Global Business via Blockchain Is Inevitable. Crypto Isn’t

For anyone familiar with the benefits of blockchain, it’s reasonable to expect global enterprises to convert, at least partially, to a distributed ledger in the coming years. Global enterprises have a ton of data and red tape to deal with, and all essential data and documents could find a secure, accessible home with blockchain technology. Furthermore, businesses can conduct all manner of transactions via blockchain.

Out of the 2,000 biggest companies in the world, at least 50 enterprises are exploring ways to implement blockchain technology. This includes Berkshire Hathaway, whose founder and CEO Warren Buffett has railed against bitcoin and cryptocurrency; however, Berkshire subsidiaries Richline and BNSF are exploring blockchain solutions to verify the sourcing of diamonds and to track railroad freight.

Similarly, JP Morgan Chase CEO Jamie Dimon doubts bitcoin, but his company created the Quorum blockchain platform and designated it open source. IHS Markit and Pfizer are both interested in Quorum. JP Morgan and Berkshire Hathaway are part of a trend. About 12 percent of financial institutions are using blockchain, and 24 percent plan to use in the coming year.

Yet there’s no indication that global enterprises are interested in cryptocurrency. Given the fact that cryptos operate on the blockchain, is the growing interest in blockchain technology a foot in the door for cryptos? Not necessarily let’s dig in and see why.

Echecks Are Ingrained Deep In the Global System

Echecks allow B2B payments. When an enterprise uses an echeck to make a B2B payment, it initiates a string of events that involves multiple players. The global echeck chain goes like this:

1. Online payment gateways partner with banks to facilitate the payment.
2. Banks partner with central government banks to ensure the availability of funds.
3. Governments and banks employ cyber security specialists and partner with cyber security firms to ensure data security.
4. Online gateway companies also employ cyber security specialists and partner with cyber security firms to implement advanced encryption techniques.
5. When making cross-border payments, enterprises oftentimes use cloud-based automation software to meet each country’s regulations and stay up-to-date on encryption standards, which implies yet another middleman the SaaS company.

How many times have you read about cryptocurrency cutting out the middleman? More accurately, it cuts out the middlemen. With B2B echecks alone, there are at least 6 middlemen attached to what would seem like a simple process transmitting a payment electronically from one company to another. These 6 middlemen represent millions of employees and executives.

Crypto advocates argue that blockchain simplifies and secures electronic payments which is true but someone like Warren Buffett knows that governments, financial institutions, and other players in the world of currency provide a latticework. This latticework is a safety net reinforcing the value of currencies. For cryptos to have true market value for global enterprises, they need a similar safety net. Right now, the only safety net for cryptos is group of private investors who may try to game the system.

Global players are moving toward blockchain for things like echecks, but they’re not moving toward cryptos.

Blockchain Will Work Great for Global Taxes but Cryptos?

For a government to be able to ensure the value of a currency, it must be able to collect taxes, and when it comes to global taxation, over 140 countries collect value-added tax (VAT). VAT is a tax on exchanges; it goes into effect every time people exchange currency for goods and services.

Blockchain is an excellent way to make sure no one skips out on VATs. Blockchain public ledgers automatically record immutable, time-stamped records of transactions, meaning all a government would have to do is establish a blockchain on which smart contracts would notarize transactions. If all transactions are recorded on blockchain, and tax ID numbers provide a running record of the transactors, collecting taxes is as simple as filtering data for exemptions and notifying merchants and buyers of taxes owed.

Bitcoin and other cryptocurrencies are exempt from VAT in the EU perhaps because individuals are anonymous on bitcoin’s blockchain. However, Sellers and service providers have to pay VAT to the relevant tax authority, says Dr. Steffen Rapp of PayTechLaw. The VAT payable therefore reduces the profit of the sellers and service providers. For this reason, sellers and service providers should include VAT in their calculations regarding the remuneration they receive from the customer.

This provides very little incentive for sellers to accept bitcoin. It reduces their profits while bitcoin investors get to make tax-free purchases. Additionally, when it comes to cryptos, Rapp says sellers should include VAT in their calculations. But they don’t have to do so if they simply register the transaction as a bitcoin exchange.

Bitcoin is an easy way for buyers and sellers to avoid taxes. However, global enterprises aren’t going to operate in this sphere for fear of audits from multiple government agencies. This might sound cynical, but when it comes to tax evasion, the current offshore system is working just fine; risking evasion that strands your money on the bitcoin marketplace isn’t very appealing.