Digital currencies are no longer the stuff of science fiction. While not yet common for consumer level transactions, using a cryptocurrency like Bitcoin for B2B (business-to-business) transactions is on the rise and becoming increasingly attractive, even for small- and medium-sized businesses (SMBs). Whether you’re a small restaurant in West Virginia (WV) or a wholesale or retail producer, distributor, or seller of goods elsewhere in the country, B2B Bitcoin transactions offer safeguards that might surprise you.
Understanding B2B Bitcoin Transactions and How Cryptocurrency Works
The means of conducting B2B transactions have evolved as technology evolves. Deals that once required waiting on “snail mail” later took advantage of the speed offered by fax and then email, with payment still made by negotiable check written from a bank account.
Today, online business transactions are routine. Wire transfers now seem antiquated next to mobile and online payment services like Venmo and PayPal. These new technologies help businesses and individuals move increasingly to cashless transactions and, in some ways, provide greater security than “old school” payment methods. B2B Bitcoin transactions are on the rise. Are you ready to catch the wave?
What Are Cryptocurrencies and How Do They Work?
A cryptocurrency is a form of virtual currency that is tracked and validated using computer code. Most cryptocurrencies use blockchain, a type of database that stores a record of every transaction it records. Sometimes referred to as a digital ledger, each transaction adds data to the blockchain, creating for each bitcoin or other blockchain cryptocurrency unit a completely unique digital signature called a hash.
As an additional security feature, every blockchain transaction is recorded on all computer systems participating in the blockchain network. If someone attempted to alter the hash in one blockchain, it would no longer match the hash’s records on computers in the rest of the network. In combination, the decentralized data storage system and unique and ever-growing digital signature for every unit transacted make Bitcoin and other blockchain cryptocurrencies incredibly secure.
What Is Bitcoin?
Bitcoin is one example of a cryptocurrency that uses blockchain technology for transactions and recordkeeping. Billing itself as a payment network and a “new kind of money,” Bitcoin operates outside of normal banking and finance structures, and it is not based on or authorized by any state or nation. Instead, it is an independent virtual medium of exchange.
Where do bitcoins come from? Individuals who help process Bitcoin transactions and secure the currency’s blockchain network are compensated with bitcoins for their services. The process is called mining. In turn, Bitcoin miners use the currency for their own transactions.
Bitcoin mining takes place on a set schedule and contemplates exactly 21 million to be mined. According to the current schedule, the last bitcoin will be mined around 2140.
Where Do Bitcoins Get Their Value?
Historically, money was created using precious metals that had intrinsic value. When countries left the gold standard, they turned to using fiat currencies, which have no intrinsic value in their materials. The money made from paper and inexpensive metals for issue by national governments have value based on demand for the currency and faith that the issuing government will back that value.
Bitcoin, like the paper and coin money the US Federal Reserve authorizes to be printed each year, is also a fiat currency. Its value is determined in part by market price—how much someone is willing to buy or sell it for.
Bitcoin launched in 2009. While its price as reflected in open trading has fluctuated, it has enjoyed an overall increase in value through the years. A single bitcoin valued at $1 in 2011 rose to $32 by June the same year. The value held relatively steady until 2017, when it jumped to more than $19,000. The next few years saw much more volatility, and the price rose to $40,000—for a single bitcoin—in January 2021. However, transactions can and regularly do involve only partial bitcoins.
How Bitcoin Transactions Work
There are no physical bitcoins, so their transactions do not involve the transfer of physical currency or wiring of funds from one financial institution to another. Instead, parties conducting Bitcoin transactions use an online payment service or a digital wallet.
Businesses engaging in B2B Bitcoin transactions use a Bitcoin payment service, sometimes called a Bitcoin merchant service, to process payments. Payment services work a bit like credit card transactions, acting as the intermediary between the payor and the payee. And, just like credit card transactions, payment may be made at the post of sale (POS), via emailed invoices, or through a plugin on your website.
Cryptocurrency payment services usually charge either a monthly fee or a percentage of the transaction value, but these fees are often less than those charged by credit card companies or PayPal. Payment services may also convert your bitcoins to dollars.
Alternatively, Bitcoin wallets are available for individuals or small businesses that want to try digital currency transactions before setting up an account through a payment service. A digital wallet is merely a program that stores your bitcoins. Every wallet has an address (a public key) and an access code (a private key). The public key is expressed as a string of characters, or it could be in the form of a QR code the payor scans. To receive a payment, payors only need your wallet’s address or QR code, which you can send via email or text. To make a payment, you need your wallet’s public key and a private key, which grants you access to the balance.
Bitcoin wallets can be hot (connected to the Internet) or cold (a storage device such as a thumb drive that is not connected to the Internet). A Bitcoin wallet must be hot for making transactions, but you can move bitcoins to a cold wallet for storage purposes.
There is generally no fee to receive a Bitcoin payment in a wallet, but many wallets charge for making payments from the wallet. Further, digital wallets are not without risk. The address is unrecoverable—if you lose it, you have no way to access your Bitcoin balance.
Practical Considerations for SMB B2B Bitcoin Transactions
Deciding to accept bitcoins or another cryptocurrency for payment requires business owners to consider several practical implications. Whether your business would benefit from adding or switching to this payment option would depend on your answers to questions like those below.
Hardware and Software Changes Required for B2B Bitcoin Transactions
In its most basic form, accepting or making Bitcoin payments likely requires only equipment and services your business already uses. Most businesses have Internet-connected computers and mobile phones, which are all you really need to use Bitcoin for B2B transactions. However, if you wanted to allow retail customers to pay using the cryptocurrency, you might also need to update your POS hardware in your place of business or, for online sales, add a plugin to your ecommerce platform.
Tools for Accepting Cryptocurrency for Your Business
Cryptocurrency payment services and digital wallets serve similar purposes. Which you choose depends on your current commerce procedures and equipment as well as on how you anticipate those to change in the future. Businesses that thrive by making few sales of significant value each have much different needs than a business that makes or accepts a large number of payments.
Tax Consequences of Incorporating B2B Bitcoin into Your Business
As noted above, the value of your bitcoins fluctuates with the market. The Internal Revenue Service (IRS) treats changes in value of virtual currency as it would other investments: increases in value realized when bitcoins are converted to fiat currency (US dollars) are taxed at the capital gains rate, and capital losses can be used to offset capital gains or ordinary income.
Dealing with the Volatility of the Bitcoin Market
The value of bitcoins is susceptible to daily market fluctuations to a greater extent than fiat currency like the US dollar. As a result, holding on to bitcoins instead of converting them to dollars or another fiat currency can expose you to the risk of a drop in value. To lock in the value at the time of a transaction, investigate whether payment processors or digital wallet accounts will automatically convert bitcoins to dollars at a scheduled time or immediately after a transaction.
Advertising and Acclimating Other Businesses to Your Bitcoin Processes
You won’t have to worry about accepting digital payments if no one knows about the option. Businesses that wish to start accepting bitcoins need to advertise and, in some cases, may need to explain how their Bitcoin transactions will work.
Pros and Cons of B2B Bitcoin Transactions
As with any change, a business must consider the pros and cons before moving to accepting B2B Bitcoin transactions. Some of the positive aspects of using digital currency can be quite compelling:
- Bitcoin transactions are almost instantaneous, with less delay time than often experienced in credit card transactions.
- Bitcoin payments are permanent—no chargebacks allowed. Once completed, a payor must iron out any dispute about the services or products purchased with the payee instead of reversing or stopping payment.
- Bitcoin payment processors have much lower fees than typical credit card companies charge.
- Bitcoins are an investment.
However, B2B Bitcoin transactions also involve certain risks:
- Bitcoin value is based on the market, which fluctuates. Payment in bitcoins today may be worth more—or less—tomorrow.
- Bitcoin balances are not insured like banks are by the Federal Deposit Insurance Corporation (FDIC).
- Those with whom you transact business may not be familiar with B2B Bitcoin transaction processes and might need training on implementation and execution.
- Additional equipment or software may be required to send or receive Bitcoin payments.
- Payments from a digital wallet often incur fees.
- Converting bitcoins to fiat currency requires extra steps, such as selling bitcoins on the market or using a Bitcoin exchange service. Businesses should ask the payment services they are investigating about exchange options, if any.
Need to Know More about B2B Bitcoin Options for Your SMB?
Businesses around the world are exploring the opportunities and benefits of using virtual currencies like Bitcoin for B2B transactions and even retail sales. From major corporations like Microsoft and national movie theater chains to local shops, restaurants, and food trucks, Bitcoin transactions offers savings over fees for credit card charges.
Xavier W. Staggs is a WV business attorney at Jenkins Fenstermaker, PLLC as well as a local business owner. His experience as a restauranteur and business owner gives him valuable insight into hospitality matters and issues business owners face every day. For a consultation to learn about legal considerations regarding B2B Bitcoin transactions or get sound and experienced legal guidance in hospitality or business matters, call (304) 523-2100 or complete this online contact form to schedule a consultation.