“I’m going to take my next paycheck 100% in bitcoin… problem solved!”
– Mayer Francis Suarez
Introduction | The Looming Threat of Hyperinflation
The era of COVID-19 and trade wars spurred an international arms race in printing money. With China’s monetary authority having reported the issuing of more than 9.62 trillion yuan in 2021 and 13 trillion dollars printed in the United States respectively, many experts warned that the practice of printing money to offset deficits will result in major economic risk.
Without a doubt, this is not the first time in human history where a government’s decision to print large amounts of money resulted in hyperinflation, most notably, the Yuan Dynasty, a decision which ultimate lead to the dynasty’s collapse. Other instances include the Crisis of the Third Century in Ancient Rome and the 1,000,000% inflation of the drachmae.
Cryptocurrencies | Hedge Against Inflation
One of the stated objectives of Bitcoin is for the virtual currency to become an inflation hedge. To this end, the theory behind Bitcoin as an inflation hedge whilst the number of Bitcoin is limited to 21 million, the number of U.S. dollars (or other fiat currency) typically increases over time at the discretion of the host government.
As such, with the looming prospect of hyperinflation on the horizon, cryptocurrency as the medium of renumeration is gaining popularity, with an ever-increasing number of employers are starting to consider paying salaries to their employees in cryptocurrency.
Potential Legal & Regulatory Issues | Dawn of CryptoSalaries
Pursuant to the Employment Ordinance (Cap.57), unless otherwise specified, “wages” means all remuneration, earnings, allowances (including travelling allowances, attendance allowances, commission, overtime pay), tips and service charges, however designated or calculated, capable of being expressed in terms of money. In view of authorities declining to recognize crypto as currency, it remains unclear whether the Labour Department or the Hong Kong courts will treat cryptocurrency as “wages” under the Employment Ordinance.
Further, the fact that the value of cryptos is far more volatile than other assets, such volatility may mean that employers may, technically speaking, face the risk of being accused that it has not complied with minimum wage requirements (for borderline payment jobs) as required under the Minimum Wage Ordinance (Cap.608).
Lastly, there is the issue of tax reporting by employers that will need to be considered. To this end, one of the main attractions for expats to work in Hong Kong lies in Hong Kong’s tax regime. The fact that unlike the United States, Hong Kong has no value added tax regime, Hong Kong remains a prime location for effecting payment in cryptos.
That said, in March 2020, the Inland Revenue Department (“IRD”) handed down the revised Departmental Interpretation and Practice Notes No. 39 (“DIPN 39”) covering digital economy, electronic commerce and digital assets.
In particular, the IRD came to the view that remuneration made in crypto should be subject to income taxation. As such, salaries tax treatment will be applicable to income from employment paid in crypto. Both employers and employees, as such, have reporting obligations to declare the amount of income received in cryptocurrency, provided that the contract for crypto is “wage” per se (e.g. salaried employment).It was further provided that the value reported should be at the market rate at the time of the payment.
Note: Although DIPNs are, technically speaking, not legally binding on taxpayers in Hong Kong, DIPN 39 did nonetheless shed light on the interpretation and assessment of cryptocurrencies by IRD.
Given the circumstances, until such matters are referred for adjudication, it remains to be seen how taxation of crypto-salary will be assessed by the IRD and the Courts.
Professional Conduct Consideration
Insofar as the legal practice is concern, it remains to be seen that a Law Firm possess virtual currency accounts (either for client’s money or office money) effecting payment in wages in the form of virtual assets as approval from the Law Society (which usually comes with an audit of the firm’s accounts) will be required before the same may be brought operational.
Global Developments
The recent mooning of cryptos and threat of hyperinflation has turned many people to explore cryptos as the better mode of store for value. As such, a reference should be made by various jurisdictions across the globe:
Japan: Since 1 April 2017, the concept of “virtual currencies” has been introduced into the legislation in Japan with cryptos being seen as a fully legalized means of payment. This has prompted GMO Corporation to put 4,700 of its employees on crypto payroll.
United States: American authorities has been known to have hosted a favorable environment for cryptosalaries. According to a study by Bitwage, it was suggested that 10.5% of companies surveyed pays their employees, at least in part, in virtual assets.
Other Benefits
Lastly, let us not forget that one of the benefits of cryptos is the availability to implement smart contracts. This is attractive for many as, where renumeration removes the human and/or ‘discretionary’ factor (e.g., where one’s bonus is calculated by formula and automatically effected), it will create a potentially fairer work environment with less labor disputes.
Conclusion
All in all, just like how crypto became inevitable, so will employers paying in cryptos also be inevitable. Firms and businesses will be wise to have the facilities needed to handle such arrangement.
This article was first published in the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.
This article is co-authored by Erin Ching of Women Unbounded Mentorship Programme.