Effects and Risks of Cryptocurrency in Business

Cryptocurrency was launched in 2009 with the successful introduction of Bitcoin. Since then the world has witnessed several new types of cryptocurrency like - Ethereum, Tether, Binance Coin, USD Coin, Cardano, XRP (XRP), Solana (SOL), Polkadot (DOT), Dogecoin (DOGE) etc.

 

Cryptocurrency is a form of secure decentralized virtual digital asset which can be used online. The first cryptocurrency transaction that was recognised between two people was done on January 12, 2009. The two individuals who transacted using Bitcoin were Satoshi Nakamoto, (unknown individual) and Hal Finney, a developer and crypto activist.

 

Since then Cryptocurrency has seen an increased inclusion of crypto transactions in businesses, As per a recent survey more than 2,300 businesses in the US accept bitcoin for business transactions. The Pandemic has also helped in increased adoption of cryptocurrency by businesses globally. 

 

Companies are now moving fast towards a hybrid form of economy by accepting cryptocurrencies. Most recently fashion brand GUCCI has announced that it will accept Bitcoin in a few of its Outlets in the USA.

 

Here are a few of the public companies that boast of a big cryptocurrency portfolio -

 

• MicroStrategy - They are into mobile software and cloud-based services. As of December 2021, this company holds 124,391 BTC (Bitcoin) in reserve, equivalent to over $5.8 billion in BTC. MicroStrategy CEO Michael Saylor even said that he was buying $1,000 in Bitcoin every second.

 

• Tesla - Electric vehicle manufacturing company Tesla is also in the league of the companies that hold Bitcoin. The company has invested "an aggregate $1.50 billion" in the cryptocurrency; the company's 42,902 BTC are currently valued at $2.04 billion.

 

• Galaxy Digital Holdings - Galaxy Digital Holdings  is a crypto-focused merchant bank that currently holds 16,400 BTC, according to bitcointreasuries.org—valued at just over $779 million at the current price.

 

• Voyager Digital LTD - The firm provides a one stop shop for trading of Digital assets. According to Bitcoin Treasuries, they hold 12,260 BTC worth around $582 million at current prices

 

• Block, Inc. - Block Inc. (formerly Square) made an investment in Bitcoin of around $50 million. Since then they have continued their investments in cryptocurrency.

 

• Marathon Digital Holdings Inc. - Marathon Digital, the company into bitcoin mining obviously, is also a big holder of Bitcoin, with 7,649 BTC in its corporate treasury (valued at around $363 million at current prices).

 

• Hut 8 Mining Corp - Hut 8, the Canada based crypto mining company also holds 5,242 BTC, worth $249 million.

 

• Riot Blockchain, Inc. - The US-based crypto mining company Riot Blockchain also holds 3,995 BTC, worth $189 million at current prices.

 

• Coinbase Global, Inc.- In the month of February in 2021, Coinbase had revealed that they held $230 million in Bitcoin on their balance sheet.

 

Globally, from developed nations like the United States, the UK, Canada, South Africa and Australia to developing countries like Venezuela, Argentina, India, Turkey, Nigeria and Kenya, cryptocurrency has seen a rise in its usage irrespective of the country's economic standing. 

 

Recently El Salvador became the first country to adopt Cryptocurrency in September 2021 followed by the Central African Republic (CAR) in April 2022. This acceptance may pave the way to a global acceptance of Cryptocurrency as a legitimate mode of business transactions.

 

How BitCoin Crypto transactions Work

 

In order to transfer Bitcoin, each participant should have pairs of public keys and private keys that control pieces of bitcoin that they own. Public keys are the keys users share in order to receive bitcoin whereas private keys are secret keys that authorize users to spend the bitcoin received by the publicly associated with the private key.

 

So for any transaction using bitcoin the participant receiving the amount must share the public key. The participant spending the bitcoin signs a message with the transaction details using their private key. 

 

After this the transaction is broadcast where the private key is verified. It then passes along the network until it reaches a mining node, where it’s ordered into a block template which later gets added onto the blockchain and becomes an immutable part of the blockchain.

 

Effect of Cryptocurrency Adoption in Businesses
 

Let's take a look at the effects of inclusion of cryptocurrency in business transactions.

 

1. A bigger reach and a new demographic to cater to for Businesses

 

Adopting cryptocurrency opens doors to a new demographic of global elite customers that values transparency and privacy in transactions. A survey shows that for companies accepting crypto transactions 40% of customers who pay with crypto are new customers of the company.Also their spendings were twice that of credit card purchases.

 

2. Privacy and Transparency in Transactions

 

Blockchain technology used by cryptocurrencies ensures that transaction details are shared only amongst the entities involved in the transactions. This ensures complete privacy of the participants of any transaction. 

 

Blockchain also has a fully auditable and valid ledger of every transaction made. These ledgers can not be forged or removed. This ensures that every transaction is fully transparent.

 

3. Reduced Transaction Costs

 

No third party involvement in a transaction means no additional payment processing or verification fee. This significant reduction in transaction cost helps lower overhead expenditures. For instance, Aramco has projected cost savings of at least 5% from blockchain implementation.

 

4. Protection from Financial Frauds

 

With cryptocurrency every transaction has utmost privacy, this means transaction details can’t be shared with any third party besides the participants of any transaction. 

 

Blockchain also creates an unalterable record of all the transactions which have end to end encryption. This ensures that no one is subjected to online financial frauds while transacting with Cryptocurrency.

 

5. Smooth International Transaction

 

Cross-border business transactions are now much easier with cryptocurrency. No need to convert currency and removal of third party involvement makes transactions much more swift from any other method of international transactions.

 

 

Risks of Cryptocurrency Adoption

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Risks of Cryptocurrency Adoption

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1. Money Laundering

 

Decentralized nature of cryptocurrency means that there is no regulating authority. This has led to an increase in cases of money laundering via Cryptocurrency,most of which are still untraceable. 

 

According to the UN somewhere around US$800 billion and US$2 trillion is being laundered across the globe annually. Most of these go unaccounted. As per a recent report an estimated $8.6bn (£6.4bn) of cryptocurrency was laundered in 2021. 

 

In 2021 UK alone seized crypto assets worth £114 million in money laundering offenses. This Crypto money laundering has only gone up by 30% from the previous year. Indian Law Enforcement Agencies (LEAs) report an increase in the use of cryptocurrency for money laundering by cybercriminals. 

 

The Directorate of Enforcement (ED) is currently investigating 07 cases under PMLA (Prevention of Money Laundering Act), 2002. These are the cases where cryptocurrency has been used as a mode of money laundering. 

 

All the cases that are being investigated by the Directorate of Enforcement under PMLA have revealed that the accused have laundered Proceeds of Crime (PoC). 

 

In India, virtual digital asset exchanges like cryptocurrency exchanges have become the new tax havens facilitating the laundering of illegal cash. More than Rs 4,000 crore of these crypto transactions have been found by the The Directorate of Enforcement in 2021.

 

2. Volatility of Cryptocurrency

 

Cryptocurrency has no inherent value of its own and its value is derived from demand and supply dynamics in the world. Crypto has historically been very volatile when it comes to its value. 

 

For instance - Bitcoin, the flagship cryptocurrency, fell to more than three-month lows in the month of May in 2021, dropping to about $30,000 at one point. Ethereum has been the most volatile cryptocurrency.

 

3. Lack Of Government Support

 

Since Cryptocurrency lacks any central regulatory there is an ever dwelling fear of abetment of money laundering and other crimes. To counter the democratic ways of financial transactions many countries have adopted unfriendly policies as a deterrent for cryptocurrency usage. 

 

Countries like Algeria, Bolivia, Egypt, China, Iran, Indonesia etc have tried to ban usage of cryptocurrency altogether. For instance In India any income from transfer of any virtual digital asset is taxed at the rate of 30 percent which is quite high and this will act as a deterrent. 

 

India’s neighbor Bangladesh is no different when it comes to cryptocurrency. It has been unfriendly toward cryptocurrencies since the beginning. This discouraging attitude of several nations has raised questions over successful adoption of crypto transactions by businesses.

 

4. Irreversible Nature of Transaction

 

As there is no way to trace a transaction in crypto transactions, crypto payments can't be charged back or reversed from merchants in a situation where a transaction is made by mistake. 

 

This is one of the major drawbacks of Crypto transactions.Transaction reversal can be a method of prevention of any financial fraud but this transaction reversal is impossible in crypto transactions.

 

5. Unfettered Crime

 

The lack of regulating authority and absolute privacy make crypto a safe haven for criminal activities. From illegal drugs to weapons trade a lot goes undetected with cryptocurrency. The U.S. Government Accountability Office found in a study that drug human trafficking is being done using cryptocurrency. 

 

Drug and human traffickers are increasingly using crypto to connect with their buyers. The Narcotics Control Bureau and Central Board of Indirect Taxes and Customs in India have unearthed payments amounting to approximately INR 2.2 crore through cryptocurrencies in several cases linked to drug trafficking. 

 

This sharp rise in crime through cryptocurrency has given substance to the suspicion of Cryptocurrency not being safe for mainstream business transactions.

 

Also Read | Top Cryptocurrency Exchanges

 

Future Of Cryptocurrency

 

Cryptocurrency is in its nascent stage and is constantly evolving. Volatility of cryptocurrency makes it difficult to make any prediction long term but experts have been following regulation efforts and institutional adoption of the cryptocurrency for a better understanding of its trajectory. 

 

Cryptocurrency has been in the spotlight quite often as not only investors but common consumers are also getting aware of the cryptocurrency. Lawmakers across the world are looking for ways on how to establish laws and guidelines to make cryptocurrency a safer method of transaction for investors and less appealing to cybercriminals.

 

With decentralization of assets being its primary pull and also a point of concern Cryptocurrency in Businesses has a long battle to fight for its legitimacy. 

 

Unfriendly policies and government crackdowns are a big deterrent but complete adoption of Cryptocurrency is the future of business transactions and we can see the changing face of the economy with the fiat Crypto hybrid mode of business transactions today.