Limitations on Cryptocurrency for Entrepreneurs

By: Alana Goycochea

Cryptocurrency is a general name for all encrypted decentralized currencies. Some examples of cryptocurrencies are Bitcoin, Litecoin, Ripple, and Ethereum.  They are all based on the use of blockchain. Given that cryptocurrency relies on peer to peer technology, it is not centrally regulated.

what is blockchain?

Blockchain is similar to a public ledger of all transactions in the cryptocurrency network. The nodes are the computers that record entries into the ledger. Each cryptocurrency type has its own rules.

why do consumers want to use cryptocurrency?

Cryptocurrency is very appealing to consumers for a variety of reasons. Mostly, it has a huge appeal for consumers that are concerned about privacy. One of the main uses of Bitcoin was on the Silk Road marketplace. Silk Road was an online black market. Consumers were able to purchase illicit drugs or other items on Silk Road because of the privacy afforded to them through Bitcoin. Whereas other electronic payment systems reveal personal identifiable information, cryptocurrency’s use of blockchain allows for complete anonymity in purchases.

The use of cryptocurrency has grown tremendously beyond the darknet. Consumers have become more privacy-aware. Further, many consumers that travel want a currency that can be used globally.

why should entrepreneurs care about cryptocurrency?

Cryptocurrency is a very quickly developing technology. It allows consumers the ability to have more privacy with their transactions. As a result, many consumers have pushed companies to accept cryptocurrency as a form of payment.  Recent reports estimate that approximately 70,000 US retailers accept cryptocurrency. Many cryptocurrency forms have little or no fees for the person receiving the cryptocurrency. This is extremely beneficial for small business owners. Credit card fees are very expensive for most small businesses.

U.s. cryptocurrency regulations

Under US law, Bitcoin and other cryptocurrencies are not viewed as a currency and are instead regulated as commodities. However, in some respects, cryptocurrency is sometimes regulated as security. As an example, the SEC requires that any platform for currency exchange must be registered. Further, there are multiple tax regulations that consider cryptocurrency as a currency and not as a commodity.

what are some logistical problems with cryptocurrency?

1.Currency Fluctuation

One of the biggest concerns regarding cryptocurrency is that the value is very subject to fluctuation. Many reports have illustrated that the value of cryptocurrency has fluctuated significantly more than the value of traditional currencies. As a result, entrepreneurs need to be constantly monitoring the value of the currency. Cryptocurrency is very subject to fluctuation as a result of monetary policy, inflation rates, and mostly the threat of further regulation. An additional risk with cryptocurrency is the risk of currency manipulation.

The value of the currency can be manipulated by majority owners. The blockchain ledger is whatever is determined by the majority of the currency holders. In September of 2018, Ethereum’s value plummeted by 45% in one week as a result of manipulation by BitMEx, a competitor. By using social media and editing the blockchain ledger, BitMEx was able to convince many people to short Ethereum and thus manipulate the price. Incidents like this should be a major concern to entrepreneurs.

2. Cryptocurrency Security

Many of the cryptocurrency exchanges are regularly hacked. These incidents can impact any exchange but have taken the biggest toll on the smaller exchanges. Given that cryptocurrency is not viewed as a currency by the US regulatory scheme, these cryptocurrency “banks” are thus not FDIC insured. Hence, if your cryptocurrency is stolen by hackers, the exchanges are under no legal obligation to refund your stolen cryptocurrency.

3. Illegality Abroad

While cryptocurrency is legal in the United States, it is not legal in all countries. There are 11 countries where cryptocurrency is illegal. There are also multiple countries (including China) where the use of cryptocurrency is severely restricted. Entrepreneurs doing business with foreigners should research the legality of cryptocurrency in all applicable market places before deciding to accept cryptocurrency.

4. Technical Difficulties

In order to accept digital currency, business owners must set up a digital wallet. Given the wide area of different types of cryptocurrency, there are many possible wallet choices. Recent inventions of technology like Optherium B2C enables customers to pay in whichever cryptocurrency they choose, and businesses receive payment in only their preferred cryptocurrency. Without technology like this, it is very difficult for small businesses to navigate the high learning curve required when accepting cryptocurrency.

conclusion

While cryptocurrency offers substantial consumer benefits, such as privacy protection, it has a steep learning curve for small business owners. Thus, entrepreneurs should be fully informed before rushing into cryptocurrency.

This post was originally posted here on February 6, 2019, and has been reproduced with Alana’s permission.

 

 


Alana Goycochea, at the time of this post, is a rising third-year law student at Penn State’s Dickinson Law. She is from Southern California and is interested in entrepreneurship law. Alana is currently serving as President of the Women’s Law

Author: Prof Prince

Professor Samantha Prince is an Associate Professor of Lawyering Skills and Entrepreneurship at Penn State Dickinson Law. She has a Master of Laws in Taxation from Georgetown University Law Center, and was a partner in a regional law firm where she handled transactional matters that ranged from an initial public offering to regular representation of a publicly-traded company. Most of her clients were small to medium sized businesses and entrepreneurs, including start-ups. An expert in entrepreneurship law, she established the Penn State Dickinson Law entrepreneurship program, is an advisor for the Entrepreneurship Law Certificate that is available to students, and is the founder and moderator of the Inside Entrepreneurship Law blog.