Understanding Cryptocurrency

Before looking at the key considerations around integrating cryptocurrency payments, it’s important to understand what cryptocurrency is at a basic level. Cryptocurrencies are digital assets and payment systems that use cryptography to secure transactions, control the creation of additional currency units, and verify transfers. Bitcoin, launched in 2009 by the mysterious Satoshi Nakamoto, was the first ever cryptocurrency. 

 

While Bitcoin and other popular crypto assets like Ethereum function as both a digital currency and commodity, many newer cryptocurrencies focus specifically on powering decentralized applications and smart contract platforms. They allow developers to build and deploy censorship-resistant apps and services. Whether used as a payment method or utility token on a blockchain network, cryptocurrencies provide a way to transfer value online without requiring traditional financial institutions. As adoption grows, more enterprises are beginning to accept crypto for transactions, integrating it into payment systems and online commerce solutions.

Security Risks and Best Practices

One major concern for enterprises dealing with cryptocurrencies is security. Crypto asset transactions are irreversible. Once an enterprise sends or receives crypto funds, there are no chargebacks or payment insurance like with traditional payment processors. This creates a huge need for robust internal security measures.

 

Best practices, such as cold storage of reserve assets in offline wallets, need to be implemented by enterprises. Risk-reducing things, such as hardware security modules and air-gapped machines. And staff security training is also ongoing. Specialized crypto custody providers can enter into a partnership with enterprises to outsource security, while allowing enterprises to retain control of the private keys used to access funds.

 

It is critical to set up multi-signature wallets instead of single private key access. In this case, transactions need multiple sign-offs to validate. Also, enterprises should segment hot wallet funds from cold storage reserves to limit exposure.

 

Through implementing strong security policies, enterprises can safely integrate cryptocurrency while not becoming prey to the typical prey of private key theft, phishing attacks and employee fraud, or incorrectly entering data.

Volatility Management

The prices of cryptocurrency are very volatile compared to fiat currency prices. That is a problem for enterprises trying to reconcile their settlements, payments, and accounting. For instance, Bitcoin’s price has completely crumbled nearly 50% in 2022 alone, following its all-time high of around USD 69,000 at the end of 2021.

 

When deciding to integrate cryptocurrency or allocate a portfolio to it, volatility risk has to be factored in by enterprises. It is wise to have fiat currency reserves to stabilize volatility exposure.

 

By utilizing fixed-rate futures contracts on exchanges like BitMEX that allow you to enter into contracts to hedge against crypto volatility, an enterprise can do this. This means that dollar value rates will be locked in regardless of market fluctuations. Another common tool for volatility management over the counter is crypto derivatives.

 

The trick is to deploy mitigation measures to avoid volatility from blowing budgets and projections. Also, techniques such as dollar cost averaging (making fixed interval purchases) spread the risk over time.

Accounting and Tax Considerations

Cryptocurrency accounting at an enterprise level can get extremely complicated compared to cash or credit transactions. Currently, there is no common set of established accounting standards across jurisdictions. Thus, enterprises must assess relevant regulations and adapt their financial reporting procedures accordingly.

 

Some key accounting challenges include:

 

  • Proper classification of crypto assets – currencies, commodities, indefinite intangibles, or current assets.
  • Tracking cost basis for gains/losses.
  • Realized versus unrealized gain/loss recognition.
  • Historic cost, lower of cost or market, or fair market value debate.
  • Impairment analysis and remeasurement methodologies.

 

Cryptocurrencies have diverse tax treatments globally as well. While some countries treat crypto as investment assets subject to capital gains tax, others classify it as business income.

 

Enterprises accepting cryptocurrency as payment also need to consider payroll tax, sales tax collection, value-added taxes, and tax reporting documentation. They may have to file additional state or federal tax forms related to crypto transactions.

 

It’s complex, so working with qualified accounting and tax professionals is highly advisable before adoption.

Payment Integration Issues

Enterprises have two primary options for integrating cryptocurrency into their payment systems – either directly through their own treasury & payment operations, or indirectly using a crypto payment processor.

 

Handling crypto payments directly allows enterprises to retain full ownership and control of coins paid by customers. But this increases technology requirements substantially. Enterprises have to build out custodial security protocols, implement wallet & address management systems, manage private keys, validate transactions on public blockchains, and handle exchange requirements.

 

Using crypto payment processors reduces direct back-end complexity. However, typical payment processors convert crypto to fiat currency right away. This eliminates the option to retain crypto assets long term on the enterprise balance sheet to realize potential appreciation. It also gives up partial ownership and control to the processor.

 

Hybrid approaches are possible as well. Enterprises can use ‘keep-in-crypto’ payment processors like BitPay, which don’t automatically liquidate to fiat, while still outsourcing many complex back-end functions.

 

No approach is necessarily better than the others. It comes down to the specific enterprise strategy and objectives behind supporting crypto payments or holding crypto assets.

Regulatory Considerations

Currently, government policies related to cryptocurrency vary substantially across different countries and jurisdictions. There is little consistency globally. Before integrating cryptocurrency payments, enterprises must understand the complex patchwork of regulations that apply to them.

 

In the U.S., for example, enterprises must adhere to diverse state policies, FinCEN money transmitter regulations, SEC guidance on crypto as securities, CFTC oversight of commodities, IRS tax policies, and more, depending on their operations. They may need licenses to handle crypto payments or interact with customers in certain ways.

 

Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations are important considerations as well. Enterprises may need to implement Identity verification and comply with asset reporting thresholds.

 

Navigating this complex and shifting regulatory environment alongside accounting rules and tax policies in each country of operation is not easy. But non-compliance can lead to serious fines or legal consequences.

 

Partnering with regulated crypto service providers, legal professionals, and compliance specialists can help enterprises appropriately integrate cryptocurrency while limiting risk exposure.

Analyzing Customer Demand

One important question enterprises need to analyze is whether their customer base will use crypto payment options. Just because Bitcoin makes headlines does not mean a company’s unique customer demographic prefers transacting with cryptocurrency.

 

Enterprises can assess current demand levels and trends by surveying, social listening data, customer conversations, as well as monitoring adoption on other competing sites.

 

Using existing crypto payment options is only going to work if a small percentage of customers are using them. The resources of the developer may be diverted to implementing other customer-requested features.

 

On the other hand, with all that said, there are segments like digital native millennials or Gen Z who are getting more and more into crypto payments. They like to avoid the credit card and banking networks. 

 

So, customer demand analysis is key before committing resources to integrate systems.

Cryptocurrency Payment Partners

If an enterprise decides to move forward with crypto payments makes sense for their customers and business model, choosing the right implementation partners becomes crucial.

 

As we covered, using a cryptocurrency payment processor can greatly simplify integration compared to direct acceptance and management. The processor handles computationally intensive functions behind the scenes so enterprises don’t have to build these capabilities internally.

 

Leading crypto payment processors include BitPay, CoinPayments, CoinGate, GoCoin, and Coinbase Commerce. Enterprises should thoroughly evaluate partners based on supported coins, transaction fees, exchange rates, security/compliance ratings, platform functionality, and existing integration support for popular ecommerce platforms.

 

For software needs not addressed by payment processors directly, there are also specialized crypto merchant services and POS solutions like Inqud, QR Retail, Blockonomics, and NetCents Technology. These can provide things like apps and APIs to enable customer-facing functionalities.

The Right Strategy

It is the need of the hour for enterprises to provide the right strategic planning to avoid jumping on the crypto bandwagon without proper planning.

 

The first part is to figure out why an enterprise is even looking to support crypto in the first place; is it mostly because of customer demand, or is there any other factor that’s driving adoption as well? What particular benefits does the business expect to gain?

 

Then enterprises can do more tactical work around what options are possible for integration, what changes are necessary, what the costs it is, and what it fits with the company’s culture.

 

Boiling the ocean is a losing game. Long term, you usually find pursuing a phased, iterative approach to be more effective.

 

First, do a simple pilot of it, then roll it out when it pans out in a more full-scale adoption. It enables the enterprises to determine the rate of adoption, acquire knowledge in dealing with volatility swings, adjust accounting practices, and develop strategy according to feedback from the users in a short time.

 

The odds for tapping into the world of web3 money are increased by carefully jumping in, refining the approach based on data, and growing slowly over time.

Conclusion

The future is bright for the enterprise when it comes to being able to drastically reduce fees, gain new customers, and position themselves strategically for the future using the cryptocurrency revolution. Adding Bitcoin to the balance sheet or payment options overnight only rarely ends well.

 

Using a strategic approach, evaluating regulations, deploying security best practices, balancing volatility risk, chopping accounting, analyzing customer demands, finding the proper partners, and iterating carefully, enterprises could be able to successfully integrate cryptocurrency.

 

We know that regulatory uncertainty, accounting complexities, tax policies, and volatility are big factors that are real, but those can be overcome.