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If you’ve paid much attention to financial markets or news in the past year, then you’re at least acutely aware of the cryptocurrency craze that’s taken place in the early stages of 2021.
Bitcoin, the original and most mainstream cryptocurrency, began 2020 at a value of $7,194.89 and surged at the tail end of the year and the first quarter of 2021, reaching a high-water mark of $64,863 in April. Likewise, ethereum, the second largest cryptocurrency, skyrocketed in value during this time frame, going from around $130 in value to begin 2020 to its current price of $2,119. While ethereum is still around its all-time high, bitcoin has since settled back to $33,475 as of July 1, but both coins’ extreme rise vaulted them into the mainstream conscience, which has since lent itself to many intriguing developments in the space.
One such development is the concept of employees receiving all or a portion of their compensation in cryptocurrency instead of a federal currency such as the United States dollar. Does this idea have staying power or is it merely a prisoner of the moment? Employers dipping their toes into the water will certainly form the answers to those questions in the coming years. And while there are certainly benefits to offering this type of compensation package as an organization, there are also several important details to consider before moving forward with such an endeavor.
The Business Case
While the buzz around cryptocurrency is palpable, companies that are actually offering it as a compensation alternative is still a niche group. Those that work in the blockchain or cryptocurrency space, such as Coinbase, pay their employees with bitcoin. These companies and their employees understand and believe in the technology or currency — it is the core of their business — thus it makes sense to compensate in this fashion.
For other companies, those that don’t operate in the blockchain or crypto space, there’s a multitude of factors to consider. Fred Whittlesey, principal consultant at Compensation Venture Group SPC, said the current interest around crypto in compensation plans reminds him of the stock plans craze in the 1990s.
“Tech companies had always used stock options and then in the 90s the rest of the business world decided to start granting stock options,” Whittlesey said. “It was more complicated than they realized from a regulatory standpoint and then they realized they were spending a lot of time and money on stuff that people didn’t even understand.”
Employers that are toying around with the idea of providing their employees the option to receive compensation in crypto need to identify the business cases for doing so, Whittlesey said. An organization could surmise that by offering their employees the option to be paid in bitcoin, they would stand out from their competition and might attract a higher level of talent. Similar to how ping pong tables, fitness centers, bar areas and other office amenities are meant to signal to prospective employees the company is a fun or cool place to work, offering bitcoin as a form of compensation could signal it’s a cutting edge, forward-thinking company.
Another business case, Whittlesey noted, is the ease of cross-border currency transfers for multinational organizations. A company might view it as an innovative way to consolidate its payment structure for the entire enterprise while eschewing exchange differences across nations. However, organizations would have to be cognizant of the varying regulations regarding cryptocurrency throughout the globe.
“It’s healthy curiosity,” said Whittlesey, “but we’ve seen too many times where companies get enamored with a new shiny object and go chasing it without really understanding why they’re doing it and then they shoot themselves in the foot.”
The biggest hurdles companies will have to overcome in regard to paying their employees in bitcoin are of the legal variety. Under the Fair Labor Standards Act (FLSA), wages must be paid “in cash or negotiable instrument payable at par.” Cryptocurrency is, of course, neither. And while the more popular cryptocurrencies can easily and immediately be sold for cash, this fact might not matter to the U.S. Department of Labor, noted Fisher Phillips, LLP.
The Atlanta-based firm also said employers will have to consider varying state laws, some of which require wages to be paid in U.S. currency, including California, Washington, Georgia, Maryland, Delaware, Pennsylvania, Michigan, New Jersey, Texas and Illinois. Specific restrictions and accompanying exemptions vary from state to state. In Georgia, for example, the statute does not apply to salaried company officials, superintendents, or certain department heads, or to employers in the farming, sawmill, and turpentine industries. Meanwhile, in Texas, while wages are generally required to be paid in U.S. currency, “an employee may agree in writing to receive part or all of the wages in kind or in another form.”
“For these reasons, you should pay base compensation in the U.S. currency in amounts that meet the federal, state, and local requirements for minimum wage, overtime, or salary-based exemptions,” Fisher Phillips wrote. “Any cryptocurrency payment program should be optional and authorized in writing by the employee (on a form clearly acknowledging the risks of doing so).”
Aside from various tax and employment laws, which would extend outside the U.S. for many companies exploring their crypto payment options, employers would also need to then determine how to proceed with the design and organization of the compensation plan and distribution. Fortunately, Whittlesey noted, many payroll companies have already figured this part of the equation out.
you’re a company that’s decided it’s a good idea to offer to pay your employees
all in crypto, there are payroll firms that will handle the withholding and all
the banking functions,” he said.
“The employer doesn’t have to worry about that anymore.”
Lastly, employers that decide to push forward with offering crypto in their compensation plans will need to be extremely diligent in their education and communication efforts. Bitcoin, for example, is a volatile asset that’s value fluctuates. Employees who aren’t well versed in crypto should be made aware of the potential risks involved in accepting part or all of their salary in it, including tax implications.
“It’s kind of the worst of both worlds with taxes, because it’s paid like salary with withholding and FICA. But as soon as you liquidate it, now you have a capital gain or loss,” Whittlesey said. “Now think about the proportion of your employees who have never had a capital gain, or a capital loss and you have to explain that. It’s the communication and education challenges and keeping people from making decisions that may seem cool, but really aren’t in their best interest financially.”
Crypto Crystal Ball
At present, most of this is theoretical. While cryptocurrency has entered the mainstream of finance for individual investors, widespread speculation around its viability still exists and many employers likely aren’t considering an adoption of bitcoin or ethereum in their comp plans anytime soon.
However, the green shoots of crypto are appearing throughout the financial landscape and as the underlying blockchain technology continues to improve, more businesses will continue to accept these digital coins as forms of payment, which will lead to more widespread adoption. Alongside this, governments will develop more sophisticated regulations to formalize its use.
Whittlesey said he foresees a future where paying in crypto will be a foregone conclusion, but there will be plenty of chaos in the journey to get there.
“As with any new compensation idea, we’ll read about the successes but we won’t read about the failures and that’s always true with new rewards ideas,” Whittlesey said. “In a three-to-five year timeframe, this technology will become so embedded in our lives that it will be obvious that it’ll be used as a part of payroll. But that’s not going to look like it does today with ‘hey, do you want some bitcoin.’ We’re at the very first part of the path to that."
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