Cryptocurrency Is Here To Stay — Is Your Business Ready?

If you buy, sell or trade goods and services, you’re likely to encounter cryptocurrencies. Colleges and universities, retailers, nonprofits and fast-food chains accept cryptocurrency. Employers are even offering their employees income and retirement plans that include cryptocurrency options.

Your clients may have already requested that you add these options to your point of service payments, or maybe you’re just crypto-curious. Take a little time to learn about cryptocurrency and how it could affect your business.

What is cryptocurrency?

Cryptocurrency is a peer-to-peer digital currency that doesn’t require a third-party or financial institution to transact payments. All transactions happen directly between equal and independent network participants, without an intermediary.

Bitcoin, Ethereum, Litecoin and Tezos are popular cryptocurrencies, but thousands more are available.

Cryptocurrency is not:

• Backed by a central bank or reserve
• Associated with or issued by a country
• Physical currency (like dollars or coins, despite their name)
• Affected by interest rates
• Affected by exchange rates based on traditional currency exchange rates
• Shared with third parties (banks, payment services, advertisers and credit-rating agencies)

Cryptocurrency is:

• Minted in limited amounts
• Valued by a market-driven formula (similar to stocks)
• Part of a decentralized and unregulated financial system known as “DeFi”
• Purchased and sold using traditional exchanges and currencies (like the euro or the dollar)
• Gaining broader acceptance as a mainstream payment option (rather than having investment-only or novelty appeal)
• Driven by a volatile supply-and-demand market with no longstanding or regulated system to evaluate it
• Valued the same in all countries (since it doesn’t rely on exchange rates or government approval)
• Stored in a digital crypto wallet (like a device, hard drive or exchange, and secured by a seed phrase)
• Part of a confidential peer-to-peer exchange network that verifies itself through crypto mining
• Used to purchase executables (like smart contracts) as well as tangible goods and services (like food)
• Considered taxable property by the Internal Revenue Service and has a tax liability (similar to capital gains)

Cryptocurrency transactions and blockchain verification

Cryptocurrency transactions are recorded in ledgers known as blockchains. Each transaction is assigned a unique code that becomes part of a chain that tracks each transaction.

Blockchains are posted on a member network where any member can verify the cryptocurrency using its transaction identification code (also known as a “transaction hash”). Transaction hashes are alphanumeric codes assigned to each purchase. A blockchain’s integrity hinges on solid cryptography that validates and chains together blocks of transactions.

Complex mathematical problems protect the transaction history and the validity of the currency. Cryptocurrency miners solve complex math problems attached to each transaction to verify the currency so consumers don’t keep spending the same digital cash (like photocopying dollar bills).

Blockchains house the transactional data of the cryptocurrency used to purchase goods and services. Miners are part of a self-policing network to keep crypto honest and sustainable.

A little bit currency, a little bit cyber liability

Some business owners view cryptocurrency as an investment strategy since values fluctuate like stocks or commodities. (What you receive as payment in bitcoin today could be worth a lot more — or much less — in the future.) Others wade into the cryptocurrency water to keep pace with client marketplace demands or seek entry into newer markets. Some retailers have even leveraged the crypto boom as a marketing maneuver.

For example, Kentucky Fried Chicken (KFC) Canada promoted its foray into crypto with a “Bitcoin Bucket” sale in 2018. Since bitcoin values fluctuate daily, customers may have paid a different price for their bucket. KFC printed the individual bitcoin price, the conversion rate and date on every chicken bucket order as part of their marketing campaign. (It even provided some historical memorabilia.) This marketing initiative was so effective that some currency converters still include chicken to bitcoin conversion rates.

No matter your business reason, you’ll want to check with your lawyer, accountant and insurance agent before you commit to a cryptocurrency.

• Ensure your crypto exchange service and digital wallet provider have top-notch cryptography and reputable insurance coverage.
• If you’re using blockchain to execute contracts or other crypto assets, you’ll need to check out your insurance coverage, too.

A word on cryptocurrency and employees

Some businesses have started offering cryptocurrency options to attract talent and realize tax advantages.

• If you’re offering cryptocurrency as a part of employee payroll options, you’ll need to be clear on the tax liabilities and legal ramifications. Make cryptocurrency a separate and optional benefit with clear statements about the risks and tax liabilities.
• If you’re offering cryptocurrency as part of an employee retirement or payment program, you’ll have to triple check with the retirement plan fiduciaries. According to the Society for Human Resource Management, cryptocurrency investment could be outside the typical investment choices included in an investment policy statement (IPS). Any deviation from IPS guidelines can serve as evidence of a breach of fiduciary obligations, resulting in employer and individual liability.

Insurance possibilities in an emerging crypto market

Cryptocurrency insurance is an emerging market with only a handful of insurance companies willing to write the policies. If your agent doesn’t have options available in this space, ask them to create a layer of protection using:

• Cyber liability (first- and third-party) insurance
• Directors and officers insurance
• Crime and fidelity insurance
• Custody insurance
• Employee Retirement Income Security Act (ERISA) fidelity insurance

The type of coverage you’ll need depends on your business operations and liability exposure. Your agent will have a questionnaire that helps zero in on your risk and identify the gaps in coverage.

Cryptoassets are part of blockchain business operations

Cryptocurrency and blockchain are synonymous; cryptocurrency technology can’t exist without it. But blockchain itself has borne some interesting business tools that affect intellectual property, contracts, terms and conditions and methods of execution. These blockchain-based executables are called “cryptoassets” and include smart contracts. Smart contracts are executed on a blockchain that dictates terms, conditions of sale and royalties. Smart contracts also use blockchain to automate workflows and perform step sequences.

For example, a vehicle purchase could occur using blockchain to send paperwork, verify acceptance, collect signatures and deposit the funds from the buyer’s account into the dealer’s account without a bank intermediary. The blockchain is updated when the sequence completes. Only parties with appropriate permissions can see the results of the transaction.

Non-fungible tokens (NFTs) are unique digital identifiers that cannot be copied, substituted or subdivided. They’re recorded in a blockchain (typically as part of a smart contract) and used to certify the authenticity and ownership of a specific digital asset and rights relating to it.

For example, artists are selling digital art using NFTs. They help to control their work by limiting its use and safeguarding against copies. Before blockchain and NFTs, copyrighting digital art was difficult and often resulted in unlicensed copying (ultimately devaluing the asset).

NFTs make one-of-a-kind digital art and assets possible, opening the door to new art businesses, collectibles and collectors.

Altcoins and tokens

Most cryptocurrency is built on open-source code that the issuer customizes, so alternate currencies (known as “altcoins” or “tokens”) are added to the crypto exchange all the time. Cryptocurrency is assigned value by the group who created it and the individuals who accept its transactional value. For example:

• Value tokens or altcoins are used to purchase goods and services (similar to cash).
• Utility tokens are for specific use cases or functions (like access to a file-sharing platform).
• Security tokens are for investing in the company that issues them (like stocks), and they have no independent purchasing power.

You could use a utility token (like Tezos) to purchase digital sneakers made for wearing in real life (IRL), along with a digitized copy to use in specific augmented reality (AR) spaces. Or you could sell your products online, manufactured for IRL and AR use.

Time will reveal who dominates the DeFi sector, but the liabilities they create are already here. If cyber liability insurance is in its infancy stage, crypto insurance is still in utero. It will be years before the dust settles on crypto and blockchain, but that doesn’t mean you’re completely exposed.

Think carefully about your cryptocurrency strategy

Any business can accept cryptocurrency as payment, but you’ll need to decide if it’s right for your business liability and strategy. As technology progresses, so do its applications and exploitations. Talk to your super trio — your lawyer, accountant and insurance agent — to enlist their powers of perception and help you weigh the risks of crypto in your business.