Coin Notes

The promise of bitcoin as a medium for daily transaction may take time. Meanwhile, the cryptocurrency has found use as the preferred means for wire transfers at small businesses.

“At this point, there’s a strong business case for cryptocurrencies to displace wire transfers because they are outdated and take way too long,” says Jared Silver, president of Stephen Silver, a jewelry store located in Silicon Valley. Silver, who had been monitoring cryptocurrencies since 2009, began accepting cryptocurrencies at his store last year. Silver says credit cards are an “expensive substitute” for cryptocurrencies because they incur charges of 3 to 3.5 percent per transaction and take time. “It (cryptocurrency transfer) ends up shaving 48 hours of cash flow time as compared to an international wire transfer,” he says.

According to him, sales made using cryptocurrencies have outpaced credit card transactions and account for 20% of total dollar amount processed at his store. (Though it is important to remember here that the dollar amount for a single transaction at a jewelry store is significantly larger in amount as compared to that an average store).

Sonny Singh, chief commercial officer at BitPay, a bitcoin payment service provider, said B2B transactions comprised 30% (or about $300 million) of the $1.3 billion worth of money transfers his company processed last year. This year, he expects that figure to go up to $4 billion. While BitPay has signed up large customers recently (Dish Network and Microsoft being the most notable), a bulk of their business in this category consists of B2B transactions with small- and mid-tier companies.

As Singh explains it, international money transfers for such companies are saddled with unnecessary charges and delays that make them expensive and time-consuming. For example, an average 2% processing fee is tacked onto each transaction. Added to that is the exchange rate risk for currencies and time spent (approximately 3-4 business days) in such transactions. With an average 1% fee charge and transaction times consisting of a single business day, bitcoin offers a more convenient transfer mechanism, says Singh.

There’s also the added attraction of investing in bitcoin, an asset that has provided phenomenal returns in the last couple of years. Retailers can choose to retain their bitcoin payments in the original form or convert them into fiat currency. Jared Silver says he retains 5% of all cryptocurrency transactions. “We believe in the long-term vision for cryptocurrencies and hold that as a form of investment,” he says.

The Challenges To Using Bitcoin For Retail Payment

But the cryptocurrency presents its own set of challenges for money transfers.

There’s the volatility risk. Price swings of 10% in a single day are not uncommon for bitcoin. BitPay says it eliminates the currency risk in a manner similar to the one adopted by most forex companies: through constant trading. It sells bitcoin purchased by customers back to cryptocurrency exchanges. The transaction may be performed near-instantly, eliminating the prospect of fluctuations in bitcoin price affecting its transaction value. Retailers who choose to hold onto or delay exchanging their cryptocurrencies may be affected by the volatility.

There is also the problem of transaction times. As bitcoin exploded into mainstream popularity last year, average confirmation times for transactions on its network multiplied, leading to significant delays in processing them. Depending on the customer’s risk profile, the company says that it can disburse funds instantly. In such cases, BitPay does not wait for confirmation times. “We make it (the transaction) so you don’t have to (wait for confirmation),” says Singh.

For some customers, such as Silver, delayed confirmation times are not a problem. For example, he says the 35 to 40 minutes delay in bitcoin transaction confirmation times last December was a “non-issue” for him because the store’s customers often pick up their products a day or more after paying. “Bitcoin was still significantly more convenient than me waiting three days (for wire transfers) and a pending status period for the transfer,” he explains. That said, he still has to wait for a day before payment is released to him using BitPay.

Cryptocurrencies also suffer from a perception problem. “People fear what they don’t understand,” says Silver. In popular imagination, cryptocurrencies are associated with illicit and illegal activity, such as smuggling drugs. Silver says bitcoin is construed as a “sneaky” form of payment. Criticism from regulatory agencies has made the case worse. “Compliance (in the jewelry industry) is extremely important because responsibility (for the sale) rests on us,” he says.

A Medium For Daily Transactions?

There’s a certain kind of business that is well-suited to process bitcoin transactions in their current form. Luxury retailers, which process high transaction amounts in single transactions, are a favorite. The nature of their transaction also makes it easy to overcome hurdles that have stymied bitcoin’s wider adoption. For example, the jewelry industry has its own KYC/AML regulations. “We made minor adjustments to our existing KYC/AML process to expand it to cover cryptocurrencies,” explains Silver.

But the road for bitcoin to become a medium for daily transactions used at stores is potholed with infrastructural bottlenecks.

As the significant delays in confirmation times last year made clear, blockchain networks for various cryptocurrencies are still unable to handle frequent transactions. Initiatives, such as Lightning Network, will help them scale. “Enabling speed of transactions is critical to using cryptocurrencies in a daily environment,” says Silver.

His enthusiasm for the use of crypto in business-related transactions apart, Singh discounts the possibility of bitcoin being used to buy a slice of pizza or a cup of coffee anytime soon. “That will take time and it really depends on the country,” he says.

The last bit is a reference to the makeup of a country’s financial services ecosystem. For example, the United States has high credit card penetration. Infrastructure, in the form of point of sales (PoS) systems, is widespread to enable use of credit cards. But such infrastructure is absent in the case of bitcoin.

Very few stores or large restaurant chains accept bitcoin. “We haven’t been targeting the restaurants and McDonalds of the world because of their PoS systems. It’s too hard,” explains Singh. In contrast, it is relatively easy for retailers with fewer or single stores, like Stephen Silver, to accept bitcoin. Stephen Silver Fine Jewelry processes bitcoin transactions using the BitPay app.

The entry of Square – a credit card processor for small and medium businesses – into processing bitcoin transactions has potential to change the market. “Square really has a chance to change the whole industry. Jack’s already said that he wants to do that,” says Singh.