Empowering small businesses with digital assets and blockchain

I. Introduction

Small businesses stand at the forefront of innovation and play a pivotal role in maintaining the United States' global standing. There are over 33 million small businesses in the U.S., defined as those with fewer than 500 full-time employees. Despite their size, these businesses have an outsized impact on the nation's economy: they contribute 44% of the U.S. GDP and employ almost 62 million workers, or nearly half the U.S. workforce. Most are run by a single owner. Moreover, small businesses serve as an “essential vehicle for intergenerational mobility and social inclusion,” providing vital opportunities for immigrants and people of color. 

But small businesses face many challenges, including financial constraints and cyber security threats. Limited access to credit, liquidity, and high transaction fees make growth difficult. Most have less than a month of operating cash on hand. While big companies can invest more heavily in cybersecurity, small and medium-sized businesses remain exposed—75% of those handling critical infrastructure have experienced a cyber breach. 

Digital asset and blockchain technologies offer solutions to these problems. Together, they can help businesses secure funding, process payments more quickly, comply with regulations, track parts through the supply chain, and secure sensitive data. While these technologies face challenges to widespread adoption, they offer an innovative and increasingly popular model for doing business that is more inclusive, efficient, and secure.

Key Terms

Blockchain: a system that records and verifies transactions on a distributed network secured by cryptography. Public blockchains operate as open, append-only ledgers, meaning data can only be added, not removed or altered. 

Smart Contract: computer code that runs on the blockchain and operates automatically when certain conditions are met.  

NFT: a “non-fungible token” is a unique digital identifier recorded on the blockchain that can be used to authenticate ownership of digital assets like artworks, recordings, tokenized funds, and virtual real estate.

II. Challenges and Solutions for Small Businesses 

a. Loans and Credit  

Many small businesses have difficulty securing funding. In 2023, fewer than half of small business owners felt they had sufficient access to capital or loans, an 18% drop from 2017. Common problems with the loan application process, including form errors, paperwork delays, difficulties in proving identity, and the time needed to gather paper signatures can inhibit access to credit.  

Moreover, lenders often generalize risk determinations in their bid to manage costs. This approach excludes businesses that might be creditworthy but don't fit traditional criteria. Barriers are especially high for people of color and immigrants: studies show that almost a third of minority-owned businesses lack a banking relationship, and people of color and immigrants generally are more likely to rely on personal savings, credit cards, and home equity for funding.  

One solution offered by digital assets and blockchain are decentralized finance (DeFi) protocols, which can streamline loan processes and eliminate traditional biases. Smart contracts, which execute automatically when certain conditions are met, can be used to automate lending and borrowing. This has the potential to reduce costs, as businesses can transact directly with each other, eliminating intermediaries that require hefty fees and paperwork. Businesses can also earn interest by lending their own digital assets, using stablecoins to reduce price volatility. Finally, DeFi protocols are more accessible: they eliminate the risk of bias, and can operate cross-border, potentially offering funding to any small business connected to the internet. In 2023, DeFi lending protocols had over $14 billion in total value locked. 

Figure Technologies is one web3 startup that uses its blockchain platform to record, share, and exchange loan data. This approach can expedite access to capital and streamline loan origination and other services. Likewise, SALT allows small businesses to access liquidity through cryptocurrency-backed loans. Businesses can collateralize their digital assets, leveraging the value of their holdings without needing to liquidate them. 

b. Payments   

Digital assets and blockchain can also transform payments for small businesses. Credit cards, the most common method of payment for U.S. consumers, impose fees of up to 3.5% per transaction, costing merchants over $125 billion in 2022. These transactions also take several days to settle, cutting into businesses’ working capital needs. Fees and delays are even higher for businesses seeking to operate globally: the average international payment takes 1-5 days to settle and costs over 5%. Finally, businesses face the risk of fraudulent “chargebacks,” or payment reversals due to allegedly unauthorized transactions. According to Visa, losses from this so-called “friendly fraud” costs sellers over $25 billion a year. 

Digital assets offer small businesses an alternative to traditional payment systems that is faster, secure, and less expensive. Cryptocurrency transaction fees are often as low as 1%—for example, Coinbase Commerce charges merchants a flat 1% fee for all cryptocurrency payments. Transactions also settle almost instantly. These benefits can drastically improve the cash reserves and liquidity of small businesses: of the more than 2,000 U.S. businesses that now accept Bitcoin as payment, most of them (77%) do so for the lower transaction fees. And because cryptocurrency transactions are irreversible, they eliminate the risk of fraudulent chargebacks.  

Digital assets can also help small businesses expand their customer base. Because cryptocurrencies are borderless, businesses can “transact and trade from anywhere in the world at any time.” According to a recent survey, 85% of merchants view cryptocurrency payments as a way to reach new customers. Global consumers have increasingly shown a preference for businesses that align with modern payment trends, and offering digital asset options can signal adaptability and a commitment to convenience. Although cryptocurrency payments face barriers to full adoption, such as price volatility and the need for on- and off-ramps to fiat, innovation is meeting these challenges. For example, Coinbase Commerce eliminates crypto-volatility for merchants by ensuring they receive the exact amount requested in a transaction. And stablecoins, whose value is pegged to a fiat currency like the dollar, reduce both price volatility and conversion fees.   

c. Regulatory Compliance 

Small businesses must comply with a variety of state and federal regulations. These include employment and labor rules; health and safety requirements; environmental regulations; and tax and health care obligations, which require annual reporting. Many businesses, such as electricians, restaurants, and those selling regulated items like alcohol or tires, also need to obtain the proper permits, licenses, and certifications, many of which must be renewed each year. Per employee, the annual cost of compliance with federal regulations “is significantly higher for smaller firms than larger firms.” Studies show that small businesses spend over $80,000 on compliance costs in their first year of business, and about 10% will face fines for noncompliance. 

The immutability of blockchain data can help. By tracking the steps necessary for compliance, blockchain creates a transparent audit trail that businesses can use to demonstrate proof-of-process to regulators and licensing bodies. Smart contracts can be used to generate quarterly reports that verify compliance, lowering both costs and the risk of error. This technology also can “improve transparency and reduce fraud” for professional licenses and certificates, replacing the current paper-based system with one immutable ledger that all parties (employers, employees, licensing bodies, and regulators) can view.

Blockchain also has the potential to streamline employee hiring, a process that often touches on regulations governing data privacy, retention, and anti-discrimination. Hiring is resource-intensive for small businesses, particularly as employees switch jobs more frequently. But blockchain can ensure that a candidate’s data is retained permanently and is immutable, “minimizing falsification risks.” Schools and employers can store credentials, such as a college degree or prior employment, on the blockchain, where they could be automatically verified by a business, reducing the need for tedious manual checks. Smart contracts also can expedite the process of employee onboarding, which typically requires significant time and input from various departments, by automating new employee permissions once certain conditions (such as training or documentation) are met. 

Blockchain can be especially helpful to small financial institutions, which need affordable and scalable solutions for complying with federal Know Your Customer and Anti-Money Laundering (KYC/AML) laws. Blockchain can expedite customer onboarding—typically a lengthy process— by allowing businesses to access previously vetted customer information. Blockchain technology can also enhance compliance by letting businesses track the flow of assets beyond their individual platforms, giving financial institutions a far deeper and richer understanding of the risks posed by specific transactions and customers. This “know your transaction” approach is groundbreaking in part because the data received by institutions is immediate, independent, and dynamic. For example, KYC can be directly incorporated into transaction monitoring tools, alerting a business whenever a customer engages in risky transactions. 

To be sure, these applications of digital assets and blockchain technology face challenges in scaling and securing buy-in and interoperability among different institutions. Businesses adopting these solutions also must be sure to comply with state and federal laws that govern employment and data privacy, among others. But new companies like Finclusive offer blockchain-based KYC/AML solutions that will help businesses ensure compliance. Securitize is another startup that connects small businesses with a global investor base by performing compliance checks and ensuring investor accreditation. 

d. Logistics    

A substantial portion of America’s construction, manufacturing, and agricultural industries consist of small businesses. For example, over 90 percent of U.S. cement and concrete product manufacturers have fewer than 50 employees. Small businesses and independent contractors also make up at least half of U.S. machine shops, apparel manufacturers, printers, and bakeries. Like larger companies, these businesses struggle with logistics—including inventory management, product delivery, supply chain fluctuations, and lost or damaged goods. But innovations like NFTs and smart contracts can offer solutions that are both secure and cost-effective.  

“Last mile delivery” is one of the most significant challenges for small businesses. This critical final step of the delivery process is dominated by large companies offering fast, free shipments. It is not only crucial for customer satisfaction, but also represents the most cost-intensive part of the supply chain, accounting for 41% of resources. To tackle this issue, many small businesses rely on third-party logistics and adopt last-mile-as-a-service solutions. Adding to this challenge, about 43% of small businesses do not track their inventory. This lack of inventory management can lead to inefficiencies and inaccuracies throughout the entire supply chain and add to the difficulties of last-mile delivery.

Nonfungible tokens (NFTs) can help solve these problems by providing real-time shipment tracking and updates—NFTs act as unique and verifiable identifiers for supply chain data such as purchase orders, inventory units, and bills of lading. Further, each participant in the chain can claim their own unique ID and use it to “sign” tokens as they move through the chain. This creates a built-in, tamper-proof audit trail of each stage of the supply and manufacturing process. Finally, smart contracts can automate additional business processes like payment settlements and contract execution, eliminating the risk of manual errors and following built-in security protocols that are resistant to tampering.

Companies like ripe.io are using blockchain and machine learning to automate farming processes and track products throughout the food supply chain, allowing both distributors and consumers to verify the origin of their grains and produce. Blockchain can also be used to track car parts from suppliers to workshops, minimizing the risk of counterfeit spare parts, or to track financing of automobile inventory at car dealerships, eliminating the need for physical inspections and audits. As supply chains often include many parties, however, companies considering implementing blockchain technology must ensure that their system has the scalability to handle the volume of transactions necessary without sacrificing speed or efficiency. 

e. Cybersecurity  

Small businesses face increasing cybersecurity threats. Each year, almost half of all cyberattacks target small businesses, and attacks are increasing. Hackers often prefer to target “mom-and-pop” businesses because their data is less secure, and they offer a gateway to larger companies. For example, hackers who stole customer data from Target reportedly accessed the data through a heating and air conditioning subcontractor in Pennsylvania. Other recent incidents include phishing and ransomware attacks on grocery stores, doctors’ offices, and school boards.  

Blockchain technology can help. The use of a distributed ledger means that data is recorded on each node in the network, eliminating the risks from an attack on central storage. Further, blockchain’s consensus algorithms can monitor for data abnormalities and malicious acts without the need for a central authority, which eliminates frictions as well as the need for costly central servers and their overhead maintenance costs. Finally, blockchain relies on encrypted public key infrastructure, an innovative approach that strengthens data authentication and “secures data communications and record management.” Companies both small and large, like Spring Labs and IBM, now offer blockchain security services to ensure tamper-proof data storage and to address ongoing challenges like privacy and scalability. 

III. Conclusion    

Small businesses are at the heart of communities across the United States. But they continue to face challenges related to credit, cybersecurity, and regulatory compliance. Digital assets and blockchain cannot solve all of these problems, but their decentralized, secure, and inclusive nature make them foundational tools for the future. For small businesses, embracing these technologies may be critical to their resilience and growth. 

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