Why Barter isn't Bitcoin

Ever since the economic bubble burst in 2008, there has been a push from entrepreneurs, small business owners, and leading industries for a better, smarter, cashless way to attain vital business necessities. The answer was the rebirth of Barter and the invention of cryptocurrencies. Nearly ten years later, both barter and digital currencies are surviving and thriving, however most believe that barter = Bitcoin. Conversely, that is not true.

It is true that both are similar and stem from a common need provide businesses an alternative way to increase sales, widen their market demographic, and ultimately grow their business, even with limited funds. However, there are fundamental differences that make barter the safer, reliable, and better option.

The World of Barter

Firstly, it is important to understand how modern barter works. When using the word “barter” a majority of the time we associate it to the concept we were taught and partook in, in grade school, “Give me your pudding, and I’ll give you two Rice Krispy treats” or “Give me two rolls of silk for ten cows.” But modern bartering is much more complex than that.

Here at IMS, we are one of the largest trade exchanges in the nation with over 16,000 member businesses that encompasses both business and consumer products and services. We use a unit of exchange called Trade Dollars. This unit of exchange allows barter to take place between one or more parties when one party may not have a simultaneous need or desire for the goods or services of the other member. The selling member accepts the trade dollars which are then deposited into their account. They get to spend those trade dollars with other business members in our network on what they need or want when they need and want it.

For example, if you owned a restaurant and wanted to mount a $20,000 ad campaign would you want to write a check to the advertising agency or issue some gift certificates to your restaurant? When you write a check the money’s gone from your bank account. When you issue gift certificates you’re printing money. But the advertising agency doesn’t need $20,000 worth of gift certificates. The restaurant can sell their gift certificates to other buyers or members in the organization to earn Trade Dollars. They then can use trade dollars earned from the gift certificate sales to pay for their advertising and perhaps have enough left over to buy products or services from those who originally bought the certificates. Not only does this conserve the restaurants cash, but it also exposes them to new clients and new business that can help their own growth.

With trade, a business’ cash stays within the business, providing better management of cash flow in addition to putting idle resources to work, and converts perishable resources, unused inventory, and empty time slots into profits.

Now, we understand that the benefits may seem like a dream, but we assure you that it is rooted solidly in legal grounds. To put it simply, members can use credits accumulated for one item to trade for several different items that together add up to their total credits. But more importantly, barter and cash transactions are the same in the eyes of the Internal Revenue Service (IRS). Both are taxed equally. In fact, barter exchanges must report goods and services sold through barter to the IRS. As barter sales are reported as income by the members, the IRS also allows them to deduct business expenses paid with trade dollars as if they were paid in cash. When done properly, there is no tax advantage or disadvantage to trade, just transparency.[1]

The World of Cryptocurrencies

Unlike barter, modern and otherwise, Cryptocurrencies have only been around since the 2000’s. The most prominently known cryptocurrency is Bitcoin. The concept of Bitcoin was proposed in 2008 by a software developer under the pseudonym of Satoshi Nakamoto, as an electronic payment system based on a mathematical proof. The primary idea was to produce a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable, and immutable way. Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense, it's like conventional dollars, euros, or yen, which are also traded digitally. Transactions are verified by network nodes and recorded in a publicly distributed ledger called the block chain. The ledger uses bitcoin as its unit of account.

But how does Bitcoin actually work?

Going to bitcoin.org, they give a “brief” break down on how the system works[2]:

Once you’ve installed the software, it will generate your first address (you can create more when you need one) which you can disclose for payments. The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in this ledger. It allows Bitcoin to calculate spendable balances so that new transactions can be verified, thereby ensuring they’re actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography (Cryptography is the branch of mathematics that creates mathematical proofs that provide high levels of security). A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast to the network and usually begin to be confirmed within 10-20 minutes, through a process called mining. Mining is a distributed consensus system that is used to confirm pending transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all the subsequent blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively to the block chain. In this way, no group or individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.

So, What’s the Deal?

In the ten years, since it’s conception, Bitcoin and other cryptocurrencies have had a wide range of responses. After the initial excitement and view of the realm of possibilities, real concerns and questions arose. The most popular topics of concern was if these cryptocurrencies were a legal tender and if there is any accountability.

The resulting response for both issues was that Bitcoin didn’t act or fall in the definitions of traditional currency or tender. Bitcoin's most important characteristic is that it is a decentralized currency. This mean that no single institution controls the bitcoin network. It is maintained by a group of volunteer coders, and run by an open network of dedicated computers spread around the world. This attracts individuals and groups that are uncomfortable with the control that banks or government institutions have over their money.[3]

With IMS Trade Dollars, as well as other Trade/Barter Exchanges in the United States, they are held accountable and monitored by the IRS. The IRTA (The International Reciprocal Trade Association) is the only barter industry association that pro-actively advocates to preserve, protect and enhance the global barter industry and had successfully lobbied U.S. Congress for trade exchanges to be recognized by the IRS as third-party record keepers. The TEFRA Act was signed into law by President Reagan in 1982, and as a result effectively legitimized the barter industry in the U.S.

This key difference is exponentially important. In Primavera de Filiippi’s article from Wired[4], she expertly explains:

Because Bitcoin is a decentralized payment system that operates independently of any government or central bank, people can exchange value on a peer-to-peer basis, without passing through any financial intermediary. This means that the Bitcoin network does not reside in any given regulation, and can therefore be constructed to be agnostic to any jurisdictional rules. Given this current lack of a central regulatory authority, people can operate the network in a pseudonymous manner, without disclosing their identity to anyone. This provides opportunities for criminal activities, including tax-evasion and money-laundering.

Due to this primary detail, lawmakers around the world have trying to regulate this technology that no one fully understands for the past couple of years with little success. The IRS is taking actions by creating taxation regulations of virtual and nontraditional currencies. Because of that, barter networks are unfairly being lumped in with cryptocurrencies. However, IRTA clearly indicates the key elements that distinguish trade dollars from cryptocurrencies:[5]

IRTA goes on to say that “It is important for barter exchanges to differentiate themselves from cryptocurrencies since banks and financial companies have, and continue to, deny merchant services and/or credit lines to barter exchanges, based on their misperception that barter exchanges are cryptocurrency organizations.”

As governing bodies still try to work through the experimental nature of block chain technologies, the best businesses can do is stay informed and know the pros and cons of turning solely turning to a new fad in the digital economy. Barter can provide everything Bitcoin promises but in a safer, stable, regulated and more accountable environment.

Now that it’s clear that barter is NOT a cryptocurrency, the real question is why would a business trust something with so many unknown variables when something that has been around since before the turn of the century is a better business practice? Barter isn’t dead, in fact it’s probably one of the best kept secrets of the business world to grow your business, get what you need, AND keep cash in your pocket.

For more information on how a Barter Exchange can help your business, visit our website at www.imsbarter.com or feel free to call us at (800) 559-8515.