Cryptocurrency Compensation: Look Before You Leap

Definitions: Cryptocurrency and Blockchain Technology

There is a wide array of definitions of cryptocurrency. Here, we define cryptocurrency as digital or virtual currency. Cryptocurrency “is a medium of exchange that functions like money (in that it can be exchanged for goods and services) but, unlike traditional currency, is untethered to, and independent from national borders, central banks, sovereigns, or fiats” (Maese, Avery, Naftalis, Wink, & Valdez, 2016, p. 468).

Some researchers have posited there may be over 10,000 different types of cryptocurrencies traded today, encompassing a total value of over $2.2 trillion (Irma, Maemunah, Zuhri, & Juhandi, 2021). Bitcoin is one type of cryptocurrency that has become the most popular digital currency (Irma et al., 2021). Bitcoin’s behavior “more closely resembles a technology-based product, an emerging asset class, or a bubble event, rather than a currency or a security” (White, Marinakis, Islam, & Walsh, 2020, p. 1).

Blockchain is the underlying technology which powers cryptocurrency (Ertz & Boily, 2019). The technology relies upon sharing data among peer-to-peer (P2P) networks (Lee, 2019). Virtual transactions such as the transfer of funds are recorded on a digitized public ledger called the blockchain (Lerer, 2019). Uses of blockchain technology in human resources include the following: background/employment history checks, employee data security/access, smart contracts for the contract/temporary workforce, compliance/regulations, and benefits/payments (Wiles, 2019). Other applications of blockchain technology include training and development and payroll (Fachrunnisa & Hussain, 2020).

History of Money

Money has evolved throughout human history, and cryptocurrency seems to be the latest trend. The barter system is the first known form of money but was flawed because each party needed to have the desired good available in order for the transaction to be successful (Dumitru, 2021). Supply and demand were inconsistent with bartering, and this inconvenience led to the creation of commodity money, or physical money, to buy goods and pay people. The Greeks started using metal coins as early as 650 B.C (Goldstein, 2021).

Printed or currency money replaced commodity money, mostly because it was more convenient and easier to use. In the mid-19th century, private banks in the United States (U.S.) printed their own money, but this created uncertainty and doubt both in terms of the solvency of the banks and value of the notes they issued. Eventually, the federal government stepped in to create the modern-day dollar, a common currency issued as a Federal Reserve Note, which was backed by gold until 1934 (Cheng & Torregrosa, 2022). In 1971 during the Nixon administration, President Nixon removed the U.S. dollar from the gold standard (Zoeller & Bandell, 2019).

Fast forward to today, and digital payments via credit card, debit and other pay transfer methods dominate. Most younger workers get their paychecks direct deposited, pay bills online, and are generally comfortable with electronic payment systems and technology. This paves the way for organizations to consider innovative ways to attract and retain these employees via compensation, especially those concerned about inflation and/or have an appetite for risk (Lalovich & Page, 2021).

Reasons Why Employees May Want to be Paid in Cryptocurrency

There are various reasons why employees may wish to be paid in cryptocurrency. The most obvious is the potential of mass generation of wealth. Cryptocurrencies, while volatile, have seen their values skyrocket, and many workers––especially younger ones––seek an opportunity to get rich quickly. As per a New York Digital Investment Group (NYDIG) survey, 54% of current Bitcoin holders want a portion of their salary paid in cryptocurrency, with 27% of those under age 30 expressing a likelihood to leave their current job for an equivalent role that pays them in Bitcoin (Bizouati-Kennedy, 2022).

Another reason employees may wish to be paid in cryptocurrency is that their organization is strongly invested in the technology in some way (Irma et al., 2021). For instance, the company where they work may be engaged in cryptocurrency trading, storage, mining, or blockchain. In these cases, cryptocurrency is likely ingrained in the culture of these companies and in the minds of the employees. They are strong believers in the potential of blockchain technology and seek a major stake in its future success.

Third, employees may find tangible benefits toward adopting and using cryptocurrency now. For instance, owners of cryptocurrency can send international payments quickly and transfer funds without a third-party intermediary, avoiding costly wires and transfer fees (Ozer, Seker, & Korkut, 2020). Proponents may view cryptocurrency technology as a more secure means of payment than banks or clearinghouses, since the platforms operate on open-sourced software that anyone can view (Ayeswarya & Varghese, 2021). More and more companies such as Whole Foods, Starbucks, and Home Depot are accepting cryptocurrency as payment in some capacity, making its overall use more viable (Nickell & Schaberl, 2022). Some may even be drawn to cryptocurrency from an ideological standpoint, preferring to use money that is not backed by a central government and has potential to uplift third-world countries and lessen global inequality (Thier, 2022).

Fourth, concerns among the labor force, both working and not working, revolve around wages and inflation. Although real wage growth increased by 2% in 2020–2021, this growth still lagged behind inflation during the same time period (Howard, Rich & Tracy, 2022). This gap may result in job seekers looking for a longer period of time which has an impact on recruitment and productivity (Brooks, 2022).

While employees and compensation professionals may be excited by the opportunity to incorporate cryptocurrency into their compensation strategy, there are a number of issues at play when considering whether to include cryptocurrency in your compensation and benefits package. The list of factors below is not exhaustive, but these factors do highlight some key considerations for compensation professionals.

Legal/Regulatory Factors

It is critical to note that the legal/regulatory framework begins with Article I, Section 8, Clause 5 of the U.S. Constitution which gives Congress the sole power to coin money. The IRS issued Notice 2014–21 classifying cryptocurrency as property for tax purposes. “That position is contradictory to the view of several other federal stakeholders, including courts and regulatory agencies” (Liedel, 2018, p. 145). These competing viewpoints will require compensation professionals to be flexible and aware of the fluid interpretation and understanding of cryptocurrency.

The legal/regulatory issues include but are not limited to the Fair Labor Standards Act and U.S. securities law. The Fair Labor Standards Act of 1938 mandates employers to pay their employees “in cash or negotiable instrument payable at part” 29 CFR §531.27. This requirement would satisfy the employer’s minimum wage or overtime obligations (ThomsonReuters, 2014). However, cryptocurrency is considered neither cash nor a negotiable instrument in the United States.

State and municipal laws must also be checked and vary widely. Some state employment laws explicitly require employees to be paid in U.S. currency, while others require employment wages to be paid to workers without costs, fees, or encumbrances, creating challenges for employers seeking to pay employees in cryptocurrencies (Lee, 2021). States like Texas are less stringent. For example, the Texas Labor Code, Sec. 61.016 Form of Payment, allows employers to pay wages to an employee in multiple forms, “(a) An employee may agree in writing to receive part or all of the wages in kind or in another form.” This language on its face seemingly opens the door to compensating employees in cryptocurrency in Texas (Christie, 2021). Other states such as California do not have clear guidance as to whether or not their laws allow for payment in cryptocurrencies (Bloom, 2022). Generally speaking, unless employees have easy access to a market or system that allows them to convert their cryptocurrency pay into cash without fees or encumbrances, the more likely the process will be viewed as problematic by a number of states.

Beyond compliance with the Fair Labor Standards Act, some types of cryptocurrencies may be categorized as investment contracts which U.S. security laws may regard as a type of security and hence subject to such laws (Ivins Phillips Barker, 2021). Recently, the SEC has cracked down on issuers of cryptocurrency initial coin offerings based the grounds that crypto is considered a security, and thus subject to further SEC regulation in the form of registration requirements or filing for an exemption (Lee, 2021).

Employers seeking to include cryptocurrency in retirement plans must consider regulations which fall under the Employee Retirement Income Security Act (ERISA). ERISA imposes a standard of care on plan fiduciaries, meaning they must act prudently and select investment choices that are in the best interests of plan participants, including the difficulty in making investment decisions and risk. There is clear debate over this topic with cryptocurrencies, as they may not be widely understood by participants, nor will investors be protected from wild fluctuations in performance. There are other risks as well. Cryptocurrency exchanges are vulnerable to hacking, and investors who lose or forget their access keys or passwords may lose their entire crypto investment forever (Blachman & Steffen, 2019).

Administrative Challenges for Employers

Employers who use cryptocurrency assets to pay employees should expect to take on additional administrative responsibilities because the process of paying employees becomes more complicated. Employers essentially take employee wages to purchase cryptocurrency and create or fund an employee account. This not only makes the payroll process more difficult, but also employers are likely to incur transaction fees during this process, making paying employees more costly (Webster, 2018). Also, employers may encounter difficulties with cryptocurrency technologies. Bitcoin exchanges are sometimes unreliable and are vulnerable to malware and fraud (Lifshitz, 2021).

Additionally, the accounting treatment for cryptocurrency is still ambiguous in the United States, creating uncertainty and challenges for employers. Although cryptocurrencies are currently treated as property for federal tax purposes, there is no mention of digital assets, crypto assets, or cryptocurrency in any generally accepted accounting principle (GAAP) in the Accounting Standards Codification (Nickell & Schaberl, 2022). At this point, employers holding cryptocurrencies to pay employees must calculate capital gains and losses for taxation, creating an additional administrative burden (Webster, 2018). Further, the tax treatment for Bitcoin and other cryptocurrencies is difficult for multi-national corporations. Tax authorities need to know if cryptocurrencies are U.S.-sourced or foreign-sourced, but this cannot be decided until the classification of digital assets is settled (Sundaravelu, 2021).

Due to the nascent nature of cryptocurrency, there is a risk that the Internal Revenue Service (IRS) or the Securities and Exchange Commission (SEC) changes their guidance, which puts employers at risk. If changes are approved in deeming cryptocurrencies as securities, employers will have to comply with a host of new state and federal security laws and recordkeeping requirements in addition to wage and hour laws (Bloom, 2022).

Culture of Risk

A major consideration with paying employee in cryptocurrency is the culture that it creates. Organizational culture is ubiquitous and represents the set of values, symbols, and beliefs that guide the behavior of individuals (DeNisi & Griffin, 2019). Organizational leaders need to determine whether they want to submit their employees to an environment that encourages high risk and high reward for their base pay compensation, something that has typically been boring and predictable.

The risks of owning Bitcoin and other cryptocurrencies are undeniable. The first Bitcoin was worth less than $1 and skyrocketed to over $65,000 in value in 2021, but has since massively regressed (White, 2022). Cryptocurrencies like Bitcoin fluctuate dramatically in price because they are mostly unregulated, lack physical substance, and are not typically tethered to a tangible asset (Nickell & Schaberl, 2022). They are risky because they do not have any metal value like gold or silver nor do they have any government-backed guarantee (Ozer et al., 2020). They trade nonstop, 24 h per day, 7 days per week, which provides convenience and excitement for traders but may put passive and uninformed investors at risk (Becker, 2021).

Recommendations

Based on the research conducted, employers considering paying employees in Bitcoin or other cryptocurrencies should keep the following recommendations in mind. First, employers should ensure they fully comply with minimum wage and overtime laws by paying employees in both “regular” currency and cryptocurrency. In the United States this means the amount of compensation paid in dollars would be above all relevant wage thresholds, leaving no doubt about compliance in this area. Additional base pay compensation and even bonuses could include cryptocurrency in some form. Second, any cryptocurrency offering should be optional and authorized in writing by the employee. It makes sense for employers to protect themselves as well as to detail the risks of investing in cryptocurrencies to employees. Third, tax and regulatory experts should be consulted prior to any program implementation. Companies need such advice to develop a balanced approach and portfolio, especially multi-national companies. Tax laws are complicated and dynamic. Cryptocurrencies are mostly unregulated, and in some countries trading or mining it may even be illegal (Lalovich & Page, 2021). Fourth, the use of cryptocurrencies in retirement plans, such as 401(k) and 403(b) plans, should be avoided. Investment committees at organizations and plan fiduciaries must act prudent and loyal under the Employee Retirement Income Security Act (ERISA), and risky cryptocurrency investments are not likely be considered prudent. Furthermore, the Department of Labor (DOL) recently identified five areas of concerns with cryptocurrencies as a part of 401(k) plan investments, which include (a) volatility and speculative nature of crypto investments, (b) difficulty of enabling informed decisions, (c) custodial and record-keeping concerns, (d) valuation concerns, and (e) an unstable regulatory environment (Lee, 2022). It is clear the DOL is not in favor of offering cryptocurrencies and related products in employer-sponsored retirement plans.

Conclusion

As the popularity of cryptocurrency continues to rise, especially among young professionals, it is important for compensation and benefits practitioners to consider a variety of factors before incorporating cryptocurrency into their organization’s compensation strategy. As previously discussed, common themes include legal/regulatory factors at the municipal, state, federal, and potentially international levels for multi-national companies. Additionally, there are likely to be substantial increased administrative costs, as well as increased risk for their employees.

The use of cryptocurrency in compensation practices can certainly appear as an enticing opportunity for employers to attract potential employees and keep existing employees. Yet, compensation professionals need to be fully aware of the complexities involved and the potential challenges associated with its application. If compensation professionals look to incorporate cryptocurrency compensation into their organization’s compensation strategy, they should be aware and prepared to operate in an environment that may constantly require them to pivot. The challenges associated with cryptocurrency compensation can be substantial, and the novelty of this approach will continue to present new demands and quandaries for compensation and benefits professionals. So, fair warning, when it comes to considering whether to incorporate cryptocurrency into your compensation practices, do be sure to look before you leap.