Depending on who you believe, virtual currencies such as Bitcoin are either the future of commerce or a disaster waiting to happen. Either way, SMEs need to be aware of the potential pay-offs and pitfalls.

“Can I pay you in Bitcoin?” might not be a question you’ve been asked by a customer yet but, one day soon, you might be. Around the world, a small but growing number of businesses are accepting payment in virtual currencies like Bitcoin. In Australia, people have used virtual currencies (aka cryptocurrencies) to buy everything from coffee, to computer services, to property.

What is virtual currency?
Virtual currency such as Bitcoin does not physically exist like coins or notes. It is digital money that is issued by its developers (rather than a central bank of public authority). Virtual currency is accepted as payment by people and businesses within a virtual community. Like traditional money, virtual currency can be electronically transferred and stored. Virtual currencies can also be traded for legal tender, like Australian dollars and cents.

Why are businesses accepting virtual currencies?
Typically, virtual currency transactions have lower costs and faster speeds than traditional financial transactions like credit transfers or card payments. A standard Bitcoin transaction can be in a merchant’s account within 10 minutes irrespective of geographical distance between merchant and customer.

A 2015 Australian parliamentary inquiry suggested that average transaction fees on the Bitcoin network tend to be 1% of the transaction amount. This is compared with 2- 4% for online payment systems (such as PayPal) or an estimated 8-9% for remittance without involving bank accounts, via money transmitters. All of which could be good news for retailers, as it creates some healthy competition for the major players in the retail payments industry.

Virtual currency, harsh reality
A distinct disadvantage with virtual currency is that its value can fluctuate quickly. For example, Bitcoin exchange rates have soared and dived dramatically in recent years, making it hard for SME owners to know when to hold on to the virtual currency, or when to exchange it for hard currency. The volatility also means profits on goods and services supplied can be quickly decimated – you have to keep a close eye on Bitcoin prices.

Put simply, virtual currencies are risky. They’re also relatively new, and not guaranteed by any bank or government.

As the Australian Securities & Investments Commission puts it: “If you decide to trade or use virtual currencies you may be taking on a lot of risk with no recourse if things go wrong”.
A standard Bitcoin transaction can be in a merchant’s account within 10 minutes irrespective of geographical distance between merchant and customer.