Cryptocurrency is gaining popularity and moving to the mainstream. This digital currency is used to buy goods and services, but it uses an online ledger with solid cryptography to secure online transactions. Some organizations have created their currencies, which can be traded within the company for their services. They are essentially like arcade tokens; one must exchange real currency to access cryptocurrency to retrieve a good or service.
Cryptocurrencies use blockchain, and it is a form of technology that is spread across multiple computers which manage and documents transactions. This blockchain system is designed to make cryptocurrency very secure, making it appealing to investors. Ultimately, cryptocurrencies provide potential opportunities as an element of a total rewards system, but there are expectations that an organization should have, and there are risks involved.
Currently, cryptocurrency is seen as a great investment
opportunity and is highly sought by many with an appetite for risk.
For example, three years ago, if one had invested $100 in
Bitcoin, Ethereum, XRP, Bitcoin Cash, EOS, Stellar, Litecoin, Cardano, Monero,
and Dash, that investment would have grown by 613%. However, this is primarily
due to Cardano and Ethereum, who delivered half and 27% of total gains,
respectively. While cryptocurrency can be very unpredictable, these 10 products
show us that crypto is growing and likely will continue to.
That is demonstrated by Bitcoin, Cardano, and Ethereum, who all
ranked highly three years ago but have continued to flourish. Lastly, creating
a portfolio of various cryptocurrencies is essential, as this will mitigate.
Cryptocurrencies, such as bitcoin, are now being used as part of income packages for employees at progressive companies worldwide. However, there are many challenges when it comes to executing this practice. This includes questions regarding the legality of cryptocurrencies. Not one central bank around the world has approved cryptocurrency as a recognized form of payment, which creates a challenge for payroll departments to rely on cryptocurrency as a payment equal to traditional currencies.
Additionally, in the developing world, cryptocurrencies are mostly unregulated, with the exception of El Salvador which has adopted it as legal tender and with Paraguay, Panama and Argentina, also now looking into cryptocurrency regulation. However, China, Russia, and Vietnam, consider trading or mining of cryptocurrencies to be illegal. Against this global backdrop, the United States, the UK, the European Union, Canada, and Australia have a more positive outlook on cryptocurrency exchanges.
Of course, there are challenges to consider when weighing the role that cryptocurrency can play in your total rewards system. Take into account the following three issues, for example:
1. Taxation. In broad terms, many countries’ “tax systems” rely on well-defined tax rules and regulations, in determining how elements of an employee’s pay, cash and/or non-cash benefits and incentive-based pay (whether cash or stock based) are taxed. However, many of these systems have yet to develop comprehensive guidance, rules and regulations to cover the use of cryptocurrencies in the rewards mix. As such, calculating any cryptocurrency related employment income liability and any related employer liability becomes an issue and a potential financial risk for “underpayment” for both employee and employer alike.
2. Labor laws. A country’s existing labor laws may also throw up challenges. For example, according to the Fair Labor Standards in the United States, “wages must be paid in cash or negotiable instrument payable at par.” Cryptocurrency does not fall under either of these categories. While laws vary from state to state and are different in other countries, there is an obvious challenge regarding the legality of this type of payment. In addition, in some federalized countries such as the U.S., individual states may have their own rules as to how wages may be paid. For example, in a number of U.S. states, wages must be paid in U.S. currency. Of course, it might be possible for an employer and employee to agree (in writing) to receive part of all of their wages in another form, but this could not be “unilaterally” imposed or demanded by one party alone.
3. Cryptocurrency price volatility. Where countries have provided employee tax guidance on cryptocurrencies received by employees in exchange for services, as in the U.S., the issue of price volatility of cryptocurrencies can also be a potential issue. Guidance from the U.S. tax authorities outlines that an employee will be subject to income tax on the “fair market value” of the cryptocurrency granted to the employee from their employer, even if the cryptocurrency is not exchangeable for cash and is as such “liquid.” If the cryptocurrency is liquid at the time of grant, this would result in the employee generating an income tax liability that would need to be satisfied from “out of pocket” cash.
This could potentially become a much bigger problem where the employee is granted a set number of a cryptocurrency rather than a set value. A significant upward shift in the price of the cryptocurrency, while it remains liquid, could result in a significant income tax liability on grant for the employee, who would need to find other sources of cash to meet the tax liability arising.
The considered approach would be to ensure all base compensation remains paid in “cash” and that only additional discretionary or optional elements of rewards, such as bonuses or other incentive-based pay, be capable of being delivered via cryptocurrency authorized in writing by the employee and in a form that clearly acknowledges the risks of doing so. In addition, employees also must make legal and tax research a priority when considering getting paid with cryptocurrency, as tax laws vary from country to country. Finally, payroll departments will need adapt to the additional challenges that arise when integrating cryptocurrency.
While there are clear challenges to consider and overcome when integrating the use of cryptocurrencies into the total rewards regime, the growing interest in using “virtual currency” to incentivize employees is likely to see increased usage beyond the current tech company environment. To wit:
1. Internal blockchain-based incentive platforms. A company’s creation of its own internal blockchain-based incentive (as explored by PayPal) provides a very effective mechanism for employee incentivization. A company can create virtual currency, which holds no value outside of the company, to reward its employees for behaviors and or performance beyond what is capable of being covered by traditional bonus or employee recognition schemes. In addition, creating a virtual currency (tradeable among employees with each transaction being posted to effectively a “public ledger”) has the potential to drive an employee’s sense of connectivity to the company, thereby increasing employee engagement and the overall employee value proposition.
2. Long-term incentives. Stock options and restricted stock are stock based long-term incentives used by many companies, from start-ups to publicly listed entities, as part of their overall compensation packages. While such incentives are well understood by both employee and employer alike (especially in terms of tax treatment), the use of stock is both costly to the business from an accounting perspective and dilutive to existing shareholders. However, it is also possible to build into a cryptocurrency-based long-term incentive, the same employee incentivization and lock-in structures found in stock options and restricted stock awards, such as performance conditions, vesting dates, lapse events and conditions. Using such crypto-based awards is attractive to the employee given the liquid nature of the more widely known crypto currencies when awards vest (over equity awards for which the market to sell may be limited). In addition, the high price volatility associated with cryptocurrency can be very attractive to employees willing to take on the risk.
Finally, where a privately held holding group wants to create a long-term incentive for management teams in their subsidiary companies without the use of equity, but still be able to a deliver an equity type outcome rather than a crypto-based solution, could be employed.
Such a cryptocurrency-based scheme would be non-dilutive to shareholders, can be hedged like equity incentives, and is less cash costly to the business than a cash based long-term incentive and all with the possible upside of delivering far greater value than where Holdco’s equity was used.
While the use of cryptocurrency as an element of the total rewards system will inevitably see more and more uptake in the working environment, one must consider the reality that cryptocurrency may not always have the same value and seek expert advice to develop a balanced approach and portfolio.
Cryptocurrency is not a guarantee and may not always have the same value, which can create challenges for employers and employees alike. Employees may not want to be paid with cryptocurrency if the value drops significantly but may be tied into a contract where that is their only option. However, there is so much interest in cryptocurrency that employers and employees are bound to find a way to make a new system work.
Nevertheless, despite the risks and unknowns, cryptocurrency as part of the total rewards system appears appealing to employees right now, which means employers should at the very least consider introducing this new idea. If you’re looking to take advantage of the opportunities and minimize the risk that comes with cryptocurrency as an element of a total rewards system, the most important thing is to find the right expert adviser backed by an organization you can trust.
About the Authors
Paul Lalovich is the managing director of Agile Dynamics.
Chris Page is a partner at Agile Dynamics.