Evaluating Recent DOL Guidance
One example of regulatory hesitance toward crypto comes from the U.S. Department of Labor (DOL): In March 2022, the DOL advised against offering crypto as an investment alternative within your 401(k) plan. While not banning the practice outright, in Compliance Assistance Release No. 2022-01, the DOL’s Employee Benefits Security Administration (EBSA) threw some cold water on the idea.
Part of the EBSA’s rationale for doing so is instructive for reasons that go beyond crypto. That advice could apply to other unconventional investment options you might find tempting. At least that’s true for those options those that carry greater than average investment risk.
The EBSA reminded employers that plan fiduciaries are charged with the duties of prudence and loyalty. The result from an employee perspective is that by including the investment option of crypto in their plan, they’re effectively signaling that “knowledgeable investment experts have approved the cryptocurrency as a prudent option for plan participants.”
No Shifting of Responsibility
The EBSA also stressed that fiduciaries “may not shift responsibility to plan participants to identify and avoid imprudent investment options.” Instead, they must do so themselves both initially and on an ongoing basis.
The EBSA is effectively stating that putting retirement savings into a crypto investment option wouldn’t be a prudent move. Here are several reasons spelled out in its compliance guidance:
- Cryptocurrencies are characterized by the U.S. Securities and Exchange Commission as “highly speculative” due to “extreme” price volatility, often the subject of “fictitious” trade data and of “widely published incidents of theft and fraud.”
- Even expert investors have a hard time getting reliable crypto market data and separating “the facts from the hype.”
- By their nature, crypto assets aren’t held in trust or custodial accounts, but “exist as lines of computer code” that can be forever lost if an investor forgets or loses a password needed to gain access to it.
- Regulation of crypto assets today is fluid and could cause legal problems. For example, “the sale of some cryptocurrencies could constitute the unlawful sale of securities in unregistered transactions.”
The EBSA’s guidance ends with a warning that employers that add a crypto option to their 401(k) might be subject to an investigation. They might also be “questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above.”
Paying Employees in Crypto
In general, paying employee wages in crypto instead of greenbacks doesn’t appear to be a legal option, at least not today. A possible workaround might be paying employees in dollars, then, at an employee’s direction through a specialized payroll service, exchanging those dollars into a specified cryptocurrency.
The Fair Labor Standards Act (FLSA) generally requires, with narrow exceptions, employees to be paid in “cash or negotiable instrument” (such as a check). Exceptions under the FLSA, under certain circumstances, allow counting the value of food and housing as an element of compensation paid to nonexempt employees.
In some situations, employees can be paid in a hard foreign currency if its dollar value can be readily ascertained and a current exchange rate is used. It’s conceivable that litigation may arise, arguing that cryptocurrency is the equivalent of a traditional foreign currency. That hasn’t occurred yet, however.
Accepting Crypto from Customers
What about using cryptocurrencies as a form of payment from your customers or to your suppliers? After all, shouldn’t a currency be used more as a payment mechanism than an object of speculation? That intention — along with the promise of privacy — might have been the original expectation behind the crypto pioneers, such as Bitcoin. But so far, crypto appears to be used more for investment — or gambling — purposes.
Even so, that doesn’t necessarily preclude using it for mundane business purposes. Factors that might make crypto attractive include:
- Exchange costs lower than credit card processing fees,
- No chargebacks, such as those that can occur on credit card-based sales,
- Rapid crediting of payment, and
- Simplified international currency acceptance with no need for conversion since each cryptocurrency is, by definition, a universal currency.
If customers want to pay you in crypto, you might wonder: Why shouldn’t we accommodate them for the sake of being flexible? There are several key reasons you might be gun shy about accepting crypto.
One is the accounting and tax burden associated with its use. Similar to buying and selling securities, you’ll need to keep track of the dollar value of each batch of crypto you acquire, whether in a purchase you make using dollars, or that you acquire by selling your goods or services.
When you dispose of crypto by using it to make a purchase or exchanging it for dollars, you’ll incur either 1) a capital gains tax liability if the cryptocurrency’s value has risen since you acquired it, or 2) a capital loss if the currency’s value has declined. The volatility of cryptocurrencies can keep you busy trying to stay on top of the situation.
There are also other administrative hassles that come with dealing in crypto. For instance, you’ll need to get a virtual crypto wallet or a crypto payment gateway (which has greater functionality than a wallet) to receive, store and make use of those digital tokens. Plus, you must enable the use of crypto payment in your online check-out system.
As the recent drop in cryptocurrency values demonstrates, the world of cryptocurrency continues to evolve rapidly. You can’t afford to ignore it, even if you decide to just watch from the sidelines for now. Your financial advisor can steer you to resources to stay informed and make wise decisions about cryptocurrency.