What is cryptocurrency and blockchain technology?

Cryptocurrency regularly makes headlines, but could it be beneficial for your business?

Cryptocurrency has existed since 2009.

While it is nowhere near as popular as traditional currency, this digital money system has increased in popularity over recent years.

The Financial Conduct Authority reveals that approximately 2.3 million people in the UK owned cryptocurrency in 2021, up from 1.9 million in 2020.

The number of businesses accepting cryptocurrency as payment has increased, too.

Several large UK retailers allow cryptocurrency transactions, and smaller businesses are beginning to adopt it.

What are cryptocurrency and blockchain?

Cryptocurrency is a decentralised digital money system that operates as virtual tokens or coins.

Government or financial institutions do not control the currencies, meaning transactions can occur easily and instantly between two parties based anywhere in the world with no bank transfer delays or fees.

There are over 10,000 cryptocurrencies.

The most widely used is Bitcoin which was also the first cryptocurrency created, launching in 2009.

Cryptocurrency ownership and transactions are recorded and tracked using distributed ledger technology (DLT).

The most well-known example of DLT is blockchain.

The technology is a public digital network which anyone can join.

Transactions cannot be changed once they have taken place, which makes cryptocurrency a secure form of payment.

Cryptocurrency is purchased from crypto exchanges and stored in digital wallets, accessed using encrypted passwords.

Examples of wallets include Coinbase, Mycelium, Electrum, and Exodus.

What do cryptocurrency and blockchain mean for business?

Giving customers the option to pay with cryptocurrency can benefit a small business, including attracting new sales worldwide.

There can also be disadvantages, so it's important to be aware of the risks and consider whether this modern form of payment is appropriate for your business.

Benefits of accepting cryptocurrency

Speed and ease of payments

The decentralised nature of blockchain means there's no need for intermediaries such as a bank or payment processor.

As a result, crypto payments can take place quickly and easily at any time and from anywhere in the world.

Lower fees

Merchant and processing fees involved with cryptocurrency transactions may be lower than traditional payment methods such as credit cards.

This can help to reduce operating costs for a business, such as having to pay lower costs for taking payments compared to fees associated with processing credit card payments.

Reach more customers

Country borders do not restrict cryptocurrency, so you could attract customers worldwide who might otherwise not have bought your products or services.

A study commissioned by BitPay of purchases using Bitcoin found that 40% of the sales were from new customers.

You might also be able to reach a demographic your business hasn't tapped into before.

A report by Gemini (PDF-3.4MB) found that cryptocurrency investors in the UK are most likely to be 18-44 years old with an income below £100,000.

Secure payments

Cryptocurrency payments are secure and transparent due to how the transaction is recorded on a blockchain.

A public key identifies each transaction, which prevents it from being altered.

It also stops people from spending cryptocurrency that they do not own.

As a cryptocurrency transaction is final and cannot be reversed, businesses can avoid chargeback requests and having to make automatic refunds on the request of a customer or marketplace platform.

Disadvantages of accepting cryptocurrency

Complicated to understand

Cryptocurrency and blockchain is a complex topic that may be challenging for business owners to understand, compared to the simplicity of traditional payment methods such as credit cards.

With thousands of cryptocurrencies and with several different transaction rules, you'll need to research which is best for your business.

You might also have to provide training so employees within your business understand cryptocurrencies.

You may need to use specialist software to take and process crypto payments.

Tax implications

You may have to pay tax if your business exchanges goods or services for cryptocurrency.

HM Revenue & Customs' detailed crypto-assets manual explains the tax rules' complexity.

It can be a good idea to seek qualified advice from an accountant or another financial professional.

Currency volatility

The cryptocurrency market is volatile, so you may lose money if the value suddenly drops.

Incidents such as the collapse of cryptocurrency exchange FTX in November 2022 have also shaken confidence in the currency.

Such issues can cause problems for small businesses with tight margins and limited cash.

Dramatic falls in value can harm your company's assets, potentially exposing your business to insolvency.

Risk of criminal activity

The Financial Conduct Authority does not regulate the cryptocurrency market, so online criminals could put your business at risk.

A 2019 study by the University of Edinburgh and published in The Review of Financial Studies found that around $76 billion of illegal activities per year involve Bitcoin (46% of all Bitcoin transactions), which is close to the scale of the US and European markets for illegal drugs.