Finance is the backbone of any business. However, money has evolved far beyond physical currency. Cryptocurrency is a relatively new innovation and with virtual currencies like Bitcoin and Ethereum gaining popularity, businesses are looking for better ways to track and account their virtual assets.
This post is meant to teach you about cryptocurrencies, how they function and the possible role they have to play in the markets of the future.
What Is a Cryptocurrency?
These are virtual currencies that allow people across different countries to do business while avoiding currency conversion fees. These currencies usually take the form of computer programs or mobile applications that act like an online wallet which allows you to send or receive payments with others using the same platform. Some examples of cryptocurrencies include:
- Bitcoin cash
How Does It Work?
Cryptocurrency is a type of alternative currency and not a legal tender. It is also called digital asset or crypto asset that is used as a medium of exchange for services and products between the parties. Because of the Income Tax Act, the CRA treats cryptocurrency as a commodity. When a transaction is made using the cryptocurrencies, for tax purpose, CRA treats it as a barter transaction since the exchange is done without a legal currency. If you have different types of cryptocurrency in your digital wallet, they are considered separate digital assets and valued accordingly.
Let us explain this through an example.
A customer pays 100 Bitcoin for a certain service on May 1st and it is equivalent to 100$ on this date. An account must be set up on your books in the asset section to show the value of the currency that you are paid. $100 worth of sales is then recorded in your sales accounts. After a month the value of bitcoin is worth $150 for 100 bitcoins and you decide to sell them. The asset in your cryptocurrency account is reduced by 100 bitcoins while the $150 cash is reflected in your income statement section, and you receive a $50 gain through the whole transaction.
What Is the Process of Transaction?
Blockchain technology was devised for secure transactions through cryptocurrencies. As defined by Don & Alex Tapscott, the authors of “What Is Blockchain Technology” (2016)
“The Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
When a fund is transferred using a digital wallet or any cryptocurrency, it goes through the blockchain process before it is credited in the receiver’s account. The process consists of the following steps:
- When a transfer is done through the digital wallet, it is represented as a “block”.
- It will await approval after it is broadcasted into the network nodes. Only the details of the transaction are visible in this step and anonymity is maintained.
- Users work on approving the block through a process called mining and these professionals are known as “miners”.
- Once the transaction is confirmed, the miner can add the block to the blockchain. After this, the transaction is submitted to the public ledger. The transaction will be irreversible and permanent at this point.
- The amount gets credited in the receiver’s account finally.
The Advantages of Using Cryptocurrency
- Cryptocurrency can be globally assessed as it operates on a peer-to-peer basis and is decentralized. Anyone can opt for cryptocurrency trading if they have access to the internet.
- Chances of fraud are minimal since it is a virtual currency and not linked with any physical cash fund. Moreover, the transactions are protected by blockchain technology which does not allow any arbitrary changes by the sender, making it difficult to counterfeit cryptocurrencies.
- Users are protected against identity theft as it allows them to send only the information the recipients require.
- The transaction fees are negligible when cryptocurrencies are used for transactions, making it a more cost-effective medium over traditional financial systems.
- The peer-to-peer network of cryptocurrency eliminates any delay that can be caused by a third party or middle man which makes the transaction process faster.
What Is the Future of Cryptocurrency?
Though in effect for quite a few years now, cryptocurrencies are constantly evolving. They continue to prosper as ICOs raised over $21 billion in cryptocurrencies last year. Another survey shows 22% percent increase in the implementation of blockchain technology in 2019 by CFOs, which is a big jump from zero in 2018.
In the recent annual Fintech Symposium hosted by Depository Trust and Clearing Corporation (DTCC), cryptocurrency became the main highlight of the discussion. A poll taken from the audience regarding their view on investing in cryptocurrency highlighted three major obstacles that deter the users:
- Regulatory uncertainties (29%)
- Valuation approach (29%)
- Fraud (21%)
Despite these uncertainties, cryptocurrencies like Bitcoin continue to flourish because of the many advantages they have over traditional transactions.
Cryptocurrencies steadily move forward towards becoming a mainstream mode of transaction. Businesses or individuals owning cryptocurrencies have to be diligent and proactive about tracking their crypt assets for bookkeeping and taxation purposes.
Cryptocurrencies are slowly but steadily gaining popularity as a transaction medium for business. However, small and medium businessowners who are not familiar with the technology and processes need to rely on a professional bookkeeper who is updated with the latest tax compliances on cryptocurrency. The basic conception of cryptocurrencies and its progress are discussed to make people more familiar with the digital assets so that they can use it wisely.