We are all familiar with fiat currency which has its value backed up by governments (the UK’s pound sterling, the Euro, the US dollar). Such currencies are also recognised as ‘legal tender’ in their respective regions.
Cryptocurrencies, in contrast, are decentralised and not supported by a particular country. They are “cryptographically secured representations of value or contractual rights: that can be transferred, stored and traded electronically, a digital asset or token which can be exchanged. The Bank of England does not currently consider them to be currency or money, even though they can be used as a means of exchange.
Even though cryptocurrencies might be ‘mined’ and are often referred to as ‘coins’, they are intangible assets – they exist and have value because people agree that they do.
How are crypto-assets treated by UK regulators?
Cryptocurrencies are just one type of crypto-asset. There is an ever-increasing array of crypto-assets, with the most recognised being exchange, security and utility tokens. Cryptocurrencies are, currently, the most common way to incentivise staff with digital assets. However, we anticipate companies will increasingly look to new ways to reward workers.
The UK regulators are still considering how they should treat crypto-assets, with both the Financial Conduct Authority (FCA) and HM Treasury consulting on this in 2019. The situation is evolving, but the position is becoming clearer with regards to cryptocurrencies in that they are likely to be outside the regulatory perimeter of the FCA (because the Treasury views them as exchange tokens); but will be subject to anti-money laundering requirements (the 5th AML Directive extended the scope in 2018).
HM Treasury produced tax guidance in December 2018 and confirmed that cryptocurrencies received as employment income are subject to income tax and national insurance.
In light of this, the regulatory environment for cryptocurrencies is less likely to change, but specific laws controlling their use in some areas, such as employment, may develop. Ultimately, while there are opportunities for progressive employers it is worth noting this is an area in which the situation may change.
Things to think about
Despite the grey areas, rewarding employees with cryptocurrencies is increasing globally. The perceived benefits include: (i) being more desirable in countries with unstable currencies; (ii) the ease of transfer; (iii) security of payments; and (iv) potential for value to increase (though it can also decrease). Specialised agencies such as Papaya Global have emerged to manage cryptocurrency benefits and assist with compliance management.
If you are considering using cryptocurrencies to incentivise your employees:
- Check this is something your employees want. Weigh the pros and cons of cryptocurrency against other tools (such as employee share schemes like the EMI scheme)
- Look at how the cryptocurrency is regulated in the countries in which you intend to use it; whether it is permissible to give it as an employee benefit, and what the tax treatment will be (both from your perspective, and from that of your employees)
- Do some due diligence to decide which cryptocurrency would be the best fit for your company. Look closely at which currencies to offer, which exchange to use and which provider or broker you should appoint to deal with the administrative side of things (similar to a pensions provider). Remember to conduct due diligence on any third party to ensure you are compliant with money-laundering requirements
- Recognising the volatility of cryptocurrencies may mean it is difficult to understand the value an employee may receive in reference to their salary, so an employee’s basic package should still meet national minimum wage legislation. Limiting cryptocurrencies initially to a bonus scheme or controlled portion of salary may be best. Also, ensure you provide clarity on the risks and update your contract.
- Review your payroll and CRM systems to understand how the benefits can be integrated and managed, if at all.
- Make sure you keep a close eye on regulatory and wider legal developments with regard to the treatment of cryptocurrencies and their use as employee benefits.
Graham Hansen is a commercial associate at HRC Law