Paying Staff in Bitcoins

The advent of digital ‘crypto-currency’ such as Bitcoin has polarized opinion. Some herald it as the future of currency and an antidote to current economic strife, while others liken its rise to the Dutch tulip bubble of 1637. Others still condemn it as a tool for money laundering and black market trading. For an introduction to Bitcoin please go to the last paragraph.

Whichever way you look at it, crypto-currency is an incredibly interesting economic experiment. While its use has largely so far been limited to online transactions, some trend-setting neighbourhoods such as Berlin’s Kreuzberg district already feature high street businesses accepting Bitcoin payments from anything down to a cup of coffee. But what about their outgoings? Can businesses now pay their employees in digital currency?

A few employers have started doing just that. Unsurprisingly, the Bitcoin Foundation itself pays staff in Bitcoin, but other tech firms have started to follow suite including The Internet Archive, Eliante, a Dutch ICT Recruitment firm, and  SC5, a Finnish software developer. Why are these firms choosing to pay their employees in digital currency? What advantages have they found and could Bitcoin become in due course an attractive salary payment method  for multi-national employers?

A new way to pay

A digital currency is completely universal with no central bank and no governing body. Payments are direct between the payer and the paid and do not require any banks to facilitate transfers. All this presents some obvious advantages.

Take the example of a digitally automated wage system. Expensify, a mobile-software accounting system, allows employees all over the globe to collate their expenses, send them to their employer, and be reimbursed. Currently,  the standard payment option is via Paypal, eBay’s electronic payment system, which carries a 4% surcharge. Add to this  unfavourable exchange rates and paying international employees in such a manner starts to look less attractive. However, Expensify is now also able to process Bitcoin transactions. If employees choose to accept the digital currency as reimbursement, the employer can instantly pay all their travelling employees with one currency without the need to exchange it and without incurring transfer fees.

If digital currency were to become ubiquitous, there would be no need for companies to keep accounts denominated in different currencies for different global transactions, saving the ensuing accounting headaches.

What are the stakes?

As long as local currency remains in use for the majority of a business’ purchases, employers would still face Forex risks. If salary were contractually set at a certain figure in Bitcoin then it’s true value would be determined by its strength against the local currency at time of payment. Assuming that Bitcoin’s value continues to fluctuate,  as it has done in recent months, this could prove extremely risky for employers. If the value of Bitcoin shot up after contracting, employers could end up overpaying for labour. Conversely, if it sharply fell then incautious employers could find themselves paying below minimum wage, with consequent legal implications and much dissatisfaction in the workforce. Contracting to pay wages at a fixed salary in Bitcoin therefore essentially amounts to a future Forex trade. Should employers decide that the benefits of digital currency justify using it to pay their employees, employment contracts should state a fixed salary in the local currency, payable in Bitcoin at time of payroll. The need to keep tabs on conversion rates would therefore not disappear.

Utilizing a completely anonymous payment system may raise suspicion about the employers’ motives. The respective national tax authorities would no doubt take a keen interest. If crypto-currency were used to reimburse high-end managerial positions, grumblings about huge secretive bonuses, golden handshakes and tax evasion would abound, with potential negative consequences on both external PR and internal morale.

Some guidance for global employers

In any case, a business considering taking the leap into crypto-currency needs to be aware that they are wandering into untested, unchartered territory. The anonymous nature of payments means detailed records of payments should be kept  of transactions, and the virtual addresses to which wages are sent should be agreed in writing lest unscrupulous employees be able to claim they never received payments. In the case of genuine mistake, it would be impossible to reclaim mispayments – employers would have no way of knowing who was behind the virtual address that had received payment in error.

As digital currency is still a grey area in terms of taxation, employers should play on the safe side by converting salary to Bitcoin only after tax and social security contributions have already been deducted.

As already mentioned, employers may wish to stipulate that the salary is accrued in local currency, to be paid in Bitcoin equivalent at time of payroll.

While it is far from  clear whether Bitcoin will be everything its current enthusiasts claim it will, the notion of digital currency has undoubtedly captured people’s imagination. With around 12 other such currencies in active circulation (Litecoin, Namecoin and PPCoin to name but a few), even if the ‘Bitcoin bubble’ does eventually burst  it seems digital currency experimenting is far from over.

What is a Bitcoin?

A Bitcoin is a piece of unique computer code. An individual Bitcoin can be “mined” by anyone who downloads an open source Bitcoin mining programme onto a large enough computer. Running the programme involves solving a complex set of algorithmic puzzles.  Once solved, a unique Bitcoin is produced. The  Bitcoin itself can be split into 100 million sub units. Founded in 2009, a Bitcoin initially traded at around 35 US cents. After some scary fluctuations it currently trades at about USD 120. There are now approximately 11 million Bitcoins in circulation and once 21 million have been mined the programme will produce no more. The currency is backed by nothing but belief.