant financial fluctuations and potential losses. Regulatory uncertainty adds another layer of complexity, as the evolving legal landscape can also impact the pricing and utility of cryptocurrencies.
Deloitte offers in-depth guidance for businesses considering crypto investments. For a volatile and evolving category like cryptocurrency, the heart of the matter is risk management. Deloitte offers some basic guidelines:
- Decide what percentage of the cash on hand and net operating costs company leadership is comfortable assigning to alternative investments in digital assets.
- Risk tolerance depends on the stake and type of digital asset.
- Agree on a risk tolerance band the company can responsibly adopt, and be prepared to revisit the subject. Risk is a moving target; financial staff must monitor investments and adjust frequently.
- Even when considering investments, consider digital assets as a whole and how they will impact operations such as payments, debt management, fundraising, and IPOs.
Corporations Investing in Crypto
One way companies can get a rough gauge of the corporate landscape of crypto investment is to look at some of the more prominent corporations with crypto holdings.
The list below from Yahoo Finance shows 15 of the top firms with significant holdings in cryptocurrency. The list’s diversity reflects crypto’s themes of tech and finance as well as a growing interest from the retail payment sector. The list includes:
- Microsoft Corporation
- NVIDIA Corporation
- Advanced Micro Devices
- The Goldman Sachs Group
- CME Group
- PayPal Holdings
- Interactive Brokers Group
- Block, Inc.
- CBOE Global Markets
- MicroStrategy Incorporated
- AMTD IDEA Group
Regulatory Landscape and Compliance Considerations
Business adoption of cryptocurrency largely depends upon ongoing regulatory progress. The United States is finally seeing some legislative movement around regulating cryptocurrency.
Large TradFi institutions have been watching crypto’s progress for many years. Some are taking the early signals from recent court rulings and federal legislative action as a green light to launch their crypto products. A prominent recent example is Paypal’s announcement of their stablecoin.
As existing TradFi moves towards launching their crypto products, the user experience will get better, and mainstream adoption will grow. Businesses must decide when and how deeply they want to integrate cryptocurrency and blockchain into their processes. As with everything in business, a lot will depend upon the business model and customers’ expectations.
Do you prefer to use cryptocurrency for purchases? Do you invest in cryptocurrency? If you trade crypto assets, ZenLedger can help you organize everything for tax time.
The platform automatically aggregates transactions across exchanges and wallets, computes your capital gain or loss, and generates the tax forms you must file yearly. You can also find ways to reduce your tax burden through tax loss harvesting.
This material has been prepared for informational purposes only and should not be interpreted as professional or legal advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.