Bitcoin was expected to take the world by storm, yet the revolution that was promised still seems unreachable. However, the technology behind it is sparking interest across a number of sectors, making way for a new form of sharing currency. SBT investigates how SMEs can benefit from Bitcoin, or its technology
Blockchain, the online public ledger technology that underpinns Bitcoin, has been the hot topic in business technology lately, because it has the potential to transform the way businesses manage and account for transactions – including VAT in the EU. Widespread revolution was on the horizon as of 2008, with Bitcoin changing the way we make transactions; changing the way that businesses charge their customers and deal with international trade. Although use of the digital currency has far-reaching benefits for both the everyday consumer, local and international business, we just don’t seem to have taken to it. Why?
Let’s start at the basics. Bitcoin uses peer-to-peer technology to operate with no central authority or banks. It’s open-source, public and a completely digital form of currency – it’s pretty much cash for the internet, termed ‘cryptocurrency’. It was first conceptualised in late 2008 when its creator claimed that it was a system of “purely peer-to-peer electronic cash”, which could be controlled outright by the holder, and sent to anybody without needing a bank’s permission or running the risk of confiscation. It saw significant promise in its own community and growing in popularity in the business sphere too, but still hasn’t reached anywhere near the level we would expect from a currency that could potentially become mainstream, as some have suggested it would.
Bitcoin itself may not have taken off, but that’s not to say that the technology behind it didn’t spark interest. Many large businesses took the online public ledgar technology used by Bitcoin under their wing due to its advantages over a centralised system. This technology is termed ‘blockchain’. Kid Misso, Senior Director of Solutions, Avalara explains: “A blockchain system records each and every transaction cryptographically; each change to the transaction creates another block in a connected and traceable chain, making the transaction nearly impossible to falsify or destroy. Blockchain is an interesting new area in business technology and could have implications for all sorts of industries, from real estate and financial securities, to transfer funds and accounting. This is because of its potential to transform the way businesses manage and account for transactions. ”
He adds: “Blockchain could have significant implications for helping reduce VAT fraud and enable stronger oversight for business owners and tax authorities, particularly as cross-border e-commerce continues to grow. It also has the potential to provide more sophisticated transparency, security and immediacy as countries, like the UK, implement digital tax reporting initiatives.”
There’s no wonder that business is seeing the potential of the technology that Bitcoin brings, with benefits of the cryptocurrency including: freedom, due to no borders and no bureaucracy; the choice of your own fees, which are unrelated to the amount you transfer, plus there are no fees to receiving Bitcoins; and the ability to convert Bitcoins to flat currency and deposit funds directly into merchants’ bank accounts daily.
There are also fewer risks for merchants. Bitcoin is secure, irreversible and doesn’t contain customer sensitive information. This protects merchants against fraud losses. It’s impossible for merchants to force unwanted charges, as can happen with other payment methods and it offers strong protection against identity theft.
Omar Mohamed, Operations and Financial Marker Analyst at Imperial FX gives an overview: “There are many reasons why SMEs will want to use Bitcoin in their transactions. Firstly, cryptocurrencies remove the costs associated with storing physical money, authorise credit and transferring funds between different institutions and countries.
“Secondly, the middle man is removed and bank fees can be avoided, improving electronic liquidity and improving payment times. A standard transaction can take around 10 minutes to reach the merchant’s account.
“Another plus point, is that the transaction is often final – however, this could also disgruntle customers who use the currency and are then unhappy with their purchase. Therefore, it is advisable that it is used for small transactions only.
“Thirdly, when using Bitcoin a single-use token is generated, which then links to an account number stored in the cloud. This single-use token is much safer than traditional forms of currency as no reusable information is included in the transaction data.”
Omar concludes: “As a currency, Bitcoin has the potential to greatly improve business processes for SMEs – removing costly bank fees and improving transaction safety, payment clearing time and transparency.”
In essence, by making transactions digitally using blockchain technology it could help businesses, in particular with international payments, with more secure procedures and with real time tracking. However, there are also disadvantages. For example, on a basic level, many people are still unaware of Bitcoin, and due to never having had a start-up currency before, it’s very difficult to predict whether the value currently held by Bitcoin will increase or decrease, especially whilst the software is still being developed. People are scared of what they don’t know, so it will take a ‘big bang’ for the masses to accept this change.
Although the private sector is recognising the downfalls of the centralised system we currently have in place, and beginning to understand, along with the government, that customers’ expectations are for more real time, personal and digital services to be implemented, the technology still has a long way to go. But with all this potential, will it ever become mainstream? Well, perhaps the slow uptake was an advantage with the history of the cryptocurrency a turbulent one to say the least. Since 2009, Bitcoin has crashed twice and plunged over 5 times, with the most recent crashes leading to it being deemed a ‘failure’. On 5th January, Chinese Officials even considered restrictions on Bitcoin transactions after hackers stole 18,866 Bitcoins from Bitsmap.
Kid Misso contemplates its potential: “Bitcoin was the first step for digital currency but due to businesses slow on the uptake it’s unlikely to become mainstream. What’s exciting is the potential for blockchain, the technology underpinning it. It is likely to take some time for businesses to adopt but from our conversations with our clients and international ecommerce continues to increase, systems and technology that automates and transforms existing ways of doing business is the future.”
Kid added: “It is early days for cryptocurrency and blockchain technology and despite the many potential benefits there is still a vulnerability if electronic credentials are stolen, but it’s a much smaller problem than the paper signature system we use today.”
The UK’s Chief Scientific Adviser, Sir Mark Walport, has argued that the government should be using this blockchain technology to help with things like tax collection, benefits, or the issuing of passports. Equally, Walport’s government report, ‘Distributed Ledger Technology: Beyond Blockchain’ describes how this technology could and should be used across a number of sectors in the UK, including healthcare, electronics, even the world of art.
Financial services of course are the most prevalent beneficiary of blockchain technology. As Kid points out, it would be a good replacement for the system used now in the financial sector due to solving the issue of the costs of using paper – one of the biggest issues facing the sector. In recent years, there have been many different initiatives intended to remove paper documents from the economy. However, in many cases the new technology has simply recreated old processes in a new way, or continued to rely on paper in other stages of the process.
Of course Bitcoin simply combines existing techniques in an innovative way, and is only just welcomed at a time when the idea of open source development on the internet is more or less fully mature. People are now receptive to the idea of alternative monetary systems, and are fully immersed in the world’s “sharing economy”. Even so, at this point there is only a small minority of people using Bitcoin and the blockchain technology that underpins it. However, as this report by Sir Walport suggests, the private sector is taking the technology under its wing, slowly but surely beginning to understand, along with the government, that customers’ expectations are for more real time, personal and digital services to be implemented. So maybe we won’t have a world run by cryptocurrency any time soon, but transactional technology is certainly on its way into the future.