Will Lack of Regulation Kill Cryptocurrency Use for Supplier Payments?

I received a lot of commentary from last week’s piece on paying suppliers using cryptocurrency. Many commented about the lack of regulation, implying that money transferred could be to support criminal activity. We know cryptocurrencies provide businesses with the ability to move assets outside of the normal banking regulatory framework. No one knows how many “dirty” transactions there are due to the anonymous nature of the transaction.

Once the necessary oversight is in place that could be a game changer. The concern is who regulates?

The challenge with regulation is who has the oversight?

The Department of Treasury does when you are dealing with money, the IRS for tax, the Commodities Futures Trading Commission when you are dealing with commodity derivatives, of course the SEC when dealing with securities, state regulators for money transfer and global regulators as well. The lesson to take is cryptocurrencies are not regulated as a technology, it depends on the application and use.  Today, investors can trade bitcoin on the Chicago Board of Exchange, which would be under CFTC rules.

What do Treasurers need to know

First of all, trading in cryptocurrencies ain’t free – take Coinbase’s current fee structure charged to buy Bitcoin:

Payment Method for Purchase Effective Rate of Conversion Fee (after waiver)
U.S. Bank Account 1.49%, with a $0.15 minimum
Coinbase USD Wallet 1.49%
Credit/Debit Card 3.99%

The transaction fee is received by the bitcoin miner. The transaction fee is therefore an incentive on the part of the bitcoin transactor to make sure that a particular transaction will get included into a block.

Second, it’s not instantaneous - on average, it takes about 10 minutes to find each block. The average block time can actually be slightly shorter or longer depending on if the total hash power of the Bitcoin network is growing or shrinking. Ignoring this detail though, this is why 6 confirmations take about 1 hour on average.

Towards the end of 2016, Ethereum had an estimated speed limit of around 20 transactions per second. As a point of comparison,  PayPal can do 193 transactions per second average and Visa can do 1,667 transaction per second.  Conclusion, cryptocurrency is both not as fast as card rails nor can it manage the volume.

Third, it depends on third party exchanges that are not backed by the Federal Reserve or Central Bank and are prone to hacking and attacks for one.

Can I transfer bitcoins to my bank account?

Bitcoins can not be withdrawn into a bank account directly. You can either sell them to somebody who then transfers money to your bank account, or you can sell them at an exchange and withdraw the funds from there.

What about Security?

From an ownership perspective, cryptocurrency passes security  responsibilities to the holder.

There are four levels of security, what is defined as Level 0,1,2,3, each with a trade-off of convenience for security. The lowest level or Level 0 is to leave bitcoin on an exchange.  This creates risks of hacking into your passwords and also if the exchange has problems (security, liquidity, fraud, etc.) you can go down with it – see Mt Gox.

Level 1 security is to store your bitcoin offline, acting as personal “bitcoin banks” and sheltered from the threat of hackers, but this has its own risks, as many companies and individuals are hit with ransomware and other attacks. Level 2 involves hardware wallets. A hardware wallet is a physical device with a specialized chip designed to house bitcoin keys in a secure manner. Level 3 security involves Coinbase encrypted on a FIPS 140 compliant USB drive stored in a safety deposit box with backup USBs stored elsewhere

Any corporates interested in speaking further about the above, please contact me.

You can reach me at dgustin@globalbanking.com

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Sources: Coinbase, ETHNews, @Bespokecyrpto

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