How-to guide: Understanding the use of cryptocurrency for payments in business (USA)

Introduction

This guide will assist in understanding how cryptocurrency can be used in business as a form of payment. Cryptocurrency is relatively new, but the technology is complex and accepting customer payments in cryptocurrency presents both benefits and challenges that businesses will need to consider. It is aimed at in-house counsel, private practice lawyers, and compliance personnel.

The legal and business regimens surrounding cryptocurrency are undergoing rapid changes, especially considering further changes anticipated in the regulatory framework with the new US administration under President-elect Trump. The nature of digital currencies and the varieties of those currencies make it impossible to offer blanket prescriptions or a one-size-fits-all set of recommendations or best practices. Instead, this guide is intended to provide the reader with a high-level overview of the practicalities associated with the acceptance of cryptocurrency as a payment method.

This guide covers:

Why would a business consider using cryptocurrency?
Basis of cryptocurrency selection
Adding cryptocurrency as a payment method

This guide can be used in conjunction with the following How-to guides: How to assess your organization for money laundering and terrorist financing risk, Implementing a policy to avoid cryptocurrency-related scams in business, How to address tax and accounting considerations when using cryptocurrency; Checklists: Staff awareness and training to prevent money laundering and terrorist financing; Key steps to mitigate risks associated with using cryptocurrency; and Quick Views: Introduction to cryptocurrency and how it works, Cryptocurrency and US tax laws, Understanding data privacy compliance challenges in blockchain and cryptocurrency, and Cryptocurrency regulation and enforcement.

Section 1 – Why would a business consider using cryptocurrency?

Cryptocurrency as defined by the US Internal Revenue Service (IRS), is a type of ‘convertible virtual currency that can be used as payment for goods and services digitally traded between users and exchanged for or into real currencies or digital assets.’ Unlike traditional money, cryptocurrency is not issued by a central bank or governmental authority and does not require a financial institution to verify transactions. It can be used for purchases or as an investment.

Currently only El Salvador and the Central African Republic have adopted cryptocurrency as legal tender; however, this is a situation that could change rapidly. It is best to check regarding the current laws of any jurisdiction in which a company plans to do business. In many other countries, while cryptocurrency is not officially recognized, it can still be used as a medium of exchange for goods and services. In these regions, acceptance of cryptocurrency is voluntary and based on mutual agreement between the parties involved in the transaction.

A key question is why a business would choose to use cryptocurrency. Several factors need to be assessed, including the reasons for using cryptocurrency for payments and whether the business has the necessary know-how and resources to do so.

1.1. Facilitating payment

1.1.1 ‘Hands-off’ payments – reliance on third-party vendors

Utilizing third-party vendors for cryptocurrency payments allows businesses to adopt a ‘hands-off’ approach, where the technical and operational complexities of handling digital currencies are managed by third-party intermediaries. These vendors offer services that convert cryptocurrency into fiat currency, shielding businesses from the volatility of crypto markets. This approach also means that vendors handle transaction confirmations and regulatory compliance, making it easier for businesses to integrate cryptocurrency payments without needing extensive in-house expertise or having to record cryptocurrency transactions.

A third-party vendor acts as an agent for the business, facilitating payments by converting cryptocurrency into and out of fiat currency. These vendors handle most of the technical aspects of using cryptocurrency, including managing risk, compliance, and control issues on behalf of the company. Given this broad delegation of authority, businesses must carefully select a vendor, particularly regarding anti-money laundering (AML) and know your customer (KYC) requirements. The vendor must also comply with any restrictions set by the Office of Foreign Assets Control (OFAC), the agency that administers and enforces economic and trade sanctions set by the US government and assist with tax compliance.

For further information, see How-to guides: How to identify relevant sanctions regimes and deal with conflicting obligations; How to ensure sanctions screening and sanctions due diligence is effective; and How to identify suspicious activity and make a Suspicious Activity Report (SAR); and Checklists: Currency transaction reporting requirements; Screening employees for roles in AML compliance; and Staff awareness and training to prevent money laundering and terrorist financing.

1.1.2 Transaction costs

One significant advantage of using cryptocurrency for payments is the potential reduction in transaction costs. Traditional payment methods, such as credit card transactions, often come with high processing fees imposed by banks and payment processors. In contrast, cryptocurrency transactions can have lower fees, especially for cross-border payments, as they rely on decentralized networks. These networks typically charge a lower processing fee than traditional banks and credit card issuers. However, the actual cost can vary depending on the cryptocurrency used and network congestion at the time of the transaction.

1.1.3 Speed of transactions

Cryptocurrency transactions can be processed much faster than traditional banking transactions. While bank transfers, especially international ones, can take several days to clear, cryptocurrency transactions can be completed within minutes. This speed is due to the decentralized nature of blockchain technology, which processes transactions continuously without the need for centralized approval. However, the actual time can vary depending on the cryptocurrency network and current transaction volume.

1.1.4 Ease of use

Introducing cryptocurrency payments into a business can be straightforward, particularly with the help of third-party vendors who offer user-friendly interfaces and integration options. These platforms often provide plug-ins (ie, software that helps to manage products, process payments and handle shipping, etc) for popular e-commerce platforms, making it easy for businesses to start accepting cryptocurrency with minimal technical adjustments. Additionally, many vendors provide comprehensive support and resources to help businesses navigate the setup and operational processes.

1.1.5 Security

Cryptocurrency provides a high level of security for transactions due to the cryptographic principles underlying blockchain technology. Each transaction is verified and recorded on a public ledger, making it extremely difficult to alter or counterfeit. However, businesses must also implement robust security measures, such as secure wallets and two-factor authentication, to protect against potential threats such as hacking and phishing attacks. Additionally, businesses should carefully evaluate the security practices and record of a third-party vendor who facilitates payment.

1.1.6 Privacy and anonymity

Cryptocurrency transactions can offer a higher degree of privacy and anonymity compared to traditional payment methods. While the blockchain records all transactions, it does not require personal information, allowing users to maintain their privacy. This can be appealing to customers who prioritize anonymity. However, businesses must balance this with regulatory compliance, ensuring they adhere to AML and KYC requirements where necessary. This is particularly important when engaging a third-party supplier.

1.1.7 Cross-border payments

Cryptocurrency is inherently borderless, making it an excellent option for facilitating cross-border payments. Traditional international transactions can be slow and expensive due to the involvement of multiple banks and intermediaries. Cryptocurrency, on the other hand, can be transferred directly between parties anywhere in the world, often with lower fees and faster processing times. This can significantly benefit businesses with international clients or suppliers, streamlining payment processes and reducing costs.

When engaging in cross-border transactions, ensure that the person or business you are dealing with is in a country that allows the use of cryptocurrency, or the specific type of cryptocurrency being used. For example, China has banned the use of cryptocurrency, stating it is ‘disruptive to the economy and the financial market, provided a hotbed for gambling, illegal fundraising, fraud, pyramid schemes, money laundering, and other illegal and criminal activities, and posed significant dangers to the resident’s properties.’ In other countries, there may be regulatory restrictions on cryptocurrency use. The European Union has adopted regulations requiring service providers to obtain the name of senders and beneficiaries for all transfers, regardless of the amount. Any self-hosted wallets holding over €1,000 will need to undergo wallet ownership verification for transactions. The new regulations will be effective from January 2026. See European Commission: Questions and Answers – DAC8.

1.1.8 Broader customer base

The ease with which cryptocurrency facilitates long-distance and cross-border transactions will allow a company to broaden its customer base beyond the business’s local operations.

In the United States, younger consumers, especially men under the age of 50, are increasingly turning to cryptocurrency as a payment option. There is still consumer resistance, with a recent survey showing that 63% of respondents expressed concerns about the security of cryptocurrency.

1.2 Establishing policies for treasury operations

The term ‘treasury operations’ refers to the part of an organization responsible for obtaining, maintaining, and servicing the company or organization’s loans, lines of credit, hedging operations, and other capital-raising activities. In the context of cryptocurrency, treasury operations involve acquiring, storing, securing, and utilizing cryptocurrency in an effective, efficient manner. Accepting and processing payments is the first step in these operations.

Establishing clear policies for treasury operations is essential for managing cryptocurrency effectively. These policies should define the company’s approach to accepting, holding, and converting digital assets, as well as risk management strategies. Treasury policies should also outline procedures for compliance, security, and auditing. By having a well-defined policy framework, businesses can ensure consistent and strategic management of cryptocurrency holdings, aligning with overall financial goals and risk tolerance.

1.2.1 Third-party custodians and security

Using third-party custodians can simplify the management of cryptocurrency for businesses. These custodians provide secure storage solutions, including

cold storage (ie, managing cryptocurrency offline), encryption, and multi-factor authentication. Custodians generally have the regulatory and compliance expertise to manage and safeguard digital assets against theft and loss. Controlling private keys in the absence of a custodian carries great risk as the loss of the private key equates to loss of the cryptocurrency and managing the private key is complex. Partnering with reputable custodians who offer advanced security features and insurance coverage can provide additional layers of safety and peace of mind.

By outsourcing custody, businesses can delegate the risks associated with the complexity of managing private keys and focus on core operations, trusting that assets are protected by the industry experts.

1.2.2 Managing counterparty risk

Counterparty risk arises when it is probable that one party in a transaction may default on its obligations. In the context of cryptocurrency, this risk is relevant when dealing with exchanges, custodians, or other intermediaries. To mitigate counterparty risk, businesses should conduct due diligence on partners, ensuring they have a solid reputation and financial stability. Diversifying relationships across multiple trusted providers can also reduce risk exposure, providing a safety net if one counterparty encounters issues.

1.2.3 Integration with financial systems

Integrating cryptocurrency payments into existing financial systems requires careful planning and execution. Businesses need to ensure that accounting and enterprise resource planning systems (that help manage day-to-day operations) can accurately record and manage cryptocurrency transactions. This may involve working with software providers to develop custom solutions or utilizing middleware that bridges the gap between cryptocurrency systems and traditional financial infrastructure. Proper integration ensures accurate financial reporting and streamlined operations.

1.2.4 Access to fiat conversion

Access to reliable fiat conversion services is crucial for businesses that need to convert cryptocurrency into traditional currencies. This can be facilitated through exchanges or third-party vendors offering conversion services. Ensuring quick and cost-effective conversion helps maintain liquidity and manage volatility. See below at sections 2.6 and 2.7. To enhance financial operations, businesses should select partners who have a strong track record and favorable conversion rates. A third-party vendor processing payments can also assist with conversions to fiat currency or recommend a suitable service for this task.

Section 2 – Basis of cryptocurrency selection

2.1 Market capitalization and stability

Market capitalization, or market cap, reflects the total market value of a cryptocurrency. It is calculated by multiplying the current price of a cryptocurrency by its total supply. Cryptocurrency with higher market capitalizations, such as Bitcoin (BTC) and Ethereum (ETH), are generally more stable and widely trusted. High market cap, as shown by business news sources, often indicates strong investor confidence and widespread acceptance.

Stability is crucial as it minimizes the risk of significant value fluctuations that could impact revenue. For instance, while Bitcoin is known for its volatility, its market cap provides a level of trust and stability. On the other hand, stablecoins such as Tether (USDT) and USD Coin (USDC), which are pegged to fiat currencies, offer greater price stability, making them an attractive option for businesses looking to avoid volatility.

2.2 Transaction costs and speed

Transaction costs can vary significantly between different cryptocurrencies. High transaction fees can deter customers from using cryptocurrency as a payment method, potentially offsetting the cost savings from the efficiencies of cryptocurrency and making it no more attractive than fiat currency. Another consideration is to ensure the costs and speed align with business needs and customer expectations.

Transaction speed is another critical factor. Faster transactions improve customer experience and streamline business operations. Various factors, such as network traffic, can impact transaction speed. For example, while Ethereum is popular, it can experience slower transaction times due to network congestion. Cryptocurrency such as Stellar (XLM) and Dash (DASH) are known for their rapid transaction speeds.

2.3 Network security

The security of a cryptocurrency network is paramount. A robust network prevents fraud and protects transactions from cyberattacks. Cryptocurrency such as Bitcoin, with many nodes and a proven track record, are considered secure.

Evaluating the security mechanisms (and the history of security incidents) can help you gauge the security level. Proof of Work (PoW) used by Bitcoin and Ethereum (currently transitioning to Proof of Stake) involves complex computations, which secure the network but consume significant energy. Proof of Stake (PoS) used by cryptocurrency such as Cardano (ADA) and Polkadot (DOT), is more energy-efficient and still provides robust security.

2.4 Regulatory acceptance

Regulatory acceptance varies by jurisdiction and can impact the legality of using certain cryptocurrency. Ensure the cryptocurrency you choose complies with local regulations, or that its use is allowed in a particular jurisdiction. Regularly review regulatory updates to stay compliant and avoid legal issues.

Working with a legal advisor knowledgeable in cryptocurrency can be beneficial. They can help navigate complex regulatory environments and ensure compliance with relevant laws such as the General Data Protection Regulation (GDPR) in Europe or the Financial Crimes Enforcement Network (FinCEN) regulations in the United States.

Beyond national adoption, many countries are exploring or have implemented various regulatory frameworks for cryptocurrencies. These frameworks often categorize cryptocurrencies differently, for example, as commodities, securities, or property, which then dictates how they are taxed and regulated. Some jurisdictions have embraced a more permissive stance, encouraging innovation within the crypto space while establishing clear guidelines for exchanges and digital asset providers. Others have taken a more cautious approach, focusing on consumer protection, AML, and combating terrorist financing (CTF) concerns, often requiring extensive licensing and reporting from crypto businesses.

The global regulatory landscape for cryptocurrency is continuously evolving, driven by technological advancements, market developments, and international cooperation. International bodies, such as the Financial Stability Board (FSB) and the Bank for International Settlements (BIS), are actively working to harmonize regulations and address potential systemic risks posed by digital assets. This ongoing dialogue aims to create a more consistent and secure environment for cryptocurrency use, while also mitigating risks associated with illicit activities and market volatility. Staying informed about these global discussions and their potential impact on national regulations is crucial for anyone involved in the cryptocurrency ecosystem.

2.5 Mainstream adoption

Mainstream adoption indicates the extent to which a cryptocurrency is accepted by businesses and consumers. Higher adoption rates suggest better public trust and usability. Cryptocurrency such as Bitcoin and Ethereum enjoy widespread adoption, making them more likely to be accepted by a broad audience.

Unless a particular type of cryptocurrency is mandated by law, the decision to accept a particular type of cryptocurrency rests with the parties to a transaction.

2.6 Liquidity

Liquidity refers to the ease of converting cryptocurrency to cash or other assets. High liquidity ensures that you can quickly and efficiently exchange cryptocurrency for fiat currency without significant price changes. Cryptocurrency with higher trading volumes, such as Bitcoin and Ethereum, generally offer better liquidity, reducing the risk of large price swings during conversion.

2.7 Volatility

Cryptocurrency is widely known for its volatility. Extreme price fluctuations can impact financial stability, as the costs of doing business and fulfilling customer contracts will be hard to predict and hard to manage. To mitigate this risk, consider using stablecoins, which are pegged to stable assets like fiat currencies and provide a more predictable value. For example, USDT and USDC are stablecoins that maintain a 1:1 ratio with the US dollar, offering stability while still leveraging the benefits of blockchain technology.

2.8 Interoperability

Interoperability in the context of cryptocurrency means that different cryptocurrency networks can work together without issues. When a cryptocurrency supports interoperability, it can easily connect and work with other blockchain networks. This capability can improve business technology and help avoid isolated systems (operational silos). To determine if a cryptocurrency is interoperable involves analyzing the technical details, such as the protocols and architecture it uses. Additionally, checking user reviews of different currencies, or consulting experts can provide insights into how well a cryptocurrency interacts with others.

2.9 Sustainability

Sustainability is becoming increasingly important for businesses that seek to reduce their environmental impact. Some cryptocurrencies, particularly those using PoW consensus mechanisms like Bitcoin, consume a lot of energy, raising concerns about their environmental impact and contribution to climate change. Before adopting cryptocurrency, a business should examine its stated sustainability and environment protection goals to see if using cryptocurrency aligns with these objectives. They should also explore more environmentally friendly options such as PoS cryptocurrency which is less energy intensive.

For further information, see How-to guide: Business and legal developments related to climate change and Quick View: Environmental, Social, and Governance (ESG) regulation in the USA.

2.10 Set up a cryptocurrency wallet

Cryptocurrency payments are made by opening a virtual ‘wallet’ (which can be cloud-based or held on a computer) to send cryptocurrency to another party. The cryptocurrency wallet holds the individual’s cryptocurrency, stores the keys used to sign in for cryptocurrency transactions, and provides an interface for users to access funds.

Section 3 – Adding cryptocurrency as a payment method

3.1 Website

Integrating cryptocurrency payments on the business website can significantly enhance appeal to tech-savvy customers and expand global reach. To begin, a reliable cryptocurrency payment gateway must be chosen. These platforms can integrate seamlessly with popular e-commerce solutions. Once the integration is complete, customers can select cryptocurrency as their preferred payment method at checkout. Ensure that the website clearly communicates the option to pay with cryptocurrency and provides a smooth, intuitive user experience, including easy-to-follow instructions and real-time exchange rate displays. Additionally, consider adding FAQs and support documentation to assist customers who may be new to using cryptocurrency. Implementing these measures can lead to higher customer satisfaction and accepting payment by cryptocurrency may attract a broader customer base with international reach.

3.2 Point of sale

For brick-and-mortar stores, adopting cryptocurrency payments requires a point-of-sale (POS) system that supports digital currencies. Modern POS systems often have built-in cryptocurrency support or can be integrated with third-party apps. To streamline the process, it is important to choose a POS system that supports multiple cryptocurrency and provides a user-friendly interface for both staff and customers. Training employees is crucial; they should be well-versed in processing cryptocurrency transactions and capable of assisting customers who choose to pay with digital currencies. Additionally, ensure that the POS system can generate detailed receipts and transaction records to maintain transparency and accuracy in financial reporting.

3.3 Transaction monitoring and reporting

To ensure tax and accounting compliance, if not using a third-party vendor, maintain accurate records of all cryptocurrency transactions using specialized software to track and report transactions. Cryptocurrency can be subject to capital gains taxes, and the valuation of transactions must be recorded at the time of each transaction. Consult a tax professional for guidance to understand the implications and requirements. Regularly review and reconcile cryptocurrency accounts to ensure accuracy and transparency in financial reporting. By doing so, avoids potential legal issues and maintains the trust of stakeholders.

For further guidance, see How-to Guide: How to address tax and accounting considerations when using cryptocurrency.