How Bitcoin Could Shake Up B2B Payments
Bitcoin is great for business-to-business transactions, if both sides know how to use it. What happens if they don't?
Bitcoin has made some big gains over the last year in business-to-consumer transactions, with many large retailers such as Microsoft, Dell and Overstock now accepting it as a means of payment.
However, the digital currency hasn’t made that kind of splash in the business-to-business (B2B) world.
Late last year, core developer Jeff Garzik tweeted, musing that it would be nice if someone could put a bit of research into the subject.
Would love to see a case study for using #bitcoin as a replacement for B2B wire transfers and payments. Honest, not fluff. Pros & cons.
— Jeff Garzik (@jgarzik) December 11, 2014
Bitcoin-based transfers between businesses would fix an inefficient system. Wire transfers, which are one of the most common ways for businesses to pay each other, are expensive, because banks have to deal with each other directly for each individual transfer, and they can sometimes take days to process.
An alternative, Automated Clearing House (ACH) transfers, are aggregated into batches by a third party, meaning that banks don’t have to deal with them individually. This often makes them cheaper, but slower. There’s always a trade-off somewhere.
Companies that choose to trade in bitcoin, though, can eliminate fees charged by banks for moving money around the world, because the participants are going outside of the banking system altogether.
It can also be far faster to trade in bitcoin, as even getting six confirmations on the blockchain will still take little more than an hour.
Furthermore, it’s ostensibly easy to make a B2B transaction in bitcoin. If you’re buying, say, car parts from a supplier in another country, then you simply send them the bitcoin, and they send you the parts.
This is exactly what Tomcar does. One of the few companies to try bitcoin-based B2B transactions, this Australian car manufacturer makes significant savings in the process, according to managing director David Brim.
“Using bitcoin on business transactions allows us to save on banking charges and international exchange rate costs,” said Brim, adding that Tomcar has saved tens of thousands by paying suppliers in bitcoin.
Speaking to CoinDesk, Brim gave a figure of $20,000 saved, although he claimed $50,000 in the video below:
It isn’t quite that easy, though. For one thing, not a lot of businesses accept bitcoin.
“We only really have three suppliers who accept bitcoin,” said Brim, who tries to persuade his trading partners to use it as much as possible. “Two are based in Israel, and one in Taiwan. We purchase maybe only 2% of the Tomcar vehicle’s parts from these suppliers.”
He tries to make these transactions as much like an electronic bank transfer as possible. Simplicity is important. He has strong supplier agreements, and uses standard commercial terms to ensure that he is protected.
Brim also does his best to escape from the dangers of capital gains taxes, which companies can incur in some jurisdictions if they hold onto the bitcoins that receive.
“We do not hold bitcoin. We only use it as a payment method. We pay all taxes involved in any payments. I have always said that if we are to use bitcoin, we would never hedge or hold the currency as an investment,” said Brim.
To this end, he uses bitcoin merchant accounts to transfer payments. This also keeps him outside the banking system when making bitcoin transactions. Australian banks, like many others, are extremely conservative when it comes to bitcoin, he said.
One reason that it might be difficult for banks to get involved is that bitcoin isn’t considered a currency in many jurisdictions. Instead, it’s often seen as some other kind of asset.
For Henryk Dabrowski, though, that’s a bonus.
Navigating currency exchange controls
Dabrowski is CEO of investment and management services holding company Alternet. His firm invests in companies that focus on advanced payments technologies and got into the digital currency space in 2014.
Alternet subsidiary Alternet Payment Solutions recently partnered with BitPay to resell its business-to-consumer merchant account services, but Dabrowski has another venture up his sleeve: targeting B2B transactions using cryptocurrencies.
The latest venture targets countries with exchange controls that make it difficult for them to trade in foreign currencies. There are tens of these countries, often but not always in emerging economies, ranging from Argentina to Pakistan.
“In Pakistan you can’t exchange rupees for anything else. You have to register yourself as an import company and you only have a certain quota,” he said, explaining that this is a way for the country to control its currency reserves.
These exchange controls can throttle international trade for businesses operating there. Ideally, they’d simply trade in bitcoin, but if foreign trading parties don’t accept it, then they need an intermediary. That’s where Dabrowski's service comes in.
How it works
A customer in a B2B transaction in a country with foreign exchange controls – say, Pakistan – might want to buy parts from another country (Germany, say). The Pakistani company has rupees, and can’t buy euros from its local financial institutions. But the German firm will only accept Euros, not rupees.
The Pakistani firm approaches an Alternet subsidiary in Panama and buys bitcoins (which Dabrowski calls a 'digital asset') with its rupees.
“The digital asset is then pledged as a currency to a loan in a foreign currency. And through that loan the foreign currency is how the company pays suppliers,” Dabrowski said.
In seven days, the loan defaults, and the bitcoins become the property of the Panamanian subsidiary, which can then sell them to regain its position.
The subsidiary works with a local banking partner to send the foreign currency to the supplier, using the digital currency as an asset linked to the fiat currency for anti money laundering purposes.
This means that the transaction isn't bitcoin all the way. Instead, it's a transaction that goes through the conventional banking system, but which uses bitcoin as a means to provide customers with access to foreign currency services that they wouldn't normally have.
If Alternet’s system can be made to work, he believes that it will free up companies in a variety of exchange-controlled countries to trade legally with those in other countries. It’s one rather complex example of how a B2B transaction involving bitcoin can look, although this one has a specific target audience.
Are we likely to see bitcoin used as a mainstream medium of exchange between businesses in 2015? Probably not. But the use cases are there, and, in time, the business world may see fit to give bitcoin B2B services a try.
World Button image via Shutterstock.
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