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Could cryptocurrency be the next step in equity compensation?

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Where once they occupied a niche corner of the internet cryptocurrencies have, over the last decade, slowly entered the mainstream consciousness and employers, looking to rethink their  compensation strategies for recruiting and retaining workers have begun to ask could cryptocurrencies be a viable new option for equity compensation?

What do we mean by cryptocurrency?

A cryptocurrency is any digital or virtual currency that’s secured by encryption techniques. Store of value Tokens, like bitcoin and litecoin, and NFTs (Non-Fungible Tokens) are the most commonly known but there are others and in them we could potentially be seeing a new standard for employee share plans. Traditionally there’s been a variety of approaches used to attract and retain top talent, including merit or target-based pay increases, learning and development opportunities, bonuses and other perks, but employee share ownership has proven to be particularly popular and successful.

Crypto in the news

No matter where you get your news you’ll have been hard pressed to avoid cryptocurrencies recently.

The Houston Firefighters’ Relief and Retirement Fund began investing in crypto in 2021, technically treating it as another alternative asset class. In an innovative move the City of Miami launched MiamiCoin which they hope will turn into a viable revenue stream for the city. Its performance has been volatile so far. The UK government announced plans to establish the region as a global crypto-asset hub and create its own NFTs. Meta Platforms Inc intends to introduce virtual tokens and cryptocurrencies as a way of rewarding creators. In Costa Rica digital assets are accepted in a number of bricks and mortar stores which, as a ‘commonly accepted asset’, makes this one of the few jurisdictions worldwide where it is legal for employers to pay employees in cryptocurrency.

Can you get your wages in Crypto?

Wage payments in cryptocurrencies remain relatively rare, with the majority of cases in digital assets and blockchain companies themselves. It gets complicated because, for example, in the United States there are federal tax issues and different States have their own minimum wage requirements and laws. Any tech-savvy company paying staff using cryptocurrencies may be at risk of violating these laws. Further complicating matters certain States require that wages be paid in U.S. dollars only.

On the other hand if workers are not technically employees but are self-employed contractors, or the payment is offered as a ‘bonus’, then it may not fall under the scope of these restrictions, with the taxable withholding burden being pushed onto the worker.

At least one crypto wallet platform has made it compulsory for all staff to get paid in bitcoin, with employees then free to retain or sell, all or part, of the digital asset immediately. This company offers tax advice to workers and although this may be an outlier, since they are in the crypto industry, they could be considered as leading by example.

Jobs in the ‘gig economy’ sometimes offer payments in crypto. Workers here may be younger people with less financial commitments who might find this option desirable because there is a chance the digital assets could significantly increase in value.

Advantages for your Employee Share Plan

The most desirable draw is the chance these digital assets could significantly increase in value, thereby providing a huge incentive for staff to stay with the company.

From an employer’s perspective a vesting period or other restriction, whereby the employee cannot immediately access the tokens can also be imposed, similar to equity-based stock options, helping with staff retention.

Another plus is that digital tokens might not dilute the cap table and so for startups this style of offering, if structured as compensation or token-based awards, could potentially provide cash flow relief, while giving immediate or long-term benefits to employees.

Risks and hurdles? A lot of questions remain

First of all how do you choose what cryptocurrency to go with for your employee share plan?

All investments carry risks but some more than others. Cryptocurrencies are currently unregulated and so are particularly susceptible to theft, fraud, counterfeiting and default risks.

Fair Market Value (FMV) needs to be determined and will trigger a taxable event, usually at grant. Tax residency status or jurisdiction has to be considered and could prove complicated.

There may be legal costs involved or added expenses for your payroll department when processing payments. Extra training might be required or specialist advice needed to provide education on the topic.

There could be a reluctance from your staff to buy-in to or adopt the scheme. Lack of regulation remains a deterrent and cryptocurrencies are still seen as the ‘wild west’ to many outside of the industry, so convincing your employees that it’s a good choice for their share plan could be a struggle.

The allure of alternative assets is their potential to outperform traditional asset classes, and cryptocurrencies, which have proven to be volatile with swings in both directions, fall into this bracket. This uncertainty can spook the more casually curious investor. 

Right now the demographic for crypto usages is very one-sided – mostly male and under 34, so while cryptocurrency discussions are becoming more commonplace there is still a wait and see element with this new frontier.

What’s being done about the risks?

There are potential security risks but steps are being made to regulate the industry. Recently European Union lawmakers backed new safeguards to cut down on money laundering and fraud. This will make it easier to identify and report suspicious transactions and freeze digital assets. These changes are a move towards aligning cryptocurrencies with other assets and investment classes, making them more traceable and less available for criminal activity.

Potential benefits

Who knows where we’ll be in ten years? Bitcoin, arguably the most recognised of the cryptocurrencies only launched in 2009, so we are still very much in the nascent stages of this exciting new prospect.

In business you always need to be thinking of the future while looking at the opportunities that are around you today. Maybe employee equity share plans invested in cryptocurrency won’t be the way forward for your company, possibly they will or maybe it’ll even be some hybrid offering, but you’re always better off having researched and considered the options

As the old proverb goes, the best time to plant a tree was 20 years ago and the second best time is right now.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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