Effects of cryptocurrency to small and medium businesses in South Africa
Cryptocurrency is defined as a digital currency and commodity, that is based on asymmetric encryption. Cryptocurrencies store value like any other currencies and have stated exchange rates like most forms of legal tender in the world(IVASHCHENKO, 2016).
There are many types of cryptocurrencies in use today and they have a fixed supply. In order to use cryptocurrencies, consumers and merchants must open a cryptocurrency wallet account. The wallets are sort of similar to bank accounts. As soon as the account is open both consumers and merchants can accept and purchase cryptocurrency.
The use of cryptocurrencies affects small and medium enterprises in South Africa positively or negatively. The positive effects will help to increase the performance and existence of small and medium enterprises were as the negative effects threaten the survival of small and medium enterprises.
Due to the current conditions that there are no mechanisms for gaining and saving money for small and medium enterprises in South Africa, for example, lack of bank loans, additional pressure in tax increases, rates and a lot of restrictions in working with currencies and cash flows. There is a very small margin of possibilities for small and medium enterprises to save money because it is done in the form of bank deposits which is not a reliable means, because financial institutions are struggling as well. This will result in a low possibility of obtaining compensation from the guarantee fund. Because of these challenges, the survival of small and medium enterprises existence is threatened.
There is no inflation on cryptocurrencies because there is a minimum number of cryptocurrencies like bitcoin that are released into the market. The reason is that that there are no political influences or any organization that influences the change in this order and there is no possibility of inflation in the system hence this affects positively to small and medium enterprises because they will be able to save. As compared to the traditional currencies which are controlled by the reserve bank and issued by the central bank(IVASHCHENKO, 2016).
With cryptocurrencies, there is an immediate settlement to our dues because it takes a couple of minutes for the transaction to be approved and go through without any challenges. This allows cross-border and beyond continents purchases that are cleared in a couple of minutes. This is a huge advantage to small and medium enterprises in South Africa because it opens cross-continent customers who buy items without fear of exchange fees and the time it takes to clear transactions(Rose, 2015). This is different from the traditional currencies in which banking systems are running on obsolete platforms which take days or weeks to send money around the world with fees charged on each transaction which is a problem for small and medium enterprises because it fixes their markets to local markets only(Rose, 2015).
Access to cryptocurrency accounts is easy because it takes a couple of minutes to open and start trading with immediate effect. This happens without questions or commission. As compared to the current banking system and the financial institutions the process is very long and tedious. There are barriers associated with opening bank accounts and restrictions in terms of the initial amount of money a small business has in order to qualify to open an account. In the banking system, a customer has to provide all their details and identity to be able to open a bank account.
The issuing of cryptocurrencies is decentralized to all participants distributed across the network in which a computer mining is a member of the system. This means there is no governments or central banks to issue currency and determine the value. If one of the computers in the network goes offline transactions will continue because the process is accessed across the platform. This helps small and medium enterprises in South Africa because business will operate as usual though there is one terminal offline. Decentralization also means the middleman has been removed and cost associated with their role as compared to the traditional financial system is governed by the reserve bank and money issued by the central bank which makes it difficult for small and medium enterprises.
Cryptocurrency blockchain cannot be changed without detection, which reduces the opportunity for fraud. Transactions are done in blockchain immutable because the transaction records cannot be deleted or changed in any way. This way closes the acts of fraud because before the transaction is appended to the blockchain all network participants must agree to show that the transaction is valid this helps small and medium enterprises to trade freely without fear. This is different to the current traditional systems that fraud and counterfeiting is a global problem that affects different industries, for example, the supply chain system is very complex fraud and counterfeiting can happen along the process and is difficult to trace(Lo and Wang, 2014)(IVASHCHENKO, 2016).
Cryptocurrencies work the same way as physical cash and combining the same functions with e-commerce. There is no need to pay commissions, interest rate and fees to banks and other middlemen. The commission paid in some cryptocurrencies like bitcoin amounts to approximately 0.1 per cent. This low percentage commission helps small and medium enterprises to save a lot of money when purchasing raw materials and save money for clients as well. If we compare with the traditional financial system, there are banking fees paid to banks and the fees for each transaction are huge.
The code to mine cryptocurrencies is open to anyone who wants to be involved. Cryptocurrencies use the same algorithms used in online banking and the only difference is disclosing user information by banking systems. Information in cryptocurrencies is shared but no data related to the recipient or the sender is shared. This helps small and medium enterprises not to share their customer data with anyone. This is different from traditional banks were information related to the sender and the recipient is shared with the central bank and the reserve bank.
The legality of cryptocurrency is another issue that has a negative effect to the survival of small and medium enterprises in South Africa. The financial system is not yet accepting cryptocurrency as a form of medium exchange. According to South Africa, Reserve bank cryptocurrencies are not a form of legal tender in South Africa and must not be used as payment for the discharge of any obligation(South African Reserve Bank, 2014).
Though the South Africa Reserve Bank(SARB) agree with the notion that cryptocurrencies payment mechanisms and innovations can facilitate flexibility, efficiency, speed and operational immediacy. However, the institution believes that the use of cryptocurrency provides a platform for, inter alia, money laundering and also used as a loophole to finance terrorism. In this regard, terrorism is considered the most heinous crime committed against humanity there for the security across the world is monitoring all the activities regarding financial transactions because it is a high risk to consumers(South African Reserve Bank, 2014).
The high volatility of cryptocurrencies has a negative effect on the operations of small and medium enterprises in that if they invest. The reason being if they buy one of the currencies at a higher price in less than a day the exchange rate drops by more than 50 per cent. This will force small and medium enterprises into extinction, for example, bitcoin value increased by more than 1000 per cent and later value dropped by 50 per cent in January if the consumer bought bitcoin at pick value all of a sudden they lose 50 per cent of the value.
Conclusion
The innovations of cryptocurrency brought many advantages that influence the survival of small and medium enterprises in South Africa, that includes a fast and efficient form of payments as compared to the traditional financial system. In the same regard there, are disadvantages as well, that counter the benefits. It has been noted that though cryptocurrencies have benefits they come with risk as well, that includes money laundering, used to finance terrorism as well which are the major drawbacks to the legalization of cryptocurrencies as the medium of exchange and that the South African Reserve Bank stated that the most risk posed by these currencies are to destabilize the existing financial systems.
