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Mircopayments beyond the PoC – A New Space for Startups and Advisories

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The conceptual idea of the Internet of Things (IoT) with a multitude of possible use- and/or business cases has gained increasing attraction in the course of the past few years. In addition to that, the evolution of blockchain technology (or to be more general, distributed ledger technology) opened a variety of new concepts for the transaction of information or digital assets. As a combination of both, the idea of utilizing a crypto-currency for micropayments in an IoT environment has gained quite some popularity.

In systems where (small) devices frequently transfer information amongst each other, various scenarios can demand for the additional transfer of value as well. Two prominent and frequently discussed examples are the car-to-car communication between self-driving cars and the machine-to-machine communication in an autonomous industrial production environment. While in the first case cars would utilize micropayments to pay each other for priority services like parking or passing, the machines of the latter example would pay each other for construction or maintenance services as well as for material or energy supply, respectively.

The advantages of distributed ledger based payment systems for such use cases with very frequent and very small payments seem obvious – low or no transaction fees, in-time settlement, no drop out risk due to smart contracts and others.

Proofs of Concept (PoC) for such and other use cases have been constructed a lot and are proudly presented on almost every second stand on the respective trade fairs. Giving the impression to be ‘out’n ready’, these PoCs seem to wait for going on production tomorrow.

At this point the question arises: Is this really the case? Is the technical feasibility of such use cases the only fence to climb? Or aren’t there a bunch of other things to be clarified first, before companies can really use distributed ledger based micropayments in a production environment?

These things-to-be-clarified-first shall be the content of the following paragraphs. (Besides, maybe the most striking problem of current distributed ledger currencies – the volatility – is beyond the scope of this article and will be left out.)

Tax

The taxation of distributed ledger based micropayments has already been discussed a bit. The majority of the discussions are on income tax, because this also effects the multitude of private crypto-investors. A good non-technical article can be found here. The biggest issue from an  authoritativeperspective is here, that by the nature of a crypto-currency, it is impossible to prove or determine assets if the client does not report.

Yet more important for micropayments is value added tax (VAT). If a machine sells a good or service to another machine, VAT could be considered – no matter how small the amount is. For micropayments, where even issuing an invoice seems counter-intuitive and cumbersome, this is not self-evident. But issuing correct invoices is always crucial for tax reasons and (from a German VAT perspective) an invoice has to fulfill certain requirements in general. However, certain requirements can be ignored if the amount is less than EUR 250.

Furthermore, VAT law differs between the sale of a good and a provided service. This distinction is crucial since both arise different tax-related consequences. In most cases such events will be treated as services, as a sale of a good generally requires a physical object. Additional issues might arise in cases where the involved entrepreneurs or entities are established in different countries – e.g., the question of where the event is actually taxable.

This shows, that there is an urgent demand for well structured tax law compliancy and in the best case, that authority approved technical or conceptual solutions for companies to fulfill their obligation of paying taxes in a micropayment environment.

Audit

First, auditors have to clarify how to treat a crypto-asset. In the end a new category would be necessary, somewhere between ‘Cash’ and ‘Trade Receivables’. But then again, the problem of non-traceability occurs. A classical “confirmation of balance” is not possible, because no central entity can confirm your assets. Or in audit-words, the completeness cannot be checked. One partial solution can be similar to how PayPal accounts have been treated, to make the client log in to the account while the auditors are present, yet this still does not solve the completeness issue. On the other hand, clients normally do not have an intention to hide assets, which lowers the importance of this issue a bit.

From another perspective a token could also be treated like a commodity or inventory. This heavily depends on how it is used.

Auditors need to prepare audit companies with micropayment-based business models. Therefore, a sound understanding of the backbone technology is inevitable.

Additionally, in most cases, a specific interface for the company’s ERP would be required for the usage of a crypto-currency for micro payments. Even if the entire business model would be based on micropayments, at least the accounts for payroll, inventory etc. are certainly accounted in the one or other classical ERP (if not pure EXCEL).

Hence, either the established ERPs need to provide such functionalities, or StartUps will have to fill this gap.  

Law

There are several possible legal issues that could arise from micropayment environments like the two examples given above. Firstly, anonymity may have several advantages, yet it comes along with a couple of legal apprehensions. The most prominent are money laundering and other crimes. Regulation, balancing/checking systems – or whatever future developments will show – will be needed to protect both users and the society as a whole from those.

Fees, if they are issued on a payment system then they need regulation as well. Especially for commercial technologies, the users need specific protection against exploitation. As a technical consequence, transaction fees need to be flexible and human-controllable. System-generated non-controllable transaction fees might run into serious legal issues. The latter is not only important for transaction fees, but also for broker fees.

Especially the latter issue can not only be addressed by authorities, but should as well be kept in mind of companies/solutions operating the payment systems.

Monetization

Finally, the transfer of a crypto asset into the one or other FIAT (‘real’) currency is an easy task for a private wallet of, e.g. a couple of ether, yet there is currently no solution for a large scale roll-out of such transfer processes. The frequent and large amount usage of the classical crypto exchange markets like binance.com and others does not seem appropriate. Especially, such an approach would come with a significant additional cost. This problem is actually much more striking than it may appear at first sight. If, e.g., a large car producer would decide to really implement a micropayment system beyond the PoC, the company would, to the current stage, put itself in a strong dependency on the one or other crypto-exchanger. The previously mentioned necessity for regulation of fees is well visible under this perspective.

Furthermore, most current crypto currencies work on a pre-paid basis. You first buy a stock of token and can spend these until you need more. This causes a withdrawal of real cash from a company’s assets and lowers liquidity. Other, post-paid or credit-based systems, similar to credit cards, might bring new possibilities and broaden the range of possible users/use cases.

To sum it up, there is a couple of construction sites around the house of micropayments that only partly have been worked on so far. A simple and evolution from PoC to going on production seems far away, as long as no solutions have been found/developed for those and other issues.

However, this does by no means diminish the expectations towards the concept of distributed ledger based micropayments – the opposite is the case. All these construction sites are nothing else than new operating space for both, StartUps and established companies, to develop technical or conceptual solutions – in order to peace by peace finish the building. Additionally, these issues raise demand for new advisory services and specialized audits.

To stay in our picture of a construction site: Let’s pick up the shovel and start working!

About the author: Dr. Jonatan Siegmund is a senior consultant at Ernst&Young for topics around RPA, blockchain and IoT. He also has the role as the EY Assurance RPA lead for Germany.

Recommended further reading: The Nuts and Bolts of Micropayments.

Featured image from Shutterstock.

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