The Right Way for Startups to Use Bitcoin

June 18, 2013

3:00 pm

So you’re thinking about using digital currency Bitcoin as part of your business?

The virtual currency founded in 2009 is still too new to benefit most startups, but it is popular enough to attract attention from regulators. So some companies could pioneer a new niche to profit from its potential to ease international payments and online sales.

There is a huge opportunity to design an economy of businesses that accepts payments for goods and services using the virtual coin, which is not controlled by any government and is accepted worldwide, said Patrick Murck, general counsel of the Bitcoin Foundation, which acts as a hub for Bitcoin users. However, there is little need for more Bitcoin infrastructure businesses, such as currency exchanges that transfer Bitcoins into dollars, Murck explained.

“Bitcoin is still an experimental thing, and you should only put into it the time and money you can afford to lose,” Murck said candidly.

The companies best suited for Bitcoin payments are digital content providers, mobile application providers, social gaming companies, and companies that make international payments, Murck said. The reason for this is because one Bitcoin can be divided into fractions much smaller than a penny, allowing users to make small purchases on apps and games without transaction fees, he explained.

Companies that accept international payments can also benefit from Bitcoin use because the digital currency eliminates the red tape of exchange rates, Murck said.

“Bitcoin is the first global currency,” Murck said.

Accepting payments in Bitcoins is also a fast way to get media publicity. New York City bar Evr and San Francisco-based Cups and Cakes Bakery both accept payments in Bitcoins, and have been reported on by media outlets including CNN and Forbes.

Bitcoin is not controlled by any government, but anybody who accepts the digital currency still needs to stay on the good side of regulators. Japan-based Bitcoin exchange service Mt. Gox did not register as a money-transmitting service with the US government, so the Department of Homeland Security cut off its access to one of its US-based accounts.

Regulators at the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) want any business that exchanges Bitcoins for US dollars to register with the government to ensure Bitcoin does not become a venue for money laundering, according to Steve Hudak, chief of public affairs at FinCEN.

If a company accepts transactions for goods and services in Bitcoins without transferring them to US dollars, they “generally do not” need to register with FinCEN, Hudak added.

“Our intention is to focus on where real money is being exchanged for virtual money,” Hudak said. “We are not making statements about the nature of money.”

Even if companies don’t exchange Bitcoins for dollars, they still need to include Bitcoin income on tax statements, said Dan Friedberg, a financial services attorney at the law firm of Graham & Dunn. The Internal Revenue Service has not issued formal guidance on how to file Bitcoins as taxes.

“Even if it is not U.S. dollars, if you are getting something of value, you have to register it as income,” Friedberg said.

Speaking of US dollars, Friedberg said investors should remember that the value of Bitcoin fluctuates constantly. Check the value of the digital currency here on BitcoinWatch. As of June 13, one Bitcoin was worth $109. Bitcoin began 2013 valued at around $13.

Keeping an eye on state regulations is also a good idea if companies want to operate as a currency exchange for Bitcoins, Friedberg said. Fortunately, startups that want to accept payments in Bitcoins can sell their coins to services such as BitPay and CoinBase, which will accept coins and deposit dollars into a bank account, eliminating the need to become a registered currency exchange.

Bitcoin is an evolving currency, and the Bitcoin Foundation is available to answer any questions from entrepreneurs and investors, Murck said.

Guest author Tom Risen remembers LAN parties and custom-building computers before the rise of the smartphone. He started reporting on the tech stock market at the Medill School of Journalism, and has written about the tech industry for Government Executive, National Journal, Slate, Policy and Regulatory Report, and for newspapers in Maryland and California. He’s on Twitter @TomRisen.

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