This Wednesday, April 2, 2014, the U.S. House of Representatives’ Committee on Small Business held a hearing entitled “Bitcoin: Examining the Benefits and Risks for Small Business.” On Monday, two days before these lawmakers and their distinguished panel of experts convened in Washington, D.C., we explored the same topic here at Romano Law.
As in our review, “Should your small business accept Bitcoin?,” Wednesday’s gathering on Capitol Hill examined both the upside and the downside of Bitcoin for small business owners. How did the Romano Law survey compare? We let the Bitcoins fall where they may.
Chairman Sam Graves explained the purpose of this week’s meeting:
We have invited a distinguished panel of experts who will explain what Bitcoin is, how it operates, why it might be a good fit for small businesses and what are the risks associated with Bitcoin. We hope that by providing information about Bitcoin, small businesses will be in a better position to know whether adopting Bitcoin as a payment system might be a way for small businesses to gain more customers.
The director of a Bitcoin exchange and several academic scholars provided a variety of opinions on the topic.
- Jerry Brito, Senior Research Fellow, Mercatus Center, George Mason University
In his testimony, Jerry Brito explores the decentralized nature of Bitcoin. He considers some of the benefits of Bitcoin for small business owners, including lower fees, transactions that are final and an expansion of companies’ international market reach. He also surveys risks associated with Bitcoin, including its volatility and insecurity. To Brito, the real challenge for lawmakers is addressing Bitcoin’s risks “without stifling innovation.”
- Adam White, Director, Coinbase
Adam White’s statement emphasizes the cryptocurrency’s positive traits, including lower fees, irreversible payments, reductions in fraud and the monetization of new markets. Following the crash of Mt. Gox, White’s company Coinbase has vowed to provide higher-quality services to Bitcoin consumers and merchants through additional transparency, security and accountability.
- Mark T. Williams, Executive-in-Residence / Master Lecturer, Boston University
Mark Williams documents his experience with Bitcoin, from a classroom experiment in 2011 when the value of a Bitcoin was $0.32, to the market high of $1,200. His testimony focuses on “the significant and currently unaddressed risks associated with Bitcoin,” outlining what he sees as the top 10 risks associated with Bitcoin use for small businesses in America.
- L. Michael Couvillion, Ph.D., Associate Professor of Economics, Plymouth State University
Providing an economic take on the Bitcoin market, Michael Couvillion balances the cryptocurrency’s reduction of transaction costs and secure cash flow payments against its price volatility and “the steep learning and implementation curves inherent in this new and unfamiliar technology.” Couvillion also examines a variety of nonfinancial advantages and disadvantages associated with Bitcoin.
How’d we do? What did they say?
The experts who testified on Wednesday before the Committee on Small Business highlighted several of the same benefits as we did regarding Bitcoin for small businesses:
- Fee reduction: All parties involved acknowledged the obvious reduction in transaction fees accompanying the use of Bitcoin. Brito notes, “If you are a small-margin business, that difference could mean doubling your profits.” As we mentioned on Monday, others noted how Bitcoin effectively eliminates fees associated with international currency conversion. White makes the observation that “a bitcoin payment made by customer in New York looks identical to a merchant as a bitcoin payment made by a customer in London, Buenos Aires, or Tokyo.”
- Finality: This Monday, we pointed to the finality that Bitcoin transactions can bring to small businesses. Brito explores the one-way nature of Bitcoin transfers as well, noting that
because there is no central intermediary, there is no third party that can reverse a transaction. This protects small businesses from chargeback fraud, which often results not just in the loss of the sale, but also in penalty fees. Such “friendly fraud” accounts for 41 percent of all claims, and if a merchant has one percent of their charges reversed as chargebacks, they can be kicked out of the credit card networks, potentially ending their business.
- New kid on the block: We pointed out how small businesses have benefitted from the novelty of Bitcoin. Couvillion made a similar observation: “At least for now, Bitcoin is considered trendy by younger consumers. This factor helps to differentiate a new small business from its competition.”
The professionals who attended this week’s congressional hearing also picked up on many of the same downsides of Bitcoin as we observed on Monday:
- Volatility: Monday’s piece notes the fickle and unpredictable nature of the Bitcoin exchange rate. At Wednesday’s hearing, Williams agreed: “One month or even one week in the Bitcoin world can be equivalent to a decade in other market.” Although he acknowledges the exponential increase in value from 2011 to 2013, Williams recognizes that “prices have not been a one-way space rocket to the moon.”
- Security: Williams cites the “virtual-bank heist” of Mt. Gox and assault on Silk Road as examples of current vulnerabilities in the cryptocurrency. In addition, he considers the risk of theft accompanying Bitcoin e-wallets: “If an e-wallet is hacked and coins stolen or transferred by mistake, they are lost forever. If a computer is infected with a virus, it could wipe out the hard drive and the stored value of all e-coins.” Brito also observes the absence of an intermediary that could replace your Bitcoins if they are stolen.
- Tax implications: On Monday, we highlighted the IRS’s recent classification of Bitcoin as property as opposed to currency, which has significant capital gains tax implications for Bitcoin users. As Couvillion notes, and we have speculated, “State taxation is not likely but is possible in some jurisdictions.”
- Dangers associated with illicit nature: Williams describes Bitcoin as “the designer currency of choice for the criminally-inclined.” We identified the traceable nature of Bitcoin and warned of the possibility of governments stepping in and seizing “dirty” Bitcoins down the road, even though the current holder might not be affiliated with any illicit activity. As Brito observes, “transaction records will always be public and accessible at any time by law enforcement.”
Bitcoin is sparking debate across the United States. On Monday night, here in New York City, Brooklyn Law School’s International Law Society, Brooklyn Business Law Society and Brooklyn Law Entrepreneurs Club co-hosted the panel discussion “Bitcoin: The Future of Global Currency.” The event featured Jack Wiener, adjunct law professor and CEO of Financial Services Consulting; professor of law Steven Dean; and Domenic Romano of Romano Law PLLC.
The panel noted both the opportunities and challenges that Bitcoin presents for small business owners. The change of pace for this new digital currency is astonishing. While previously known by only the most technically proficient, Bitcoin has come into the full media spotlight and public consciousness. Bitcoin has also officially secured its place with federal lawmakers in Washington.
Will clarifying laws and more regulations follow?
Senior Law Clerk