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The Pros and Cons of Digital Currencies

As recent media and government attention has stoked the debate surrounding the use of digital currencies in business, it has become evident that there are still many unanswered questions and discussions to be had around the risks and opportunities of digital currencies. First and foremost, it is important to understand that digital currencies, or cryptocurrencies, are currencies used as a means of exchange without the backing of a third party, such as digital currency on a gaming site. This distinction is critical when making parallels to the conventional banking system.

While the benefits of using digital currencies, namely lower transaction costs and the ability to make payments at any time, may be appealing, the risks around security, payment beneficiary identification and currency volatility (e.g., Bitcoins) have raised concerns in the marketplace among consumers and businesses. Despite the significant unknowns surrounding digital currencies, some large corporates are beginning to open the doors for acceptance. The recent steps taken by large and prominent corporates in key sectors, including online retailing and food and beverage, demonstrate an appetite to continue expanding the use of digital currencies. Depending on the outcome of these early steps, digital currencies may emerge as a legitimate part of the mainstream payments landscape or recede into the background as novelty.

Despite the allure of lower transaction costs, corporates should carefully navigate and understand the risks associated with these alternative payment methods. First, corporates should understand that there is currently a limited user base and the regulatory framework and tax treatments of digital currencies are still being determined. Additionally, much of the infrastructure required to support the broader use of digital currencies is, likewise, still being developed. For instance, digital currencies are not accepted by banks and thus companies cannot earn interest on digital currency balances. Also, the value of digital currencies relative to major fiat currencies can be highly volatile and there are few alternatives (i.e., derivatives) available to hedge this risk. Along with others, these areas of uncertainty and risk will limit the acceptance of digital currencies into the payments mainstream.