Remarks by Jamie Dimon, chairman and CE of JP Morgan Chase, earlier this month disparaging the bitcoin virtual currencies as a “tool for criminals and money launderers” are perhaps no surprise. Nor is the scepticism that bitcoins are a bubble, an “Enron in the making” as quoted yesterday by Saudi billionaire Prince Alwaleed bin Talal.
For the mainstream banks the rise of cryptocurrencies represents the risk of a serious loss of revenue from currency exchange and other transaction charges.
However, cryptocurrencies like Bitcoin have been growing in popularity both among investors and SMEs, particularly those that trade via e-commerce or in several countries.
While there has been a significant growth in investors trading in bitcoins, this should come with a health warning. Value can be volatile. In January 2017 one Bitcoin was worth $800 and by June it had risen to $3000. But within a month the value had dropped to less than $2000 before rising nearly $3000 by the start of September.
Plainly, investment in the currency is only for the experienced investor with strong nerves and an ability to write off the investment at worst.
How useful is accepting payments in bitcoins to SMEs?
The advantages for businesses in allowing payment in bitcoins is in lower costs and therefore greater profits.
Accepting payments via debit or credit cards attracts significant transaction fees, whereas the charges made by companies that manage Bitcoins are significantly lower. Because bitcoins are not currencies issued by any government, trading in them is not subject to tax.
For small businesses the speed of transactions is another benefit. It can take up to a week before a credit card payment reaches the business’ account, whereas with bitcoins payments typically arrive within a couple of days.
Another benefit is saving on the high cost of currency conversion that is charged by banks.
Bitcoin payment is becoming increasingly popular with customers which presents an opportunity for those businesses that accept it.
There are, however, drawbacks to having a bitcoin account. There is no regulation in the UK, so it is not covered by the FCA (Financial Conduct Authority) and losses would not be covered under the Financial Services Compensation Scheme, which protects lost deposits of up to £85,000 from bank or savings accounts. There is also the perception, whether or not this is justified, that bitcoin transactions are used by those wishing to launder money, or by those operating in the ‘dark web’ or others trying to avoid paying tax. This is made easier by the distributed ledger payment system that confirms a payment without the need for disclosing a customer’s personal information. Use of bitcoins could therefore expose businesses to greater scrutiny by HMRC and anyone monitoring money laundering such as banks that receive the converted cash.
The other main risk is bitcoin value fluctuation, but this can be mitigated by using a payment processor to convert bitcoin transactions into actual currency (whether $US or £Sterling) and pay it into the company bank account.
For any business trading globally there are certain benefits to using bitcoins, but legitimate businesses need to have appropriate and secure systems supported by detailed record keeping in place.