David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting, and marital dissolution services in Philadelphia and the Delaware Valley.
Bitcoin and other digital currencies (such as Litecoin, Ethereum, Dash, and Dogecoin, among more than 700 others) often are described as the future of monetary transactions.
Bitcoin, said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley, is the most well-known of the digital currencies, and is accepted as payment by such companies as Microsoft, Expedia, Newegg, Intuit, and PayPal.
However, just because these companies do, should you accept payment in Bitcoin? This week’s blog by Certified Fraud Examiner Anderson will seek to answer that question.
Without getting too deep into the technical details, Bitcoin is a cryptocurrency, meaning it essentially exists electronically, relies upon electronic or digital wallets and electronic public ledgers to record transactions, and – because Bitcoins are associated with secure and private electronic addresses instead of identified digital “footprints” – Bitcoin transactions are anonymous. Additionally, their value is not tied to any specific currency.
To obtain Bitcoin, one must set up a digital wallet and then purchase Bitcoin from a Bitcoin seller. One can then make payments in Bitcoin for goods and services to vendors who accept Bitcoin, or one can convert Bitcoin to currency from a Bitcoin buyer. Additionally, one can sign up with a digital wallet to sell goods or services in return for Bitcoins. Bitcoin wallets are not insured by the FDIC.
Although there are more than 100,000 businesses worldwide who accept Bitcoin, most of these are located outside of the United States. In July 2017, Bloomberg reported that just three of the top U.S. retailers accepted Bitcoin, and that overall acceptance by U.S. retailers was expected to decline.
In 2014, Circle Internet Financial Limited facilitated a “bank” for exchanging Bitcoins to and from currency, but it ceased doing so in December 2016. In the United States, there are several vendors who facilitate buying and selling of Bitcoin. Three of the more well-known are:
- Coinsource.net, which operates 127 ATMs nationally, including three in the Philadelphia area. Coinsource.net charges an 8 percent fee to sell you Bitcoin and a 4 percent fee to buy your Bitcoin. ATM withdrawals of cash are limited to $3,000 per day.
- Coinbase.net, which requires you to link your credit card, debit card, and/or bank account to their service. All purchase or sales of Bitcoin incur a 4 percent transaction fee. Currency conversions incur an addition 0.5 percent fee.
- BitPay, which provides the user with a prepaid VISA card. Merchant fees are 1 percent. Cardholder fees include a network use fee of approximately 5 percent; a currency conversion fee of 3 percent, ATM fees of $2 to $3 per transaction, and card loading fees of up to $5 per loading. ATM withdrawals are limited to $3,000 per day.
As of August 2017, there were 838 ATMs in the United States which facilitated Bitcoin transactions out of a worldwide total of 1,515 ATMs.
Bitcoin prices are not regulated by any country, and can fluctuate significantly. During the past year, Bitcoin has increased from $600 per Bitcoin to over $4,900 per Bitcoin. Along the way, Bitcoin’s dollar price has experienced rises and falls of up to several hundred dollars in a day.
To gain a better understanding of the risks involved in accepting payment in Bitcoin, Anderson – principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley – interviewed Philadelphia federal criminal defense and white-collar crime attorney NiaLena Caravasos (https://nialena.com/).
While the discussion focused on the risks to attorneys and other professionals in accepting payment in Bitcoin, most of the points Ms. Caravasos made clearly are applicable to most businesses.
Ms. Caravasos began by asking the questions, “Why would someone want to or need to pay me in Bitcoin instead of by check or cash?”, “Why can’t the payor just convert Bitcoin into currency?”, “If your client was a farmer, would you accept payment in cows?” and “Why wouldn’t you suggest to your farmer client that she/he sell the cows to raise funds to use toward the payment of legal fees?”
She stated that, because of the lack of government regulation and anonymity of Bitcoin, the use of Bitcoin instead of check or cash could raise the issue of whether criminal activity was the source of the Bitcoin, and if the use of Bitcoin was related to money laundering. Ms. Caravasos also questioned whether the IRS might soon issue guidance that requires all Bitcoin payments equivalent to $10,000 or more to be reported on Form 8300.
She stated that payments by check or credit card of $10,000 or more don’t require filing a Form 8300, but that if the IRS requires such a report to be filed for Bitcoin payments, this creates additional work for the party accepting the payment in addition to possible IRS inquiry regarding the payor of the Bitcoin.
Ms. Caravasos also noted that in Pennsylvania, attorney retainers must be held in IOLTA accounts (interest-bearing client trust accounts). Since banks do not accept Bitcoin, attorney retainers can’t be paid in Bitcoin.
Additionally, Ms. Caravasos explained that the volatility of Bitcoin may create further issues down the line regarding client-held funds. Any unused portion of client funds held in IOLTA must be returned to the client at the end of the case but, if the value of Bitcoin has fluctuated wildly during the interim time when the client funds are being held in IOLTA after conversion to U.S. currency, this may raise additional problems regarding what amount is ultimately owed to the client.
She identified other risks associated with accepting payment in Bitcoin:
- Lack of deposit insurance on Bitcoin;
- Risk associated with the company providing the digital wallet, as most of these are small companies whose reliability and financial strength is not easily determined;
- Risk associated with linking your credit card, debit card or bank account with a Bitcoin company, for the same reasons as above;
- Volatility of Bitcoin price fluctuations, as noted above, Bitcoin prices are unregulated and can experience significant fluctuations;
- Limitations on ATM cash withdrawals, such withdrawals are limited to $3,000 per day;
- Bitcoin-related processing and conversion fees, these are higher than most merchant-related credit card fees;
- Risk of increased scrutiny of law enforcement due to accepting Bitcoin payments.
Ms. Caravasos also noted that since Japan already subjects digital currencies like Bitcoin to anti-money laundering scrutiny, and Australia has announced its intention to do the same, it is likely that the United States also will do so soon. She pointed out that U.S. Senate Bill No. 1241, which is currently on the agenda of the Senate Judiciary Committee, contains provisions to regulate digital currencies, including Bitcoin, as part of anti-money laundering.
In conclusion, Ms. Caravasos stated that because the risks are so great at present, now is not the time to begin accepting payment in Bitcoin.
If you have questions about any finance or fraud issues, you should speak with a Certified Fraud Examiner from an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley. The Philadelphia forensic accounting firm of David Anderson & Associates can be reached by calling David Anderson at 267-207-3597 or emailing him at firstname.lastname@example.org if you require the services of a Certified Fraud Examiner or any other forensic accounting services in Philadelphia and the Delaware Valley.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst.