Magazine article Risk Management

Will Bitcoin Turn Business on Its Head?

Magazine article Risk Management

Will Bitcoin Turn Business on Its Head?

Article excerpt

Particularly over the past year, individuals have seen lucrative returns from investing in various types of cryptocurrency like bitcoin, ethereum and ripple--the three most popular by market capitalization. Stories of amateur investors becoming cryptocurrency millionaires have sparked widespread public interest and, as a result, its prospects not only as an investment vehicle, but as a possible alternative to traditional currency continues to grow.

The increasing acceptance of cryptocurrency by governments and businesses has helped to fuel the boom. Japan declared bitcoin legal tender in 2017, while businesses such as Overstock.com, DISH Network, Microsoft, Intuit and PayPal are currently accepting payment in bitcoin. Overstock.com has accepted bitcoin since January 2014, while Microsoft has allowed its customers to use bitcoin to purchase content in the Windows and Xbox stores since December 2014. More recently, Microsoft announced that it was adding bitcoin support to Excel 2017 so users can track, calculate and analyze bitcoin data using the software.

Yet cryptocurrency continues to experience considerable growing pains. While the values of various digital currencies have increased exponentially over the past year, there have been more losses than gains in recent months, highlighting their inherent volatility. Bitcoin, for example, was trading at almost $20,000 last December, but plummeted to $7,000 by early February. Bitcoin was hardly alone--similar trends were seen across the board. In the space of a month, the value of the entire cryptocurrency market dropped from all-time high of $836 billion on Jan. 7 to $279 billion on Feb. 6 before jumping to S400 billion three days later.

With this increased activity has come an increase in restrictions on cryptocurrency use. A number of banks including JPMorgan Chase, Bank of America, Citigroup and Lloyd's have recently banned customers from using credit cards to buy cryptocurrencies, as Capital One and Discover did previously, meaning all of the top five credit card issuers have now announced or implemented bans. In addition, India and China are considering tougher regulations on digital currency, while regulators in South Korea and Russia have expressed concern. Famed investor Warren Buffett issued warnings that the bitcoin boom will "come to a bad ending," while JP Morgan CEO Jamie Dimon has called the crypto craze "a fraud" (though he later recanted the statement).

As with any new technology, there are both risks and rewards to adopting cryptocurrency, and businesses need to be aware of both before deciding whether to get involved in this nascent market.

POTENTIAL CHALLENGES

Accepting cryptocurrency offers businesses a number of benefits including lower to no bank transaction fees, enhanced fraud protection, increased transparency of transactions, less collection and retention of data like credit card information or proof of identity, and no chargebacks. But there are challenges that need to be solved before cryptocurrency can become mainstream.

Beyond the economic issues related to pricing volatility, businesses accepting it as a form of payment will need a way to comply with know your customer (KYC) and anti-money laundering regulations. "When a business is accepting money using credit cards, checking drafts or bank transfers, there is an inherent way to track the customers," said Vishal Singh, chief technology officer at software development company LINK3D. "With bitcoin, businesses receive the transaction from a crypto address, which could be anywhere and could have been funded in unknown ways. There are several companies that are trying to address this specific problem."

The technology used to build ethereum's platform includes "smart contracts" that control the transfer of digital currencies or assets between parties, while bitcoin uses a "private key," a 256-bit number that allows a user to spend their coin. …

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