This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Bitcoin’s rise as the first decentralised, convertible crypto-currency is well-documented. 2014 saw a huge rise in the public awareness and use of Bitcoin, with over 300 Bitcoin ATMs going live globally in the course of the year. Most of these (nearly 50%) were in North America, but nearly a third were in Europe. Some organisations in the US and Canada are also blazing a trail by introducing Bitcoin as an employee benefit or part of wages for their employees. Adoption of Bitcoin as a national currency was even touted as an alternative to Drachma if Greece exited the Euro. Despite some high profile cyber attacks on Bitcoin exchanges, Bitcoin appears here to stay – for now at least.
Digital currencies such as Bitcoin are clearly on the UK Government’s radar. Earlier this year a report was published by the Treasury alongside the Chancellor’s March budget speech which included responses to last year’s consultation on the benefits and risks of digital currency as well as next steps. Currently, digital currency exchange is not regulated, although this looks set to change.
What are the implications for employers considering the use of Bitcoin?
The Government, broadly speaking, treats Bitcoin like a foreign currency or “single purpose voucher” depending on the context. However, payment of employee’s wages is a highly regulated area, by reference to Sterling. For example, national minimum wage regulations require (currently) a minimum of £6.50 per hour to be paid to workers. On making employees redundant, companies must pay a statutory redundancy payment calculated by reference to a statutory figure for a “week’s pay”, which is (currently) capped at £475. The PAYE and national insurance tax regimes cover “earnings” – and questions remain as to how virtual currency earnings would be calculated by Her Majesty’s Revenue and Customs. These elements of managing payroll and social security would be extremely difficult to administer were Bitcoin adopted by employers instead of Sterling.
In practice, employers would probably need to impose an exchange rate mechanism between Bitcoin and Sterling to ensure that it was possible to calculate wages and tax bills by reference to statutory requirements. Although, even then, it would not be certain until the Government legislated in this area that employers had properly discharged their statutory duties by doing so. This potentially necessary step could be highly beneficial to employees, who would have a capped floor on their earnings (so as to ensure they did not fall below legal minimums), but no ceiling if the value of their Bitcoin salary were to rise based on the agreed exchange rate.
Perhaps on a more practical level, we may see employers – particularly in the Tech sector – introducing Bitcoin as a form of employee benefit, rather than the more radical move of paying salaries in Bitcoin. Careful consideration will be needed in relation to the tax treatment of such benefits and the way in which the payment of the benefit is documented and administered.
Where next for the UK and digital currency?
The Government has said that it is keen to support the use of such emerging technology, whilst ensuring that the risks of criminal use are minimised. At this stage, the Government has opted for the drafting of best practice standards as opposed to legislation, although anti-money laundering regulation will now apply to digital currency exchange.
However, employers who shy away from using the decentralised Bitcoin may be more enticed by the prospect of digital Sterling. With both the Bank of England and private sector businesses investigating the possibility of developing Bitcoin-esque technology to create a central bank-issued digital currency, there may come a point where employees could be paid a digital salary. In the meantime, innovative employers aiming to set themselves apart by offering payment or benefits in Bitcoin should ensure that they have considered the wide range of legal and practical implications.
