Cryptocurrencies: Yellow Light Or Full Speed Ahead?
Love or loathe the idea, cryptocurrency has moved far beyond what some thought was a scheme when it caused a blip on the radar in 2008, when Bitcoin.org was first registered as a domain name. Fast forward to just a couple of weeks ago, when on September 7, El Salvador officially became the first country in the world to adopt bitcoin as legal tender, clearing the way for its 6.5 million residents to pay taxes and other debt with the cryptocurrency and allowing businesses nationwide to accept it as payment.
An entire country’s use of bitcoin will be an interesting experiment to observe. In the meantime, the media industry is taking a serious look at the non-fungible tokens (NFTs) market, which involves auctioning content images on the blockchain. This has company CFOs and treasurers scrambling to evaluate whether cryptocurrencies should be part of their accounting. It’s all rather complicated, but one of Media Financial Management Association’s (MFM’s) board members, Cal Mostella, VP and treasurer of WarnerMedia, sheds invaluable light on the topic. His knowledge – and his recommendations – are included in his article, “The Cryptocurrency Revolution,” which appears in the September/October issue of MFM’s member publication, The Financial Manager (TFM), currently available on the MFM website.
Cryptocurrencies are controversial because unlike to so-called “fiat currencies,” like the U.S. dollar, they’re digital only, created as binary data that acts as a means of exchange. Individual coin ownership records are stored in a blockchain ledger that secures transaction records, authenticates the mining of new coins and verifies the transfer of coin ownership. Still, crypto is volatile by its very nature, and subject to fraud, which is also why governments, financial institutions, companies and individuals have widely varying opinions on whether cryptocurrencies should be allowed and used.
Regulations around cryptocurrencies are still being created, but the U.S. in 2019 required cryptocurrency exchanges to conform to two sets of regulations designed to keep cybercrime in check: AML (anti-money laundering) and KYC (know your customer). Each set of regulations carries its own list of onboarding requirements and procedures, such as using third parties to verify sources of crypto and compliance with regulations. There are 11,000+ types of crypto in the market with more being added all the time; they are used for different purposes, but all are ultimately vying for widespread adoption.
Mostella, who states that it’s currently difficult to predict which cryptocurrencies will survive long-term – and noting that “even Bitcoin isn’t a sure winner” – assures us that blockchain, the underlying technology on which cryptocurrencies are built and carried, isn’t going anywhere, and if anything, will emerge victorious. He goes on to describe three specific ways in which cryptocurrencies can be used, and offers tips on how media financial leaders may want to vet them.
The first use of cryptocurrencies is indirect POS (point of sale). The online payment platform PayPal is a good example of a platform that accepts crypto at point of sale and offers hosted checkout, payment buttons and other technology that integrates with cryptocurrencies. In the case of companies like BitPay, which provides Bitcoin and Bitcoin Cash payment processing services for merchants, customers receive invoices via a QR code and must use a wallet app to pay at a locked-in exchange rate. BitPay then converts that payment into the merchant’s local currency through its bank. Indirect POS is similar to credit card payments, yet carries lower processing fees. In addition, because this method settles accounts in local currencies, it provides a workaround to tax implications and complicated accounting required when accepting cryptocurrencies.
It’s important to conduct due diligence when choosing a third-party payment platform, examining their reputation among customers, their transparency and the quality of their recordkeeping. Indirect POS is also less than perfect, since most cannot accommodate commissions on secondary sales of digital assets, a requirement of many so-called “smart contracts,” which run when pre-specified conditions are met (see the article sidebar for information about smart contracts).
Direct acceptance, the second way to accept cryptocurrencies, differs from indirect POS primarily because it requires the use of a digital wallet. A digital wallet, also called an e-wallet, allows one party to make electronic transactions with another party by exchanging digital currency units for goods and services. “Cold” digital wallets use a piece of hardware, like a USB drive, to store the private information that allows crypto exchanges. “Hot wallets,” conversely, run on apps, programs or websites. They are more convenient, but also more easily hacked, a concern even though they only carry information about a currency’s location on the blockchain.
If a company decides on direct acceptance, it must determine which type of digital wallet to use. Most companies opt for hot wallets, which spread risk by allowing multiple employees to access them; a USB device can only be used by one person at a time. The question then becomes that of acceptable levels of security. Fortunately, new technologies continue to be refined, and assurances like multi-signature structures (“multisig”) are available. These allow the company to determine how many keys are needed to unlock the vault. There are even companies that provide key management services to ensure a company isn’t locked out if wallets are lost or passwords are input incorrectly.
The third type of cryptocurrency acceptance in use is a hybrid of both indirect POS and direct acceptance. This scenario seems likely for the media industry, which may want to use direct acceptance with smart contracts, for example, but indirect POS for other transactions. Finance teams responsible for making recommendations about which options to implement are going to be busy.
These issues all roll into the larger challenges companies face: if they plan to use a cryptocurrency, how will they manage it? Questions include whether the company should keep crypto on its balance sheet or automatically convert to fiat currencies, whether to use crypto both for accounts receivable and payable and how to track it. Each decision includes myriad accounting and tax implications. Further, because crypto is both intangible and volatile, each use may need to be treated as a barter rather than a cash transaction.
The cryptocurrency concept is one of the more fascinating topics I’ve come across during my tenure at MFM. I fully agree with Mostella’s conclusion that, as with all transformational technologies, cryptocurrencies carry both promise and risk, and that crypto is an incredibly complex undertaking. Smart financial leaders will take the time needed to determine the best course of action for their company, be it integrating crypto now, or holding off until the business world learns and reports more best practices for it.
MFM’s upcoming Media Outlook 2022 is scheduled to be held virtually on October 19 and 20, 2021. The agenda includes a session called “Reinventing Revenue,” which is likely to include discussion of NFT sales and cryptocurrencies. Media Outlook 2022 is free for all MFM members in good standing; the discounted never-member rate includes a one-year trial membership.
Mary M. Collins is the outgoing president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedIn, Facebook, Instagram and Twitter accounts until September 30, 2021. After that date, connect with her via LinkedIn.