What exactly is blockchain? What does cryptocurrency mean for my business?

Blockchain is like a block of strong boxes with glass fronts – the contents are visible but totally secure.

A blockchain, originally block chain, is a growing list of records, called blocks, which are linked using cryptography (a sophisticated form of encryption that exists at the intersection of mathematics, computer science, electrical engineering, communication science, and physics).

A blockchain is designed to be resistant to modification of the data. It is an open ‘distributed ledger’ that records transactions between two parties efficiently. It can be verified and is permanent.

As a distributed ledger, a blockchain is typically managed by a peer-to-peer network that adhere to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires consensus of the network majority.

Try this analogy
You want to give me an apple. In the real world you’d simply give me the physical asset and there is only one apple. Now what if it’s a digital apple. You transfer the apple over the internet into my fruit account. However, how do I know that you aren’t going to transfer that same apple to another person? In that case who has ownership of the apple?

This becomes a double spending issue.

One way around this is to hand the asset over to a neutral trusted third party. But a distributed ledger solves this issue in another way.

You now have multiple people who have a record of the apple’s ownership. These all need to matchup and agree on a transaction before completing a trade of the apple.

When all the records match up, a new record or block is added to the chain of historical transactions. This block is immutable and transparent. Everyone in the system can see the transactions, although not the identities of the two parties.

Cryptocurrency: can it benefit your business?

Blockchain technology was invented in 2008 to serve as the public distribution ledger of the cryptocurrency, bitcoin. This enabled bitcoin to be the first digital currency to solve the double spending problem without the need of a trusted third-party authority.

There are now over 1600 cryptocurrencies in existence with more created constantly, some with very specific transactional and investment goals, including the promotion of social causes.

So, should your business embrace this new digital frontier? Here’s some pros and cons.

  • Faster payment
    Cryptocurrency transactions happen almost immediately, unlike credit card payments that may take days to clear. As a result, you’ll have access to the coin payments in minutes. Sales are also final, which means that charges cannot be negated after the fact. All of this translates into more financial security for your business.
  • Reduced transaction fees
    Unlike with credit card transactions, where banks serve as intermediaries and charge a fee, cryptocurrencies are decentralised, which means that transactions have no third-party involvement. If you are selling online, you will likely be charged a small flat fee from your merchant wallet account or accounts (such as BitPay or CoinPayments), which allow you to accept certain cryptocurrencies.
  • Improved customer access
    As more consumers and businesses adopt cryptocurrency, offering coin payment options will increase your marketplace. As it’s an international currency, your business becomes more accessible for global clients. There are no exchange rates or fees across borders so it is a strong option for conducting global business.By simply accepting cryptocurrency payments, you may boost your bottom line as you attract new customers.
  • Lack of regulation
    Cryptocurrency is still relatively new, and as a result, governments around the world have issued limited, and differing regulations. This general lack of regulation can mean uncertainty about what kinds of taxes and investment limitations may be imposed in the future.
  • Value volatility
    Cryptocurrencies are volatile, which makes them attractive to investors seeking high reward through elevated risk, but also potentially dangerous for businesses that accept them as payment. Imagine if a customer pays you in Bitcoin, and then after the transaction the value crashes.The volatility issue is muted by the fact that merchant wallet accounts offer immediate conversion to fiat money. (Money declared by a government to be legal tender.) Unless a crash occurs within a few seconds between payment made and accepted, most companies are protected from volatility. So, choosing to automatically convert payments to fiat is a sound decision.
  • Taxation and accounting challenges
    If your business accepts or invests in cryptocurrency you will need to understand the changing regulatory environment. You’ll also need to factor in the tax and accounting tasks required. Your Markhams advisor will be able to help you in this respect.

If you’d like to discuss cryptocurrency in relation to your business, click here to contact a Moore Stephens Markhams advisor.

Prepared by Paul Rickerby, a Moore Stephens Markhams director. Paul enjoys helping businesses succeed and has experience in a wide range of industries, with particular expertise in the contracting and construction, transport, manufacturing and pharmacy sectors, as well as assisting clients with strategy, structuring, succession planning, valuation and general business advisory experience.