The development of blockchain has led to new digital assets like cryptocurrencies and stablecoins. These are the transaction currencies in digital form that help move value across countries and a marginal transaction cost. These coins are quite stable unlike the volatility of bitcoins.
The value of these stablecoins is referenced against a stable currency like the US dollar or the Euro. Its development led the governments to develop the Central Bank Digital Currency(CBDC) that would be maintained and run on public infrastructure and represent a liability of the Central Bank.
The main benefit of these digital assets is the lower cost of transactions for both domestic and international transactions. They help complete transactions in real-time. Ir can also be used for conditional payments and even escrow payments.
There is a widespread concern related to privacy, operational risks, and cybersecurity risks. A failure in one type of digital system can reflect on other digital assets also. These apprehensions should not overshadow the benefits of such systems as they provide an equitable solution to the limitations of the traditional systems as they exist today.
We discuss here the benefits and the potential impact on small and medium businesses that fuel economic stability and growth. Small businesses have a significant role in the economy. They generate employment, and revenue, and offer upward mobility, and economic opportunity, especially to marginal groups like minorities and immigrants.
Financially fragile.
Many small businesses operate on thin margins. This leads to significant vulnerability due to economic changes. They have limited access to finance, and credit and they are perceived to carry a higher risk.
The major problem faced by small businesses is payment delays, especially by large businesses. Large businesses are essentially enjoying short-term credit at the expense of these small businesses thereby increasing the working capital needs of small businesses and reducing their cash reserve.
These twin challenges make it hard to maintain buffers and they become more vulnerable to economic uncertainties. New modes of payments, competition within the players in the digital currency industry and innovations can help lend stability to the small business as well as develop their resiliency.
Effect of delay in transaction settlements.
Today most transactions are done by cards – credit cards predominantly but debit cards too. The cost of transactions to the small businesses could exceed 3% and could go up further in future. Transactions through online shops like Amazon, Flipkart, and Shopify are even more expensive. Moreover, there is a delay in receiving the proceeds of the sale which further leads to an increasing requirement for working capital.
There are few alternatives to the major card issuers. Small businesses have to accept the terms offered for the fear of using this stream of revenue and customers. they may pass on a part of the transaction fee to the customer by increasing the prices but that makes their product more expensive and less competitive in the marketplace.
These problems get magnified when dealing with cross-country transactions. The interchange fee, transaction costs and delays can be very high. The transaction fees are unpredictable and may vary depending upon the number of intermediaries involved. The complexity of these inter-relationships makes them an attractive target for fraudsters and scams proliferate in this domain.
Blockchain technology can help.
An open, competitive payments infrastructure can help ease this crunch. Government initiatives should work together with private sector innovation to create a more equitable transaction process. the public sector can take advantage of the advancements in cryptocurrency and blockchain technologies to address this gap.
An open system will drive transaction fees down, generate competition, and modularise services that are part of digital payments systems – reversibility, cashback, chargebacks, intermediation etc. so that businesses can opt for what they need.
This would lower the transaction costs both domestically and especially so in cross-border transactions and faster credit from these transactions. This would help improve the liquidity of the small business.
How Digital Currencies Can Help Small Businesses
by Shai Bernstein and Christian Catalini
HBR 2022/05
R2G 