What Small Businesses Should Know About Cryptocurrency

  • Cryptocurrency is a digital medium of exchange that allows direct transactions without third-party processors.
  • Cryptocurrencies aren’t regulated or backed by any government.
  • Accepting crypto as payment at your business can lower transaction fees but also introduce security concerns.
  • This article is for entrepreneurs and small business owners interested in learning about cryptocurrency as a customer payment method.

Cryptocurrency is all the rage these days, with wild price fluctuations occurring almost daily. But with this medium of exchange now more than 10 years old, it’s finally working its way into the mainstream. Cryptocurrency is now being actively traded 24/7 and, according to data from Skynova, more than 30% of U.S. small businesses now accept it.

But is cryptocurrency right for your small business? There are several serious considerations to take into account – both technical and pragmatic – before deciding to accept crypto. We’ll weigh all the cryptocurrency factors small business owners should consider and look at how some blockchain startups are trying to push the space forward.

What is cryptocurrency?

Cryptocurrency is a digital medium of exchange that relies on peer-to-peer blockchain technology; as such, it’s decentralized in nature. In other words, no central bank or government regulates or backs crypto. Buyers transfer funds directly to sellers without the third parties traditionally used to process payments.

“Cryptocurrencies cut out the middleman in a transaction,” said Chris Poelma, CEO and board director of PCS Software Inc. “Rather than store your money somewhere where you’re dependent on an organization to safeguard it, you hold on to it through an encryption only you have a key to. As we hear more stories of data breaches and hackers becoming more sophisticated, cryptocurrencies sound more appealing to consumers looking for a safer way to do business.”

Small businesses might choose to accept cryptocurrency for many reasons: It’s at the forefront of technology, it can attract customers who use crypto, and it eliminates certain kinds of fraud. But is it right for your business?

Benefits of accepting cryptocurrency

Compared to traditional point-of-sale (POS) systems, cryptocurrencies offer several primary benefits that you may want to consider.

  • Lower transaction fees: The lack of a central intermediary dramatically reduces transaction fees. Small businesses that accept credit card payments via credit card processing companies often incur fees of around 25 cents for each card swipe plus 2% to 4% of the transaction total. These costs add up, which is why smaller stores often have credit card purchase minimums on their POS systems. Accepting crypto can reduce these costs to less than 1% of the value of each transaction.
  • Merchant protection: Crypto’s decentralized setup also protects merchants from fraudulent chargebacks. The transactions, like cash, are final because no third party can reverse charges. (Learn more about credit card receipt signatures to protect your business against fraudulent chargebacks.)
  • Increased sales: Crypto enables small businesses to expand and open their doors to international buyers who previously couldn’t access their products and services. For example, one small electronics retailer reported selling $300,000 worth of merchandise to nearly 40 countries by accepting cryptocurrency.
  • Convenience for customers: Accepting cryptocurrency offers customers additional ways to pay while providing an extra layer of protection for their information.

Key TakeawayKey takeaway: By accepting cryptocurrency as a payment method, you can reduce your transaction processing costs, protect your business from excessive chargebacks, expand your market, and cater to consumer preferences.

Risks of accepting cryptocurrency

Cryptocurrency isn’t without its downsides. Here are some of the risks of accepting cryptocurrency.

Technical barriers

Accepting cryptocurrency requires setting up a digital wallet on a digital currency exchange, which could be technically prohibitive for small business owners unfamiliar with the technology. Cryptocurrency is an information-dense field with a relatively steep learning curve, which can be a significant obstacle when you’re also trying to run a business.

“As it stands now, small businesses in particular would find it difficult to accept cryptocurrency,” said Serge Beck, CEO and founder of blockchain ecosystem company Optherium. “And even without the technical obstacles, the volatility of crypto values still creates a disincentive for entrepreneurs to hold digital currencies.”

Cryptocurrency volatility

Digital currency’s highest risk is price volatility, which makes its value extremely unpredictable. For example, Bitcoin was first valued in pennies in 2009 but rose to more than $65,000 per coin in February 2021.

“You will have to make some form of arrangement for translating your cryptocurrency back into your currency of record,” said Areiel Wolanow, managing director of consulting firm Finserv Experts. “Cryptocurrencies are volatile, [so] you will want to do this quickly and regularly.”

Using a merchant service company such as BitPay or Coinbase helps insulate small businesses against that volatility by immediately exchanging digital currency for its cash value. Through these services, cryptocurrency payments are made in real time for the currency’s current value. [Read related article: Are Digital Payments Really Killing Cash?

The only reason for a business to hold on to cryptocurrency would be as a speculative investment, said Wolanow, but this essentially amounts to gambling with your revenue stream.

Cryptocurrency security

Although cryptocurrency transactions eliminate cyber threats like stolen credit card numbers, the currency still isn’t 100% safe from cybersecurity threats. So far, there is no way to completely prevent cybercriminals from getting their hands on users’ wallets. This is particularly dangerous because, unlike fiat currencies like the U.S. dollar and the euro, cryptocurrencies are not backed or insured.

However, some cryptocurrency companies are working to change that. Coinbase, for example, holds less than 2% of customers’ digital currency online; in the event of a breach, the company fully insures losses. All fiat currency maintained on Coinbase is subject to FDIC insurance, up to $250,000, just like with conventional banks.

However, these protections don’t apply if your personal wallet is hacked; it’s still your responsibility to secure your personal account, but you can rest easy knowing that if the company suffers an attack, your funds are safe.

Companies are also working on solutions to address wallet security. According to Beck, Optherium employs a biometric verification method that identifies a user based on their facial structure to grant wallet access, significantly reducing a thief’s ability to steal someone’s assets. This method also helps users reconstitute their wallets when access is lost.

TipTip: If you’re going to accept crypto, take safety measures to process transactions and store digital payments securely. To better protect your accounts, you can enable multifactor authentication, secure and maintain your private keys, and even take your crypto offline by putting it in cold storage.

Regulatory uncertainty

Another issue with accepting cryptocurrency is that the regulatory landscape will likely change in the near future. Lawmakers are currently crafting regulations to govern it. Once regulations are in place, they will likely evolve further, meaning business owners will have to adapt.

“Because cryptocurrencies are relatively new, there’s much uncertainty around how the government will work out kinks in its regulation,” Poelma said. “Indeed, new regulations could be passed by the time you read this. [Cryptocurrency] won’t be universally accepted until businesses are certain they know how to report gains and pay proper taxes on cryptocurrency transactions.”

Changes in cryptocurrency regulation will likely continue as cryptocurrency’s adoption expands and new problems and difficulties arise.

Key TakeawayKey takeaway: Any entrepreneur who chooses to accept cryptocurrency should be prepared to adapt to periodic changes in the law. You should keep an eye on the ever-changing local and state business regulations in general, particularly laws about doing business online and data privacy regulations if you accept digital payments.

How to accept cryptocurrency

If you decide to move forward and start accepting cryptocurrency, there are a few steps you’ll need to take. Overall, the process is similar to getting set up with a credit card processing company.

To start, you’ll need to decide whether you want to use a processor to accept payments or you want to accept them manually. Using a processor will simplify the process; you’ll need to register with a company like BitPay or PayPal to start accepting payments.

TipTip: If you need help choosing a payment processor, check out our reviews of the best credit card processing companies.

Alternatively, you can accept cryptocurrency payments to your small business manually, but the process is a bit more complicated. First, you’ll need to create an account on a crypto exchange (such as Coinbase) so that customers have somewhere to send your payment. Then, you can add functionality to your website (like a QR code) so that customers can send crypto to your exchange account.

Finally, you’ll need to take steps to withdraw your crypto from your exchange account, either by moving it to a digital wallet or exchanging it for dollars and transferring the funds to your business bank account.

Dock Treece contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.