Virtual CurrencyUnderstanding Virtual Payments, Security Risks, & Implementation Strategies

A Practical Guide to Virtual Currency for Online Merchants

Once a fringe and esoteric asset class, virtual currencies are now part of the payments mainstream.

In November 2024, Bitcoin surpassed the $100,000-per-coin milestone for the first time in history. This was a figure thought impossible for a virtual currency whose value had fallen as low as $3,000 in 2019, and which was valued at a fraction of a dollar just a decade before that.

Merchants and banks are beginning to take notice. Today, roughly 10,000 businesses worldwide accept virtual currencies as payment. US banks may soon be allowed to take custody of digital currencies on behalf of depositors, too.

What is Virtual Currency?

Virtual Currency

[noun]/vər • CHəw • əl • kər • ən • sē/

Virtual currency, also known as virtual money, is an electronic representation of value that functions as a medium of exchange.

Virtual currency is an unregulated subset of digital currency issued and controlled by developers. Digital currency, on the other hand, is a broader term that includes virtual currency but also regulated forms of non-physical money, like central bank digital currencies (CBDCs), which stand in for traditional currency (like the US Dollar).

Although this distinction may seem pedantic, there are real-world consequences. For tax purposes, the IRS considers virtual currency to be property, rather than currency. This means that merchants who receive cryptocurrencies as payment may be engaging in taxable property transactions.

Accepting cryptocurrencies could let you capture a sizable and tech-savvy consumer base. Today, an estimated 17% of US adults have invested in or used cryptocurrencies to purchase goods or services. Among young adults aged 18–29, this proportion is even greater, at 29%.

Beyond this, you could position yourself to take advantage of lower transaction fees compared to credit cards. Or, even minimize or eliminate chargebacks altogether (more on these benefits later).

Types of Virtual Currencies

Broadly speaking, there are three types of virtual currencies: cryptocurrencies, stablecoins, and closed virtual currencies.

How Virtual Currency Payments Work

The virtual currency payment process is very complex. But, many plug-and-play crypto payment gateways have emerged, and are happy to do the heavy lifting for you. From your perspective, this makes the virtual currency transaction process similar to a standard payment process flow.

You will need a couple of specialized key components:

• A Digital Wallet: This is where you will receive and securely store your virtual currency payments. Think of it as your crypto bank account.
• A Payment Processor: A service like BitPay or Coinbase Commerce that automates the payment process, from generating addresses to converting crypto into cash.
• A Conversion Strategy: Your business rule for whether to hold the received crypto as an asset, or instantly convert it to fiat currency to eliminate price volatility risk.

Besides the specialized technology, there are a couple of other quirks to be aware of.

For starters, unlike credit card payments, virtual currency transactions cannot be reversed or charged back once confirmed by the network. Although this eliminates the risk of friendly fraud (more on this later), it also means that any legitimate refunds must be handled as a separate, new transaction from the merchant back to the customer.

Another difference is that transaction speeds are variable. Unlike card payments, which can be authorized within a few seconds, virtual currency transaction times depend on the specific blockchain being used and its current level of traffic. Some networks confirm in seconds, while others, like Bitcoin, can take longer because of the number of entries in the blockchain. If you’re running auctions or selling time-sensitive digital goods like concert tickets, this can be an important factor.

On that note, every cryptocurrency transaction will include a network fee that is paid to the cryptocurrency network’s validators, or miners (sometimes referred to as a “gas” fee). This fee may be bundled with the rest of your payment processor fees or assessed separately. 

Examples of Virtual Currencies That Merchants Already Accept

There are an estimated 25,000 cryptocurrencies in circulation as of this writing. But, only a handful are commonly used and accepted in eCommerce. Some of the most popular include:

Why Accept Virtual Currency?

Accepting virtual currency could allow merchants to unlock a compelling suite of benefits that address some of the most persistent pain points in traditional eCommerce, like high chargeback fees and the ever-present threat of fraud.

Specifically, by accepting virtual currency, you may be able to:

#1  |  Eliminate Chargebacks

Virtual currency transactions are final and irreversible once confirmed on the blockchain. This completely eliminates the risk of forced post-transaction reversals, like fraudulent chargebacks.

#2  |  Lower Transaction Fees

Payment processors for virtual currencies typically charge a fee of around 0.5% to 1%, a discount compared to the 2.5% to 3.5% rate associated with processing credit card transactions. If you run a high-volume or low-margin business, these savings can be substantial.

#3  |  Engage in Global eCommerce

Virtual currencies are borderless. This means you can accept payments from anyone, anywhere in the world, without having to worry about currency conversion or lengthy international payment settlement timelines.

#4  |  Receive Funds Faster

While credit card and ACH payments can take several days to settle, virtual currency transactions are often confirmed and available in your account within a few hours, or even minutes. This helps you minimize settlement times and maximize cash flow.

#5  |  Access a Growing Customer Base

Crypto-native consumers tend to be tech-savvy buyers with significant disposable income, who are enthusiastic about supporting businesses that embrace cryptocurrencies. Accepting virtual currencies is an easy way to tap into this rapidly expanding market segment.

#6  |  Enhance Brand Appeal

Accepting virtual currencies can be a powerful marketing tool. It can signal to your customers that your business is innovative and forward-thinking, and attract a demographic that values technology and financial sovereignty.

#7  |  Simplify PCI Compliance

Because virtual currency payments are not processed through traditional card networks, they fall outside the scope of the Payment Card Industry’s Data Security Standard (PCI-DSS). This means you can potentially reduce the complexity and cost of staying in compliance.

#8  |  Reduce Data Breach Risks

Since customers pay directly from their own wallets, they never have to share sensitive credit card information with you or your payment processor. This removes a key vector for data theft and protects your business from the financial and reputational damage that would result from a data breach.

Security Risks with Virtual Currency Payments

That said, virtual currencies are not entirely risk-free. Instead, they introduce a new basket of potential risks that you must manage, including:

While secure and verifiable, the blockchain technology that underlies virtual currency has several potential points of failure. For starters, you’ll need to prioritize the security of your (and your customers’) digital wallets, given a single breach could lead to a complete loss of funds. Similarly, the private keys that control access to these wallets must be managed with extreme care; if lost, they can never be recovered.

Beyond the technology itself, there are certain operational risks to consider. Most notably, the inherent price volatility of many cryptocurrencies means the value of a payment could drop significantly before it is converted to fiat. Correcting an erroneous payment or issuing a refund may also be more operationally complex, since doing so requires you to initiate a new, separate transaction (and pay the associated transaction fee).

Although virtual currency transactions eliminate the risk posed by some forms of fraud, you may have to contend with new types of crypto-specific fraud. For instance, scammers may use sophisticated phishing tactics to gain access to your wallet. You’ll need to be vigilant and rely only on confirmations from their payment processor or the blockchain itself.

Unlike the regulatory environment surrounding debit and credit cards, the legal and regulatory landscape for virtual currencies is still evolving. You’ll have to stay informed about changing tax reporting requirements and anti-money laundering (AML) laws pertaining to digital currency transactions. Failure to comply can result in significant penalties. You should only partner with reputable payment processors that can help navigate these obligations.

Virtual Currency Regulations & Compliance for Merchants

In the United States, the regulatory framework surrounding virtual currency transactions involves a complex patchwork of federal and state rules.

On the federal level, the IRS treats virtual currency as property, rather than currency. This means that receiving it as payment is a taxable event.

At the same time, depending on your business model, you could be considered a money transmitter by the Financial Crimes Enforcement Network (FinCEN). That would carry certain registration and reporting obligations.

Several key compliance requirements are likewise non-negotiable. Like cash, any payment received in virtual currency that is valued at over $10,000 must be reported to the IRS. If you use a third-party payment processor, they will likely issue a Form 1099-K to report your transaction volume. And don’t forget: you’re still responsible for collecting and remitting sales tax on the fiat value of the goods sold at the time of the transaction.

You also have to consider international regulations if you sell to customers outside the US. The simplest way to manage these complex requirements is to partner with a compliant virtual currency payment processor. These services, which will handle the nuances of AML and Know Your Customer (KYC) rules on your behalf, can allow you to focus less on compliance and more on running your business.

Is Virtual Currency Right for Your Business?

Suffice to say, the benefits of accepting virtual currency are compelling. Then again, it’s not a one-size-fits-all solution. So, how do you know if it’s right for you?

Performing the Cost-Benefit Analysis

One way to determine whether virtual currency is right for your business is to conduct a classic cost-benefit analysis. You weigh the potential upside against the possible downsides (i.e. implementation costs).

Specifically, consider the initial setup fees for payment processors, the internal training required for your staff, and the potential impact on your accounting practices. Balance these against the potential savings from lower transaction fees, the marketing value of attracting a new customer segment, and the competitive advantage of being an early adopter in your niche.

Remember, though, if you ultimately decide to give virtual currency payments a try, you don’t have to go all-in. At least, not at the start.

Getting your feet wet with a pilot program is an excellent way to test the waters. Start by enabling virtual currency payments for a specific product line or for international customers only. This allows you to gauge customer demand, refine your internal processes, and collect data before you decide to move forward with (or scrap) plans for a full implementation.

How to Accept Virtual Currency Safely

Your checkout environment is probably the point at which you’re most vulnerable to fraud. If you decide to accept virtual currency payments, you’ll need to be thoughtful and deliberate about security, pricing, and customer service. Here are some tips:

For most merchants, using a third-party payment processor like BitPay or Coinbase Commerce is the most practical and secure option. These services handle the entire payment flow, from payment address and QR code generation to fiat conversion and settlement.

Direct wallet acceptance is possible if you’re technically inclined. But, the juice often isn’t worth the squeeze.

Protect your assets from bad actors. Use cold storage (i.e. offline wallets) for the majority of your virtual currency holdings, and keep only a small amount in a “hot” online wallet for operational needs.

Implement multi-signature wallets that require approval from multiple team members before funds can be moved. Also, conduct regular security audits of your systems to identify and patch vulnerabilities.

Like we talked about, a lot of virtual currencies are subject to radical price volatility. Your checkout system must use real-time price updates to ensure the customer is quoted the correct amount of virtual currency at the moment of sale.

Consider implementing an instant conversion strategy to immediately change all incoming payments into a stable fiat currency like the US dollar or a fiat-linked stablecoin so as to eliminate volatility and simplify your accounting.

Set transaction limits to cap your exposure on any single purchase, and require buyers to undergo multi-factor authentication checks for purchases above a certain threshold.

You may also want to implement waiting periods for high-value digital goods. That will let you ensure the blockchain transaction is fully and irreversibly confirmed before you ship anything out.

Proactively address aspects unique to virtual currency payments in your policies and correspondences with customers.

For example, your refund policy may state that refunds will be issued in fiat currency for the original purchase value, rather than in the cryptocurrency itself. Likewise, clear support documentation and regular staff training can ensure that customer concerns and potential misunderstandings about virtual currency payments are accurately and promptly resolved.

Maintain meticulous records of all virtual currency transactions, including the time of sale and the fiat value, for tax reporting purposes.

As your volume grows, you may need to implement Know Your Customer (KYC) procedures for high-value transactions to comply with anti-money laundering regulations. Working closely with a compliant payment processor, along with knowledgeable accounting and legal personnel, can help you stay ahead of these evolving requirements.

The Bottom Line on Virtual Currency Payments

Virtual currencies represent an evolution in the payments landscape. But, while the technology eliminates traditional pain points like chargebacks and international payment friction, it also introduces new challenges around volatility, regulatory compliance, and operational complexity. 

Still on the fence? Well, have you considered that a measured approach often yields the best results?

Starting with a pilot program lets you test customer demand, refine internal processes, and gain practical experience without committing fully to the technology. Even with a pilot program, though, you’ve got to remember that the key is in understanding your customer demographics, carefully evaluating the cost-benefit equation for your specific business model, and implementing robust security protocols from day one.

Virtual currencies are likely to become a more important component of the merchant payment toolkit every year. By staying informed about technological developments, maintaining compliance with evolving regulations, and partnering with reputable payment processors, you can position yourself to capitalize on this emerging opportunity while minimizing associated risks.