Even if you don’t own any cryptocurrency, it's a safe bet you’ve heard about it. So have your employees. Are employees asking if they can be paid in cryptocurrency or have it as an investment option in their retirement plan yet? What should your organization consider when deciding whether to offer this new and exciting option in response to employees’ requests?
What Is Cryptocurrency?
Cryptocurrency, or crypto, is a digital currency that works through a computer network rather than through the banking system. It’s not reliant on any central authority (banks or governments) to uphold its value or maintain it. Its security is through cryptography, which makes it nearly impossible to counterfeit or double-spend. When you own cryptocurrency, you own a line of computer code in your digital wallet that states the value of your crypto holding.
There are thousands of types of cryptocurrency, and most are based on blockchain technology to prove their legitimacy and ownership. Blockchain is a ledger that is distributed via a network of computers that supports the legitimacy of the crypto for its owners. It chains together blocks of information that contain the history of a crypto unit’s past transactions and current owner. The most well-known cryptocurrencies are Bitcoin and Ethereum.
What Are the Advantages and Disadvantages?
Advocates of cryptocurrency point out that since crypto transactions don’t run through a bank or central authority, they can be completed much more quickly and cheaply than traditional transactions. Since they are not supported by a single entity, there is less likelihood of collapse from a single point of failure, such as when the failure of a large bank triggers failures of other financial institutions. There is no regulation of cryptocurrency, so it can easily move across country lines, speeding up and simplifying international transactions. Because most retailers do not currently accept crypto, it’s most often thought of as an investment by its owners.
Critics of cryptocurrency believe the lack of regulation makes it risky because it is not backed by banks or governments. The value is based on what others are willing to pay for it on any given day. They point out there are no easy ways to evaluate crypto’s value, like traditional investments are valued. Cryptocurrencies set their own uses for the currency and their own rules for things like how much of a certain cryptocurrency will be issued, how fees are charged, etc. While cryptocurrency ownership is meant to be widely decentralized, ownership is actually highly concentrated. Researchers at MIT and the London School of Economics and Political Science recently found that only 10,000 accounts were responsible for about 25% of all Bitcoin ownership.
While the blockchain would be very difficult to hack, the same is not as true for digital wallets and crypto exchanges. Perhaps most importantly, crypto performance is very volatile. For example, cryptocurrencies lost $270 billion in overall value during the early weeks of May 2022, at the same time the stock market was falling.
Is there a Place for Crypto in the Workplace?
What uses can employers make of cryptocurrencies? Can employees be paid in crypto, or can it be offered as an investment option in an employer-sponsored retirement savings plan, like a 401(k)?
Paychecks
The rules around paying employees’ wages are governed by the Fair Labor Standards Act (FLSA), which became law in the late 1930s during the Great Depression. In that era, the government wanted to prohibit companies from paying employees in company scrip that could only be used at company stores. Knowing that, it’s not surprising the FLSA requires wages to be paid in U.S. currency. Even so, employers are seeing interest from employees in being paid in cryptocurrency. The mayors of New York City and Miami, Eric Adams and Francis Suarez, and athletes like Aaron Rodgers have publicly indicated an interest in receiving crypto paychecks.
Some payroll service providers now offer the ability to convert an employee’s U.S.-fund paycheck into cryptocurrency before it’s provided to the employee. This conversion methodology is currently used to pay U.S. employees in a foreign currency, so it’s not uncharted ground. This arrangement isn’t without concerns, however. One problem could occur if the value of the cryptocurrency decreases in the time between when the paycheck is calculated in U.S. funds and when it’s converted to crypto and provided to the employee. If the decrease in value results in insufficient payment of required amounts, like meeting minimum wage or the salary basis test, the employer would be in violation of wage and hour laws.
While interest by high-profile people in being paid in cryptocurrency makes the news, actually paying employees in crypto is not currently the norm.
Retirement Plan Investment Option
As cryptocurrency gains popularity, employees are also asking that it be included as an investment option in their employer’s retirement plan. The Employee Benefits Security Administration (EBSA), the DOL’s benefits administration branch, provided its thoughts on this in its Compliance Assistance Release number 2022-01, published on March 10, 2022. The release cautions fiduciaries of ERISA-covered retirement plans to use “extreme care” before considering adding a cryptocurrency investment option. It states that plans with a crypto option should plan to be investigated by the DOL due to its belief that cryptocurrency is too risky and volatile to be a good retirement investment option. Ali Khawar, acting assistant secretary of employee benefits at the DOL, clarified the DOL’s investigation position in comments at a benefits conference in late May. “That’s not really the way our enforcement program works,” Khawar said in response to speculation that investigative action would automatically be taken for those offering a cryptocurrency investment option. He also noted the agency doesn’t have the resources to support that kind of effort. Instead, he said the agency is focusing investigations on those doing “aggressive marketing” directed at convincing plan fiduciaries to allow risky cryptocurrency investments in their 401(k)s.
The DOL isn’t the only government agency skeptical of cryptocurrency as an investment. The Securities and Exchange Commission also considers cryptocurrency investments highly speculative, so cryptocurrency is not yet accepted as a mainstream investment vehicle.
In early May, Fidelity Investments announced a new retirement plan product that includes Bitcoin as an investment option in response to customer demand. This new product sets a maximum contribution percentage of 20% by the employee in crypto. Who would bear the responsibility of offering cryptocurrency as an investment option — Fidelity or the organization that uses this new model? The fiduciaries of the organization who make investment decisions for the plan could be held responsible. Plan fiduciaries are commonly employees of the organization, such as those sitting on an investment committee that chooses the retirement plan’s investment options. Fiduciaries must act solely in the financial interest of the plan’s participants and adhere to exacting standards of professional care. A fiduciary who breaches those duties can be held personally liable for any losses to the plan that result from the breach, and their personal assets could be seized. Faced with the stated opposition of the DOL, fiduciaries may understandably be slow to adopt cryptocurrency as an investment option in their organization’s plan.
The EBSA notice goes on to state DOL’s position that a cryptocurrency investment presents “significant risks and challenges to participants’ retirement amounts, including significant risks of fraud, theft, and loss.” It cites numerous areas of concern with crypto investments: speculative and volatile investments, the challenge for plan participants to make informed investment decisions, custodial and recordkeeping concerns, valuation concerns, and the evolving regulatory environment for cryptocurrencies.
One possibility for providing crypto as a retirement plan investment choice is adding a brokerage option to the plan. In this option, participants can invest in almost any administratively feasible investment instead of being limited solely to their plan’s menu of funds. This is not a new creation, but it’s one not many plans have. The EBSA Compliance Assistance Release stated they would investigate plans allowing crypto investments through brokerage options. That statement has created concern about whether the DOL now expects fiduciaries to investigate and oversee the thousands of offerings a participant can invest in through a brokerage option. But that’s a topic for another article.
With all this publicity, questions about cryptocurrency are getting the attention of Congress, too. A bill was recently introduced in the Senate to limit fiduciary responsibility for investments that participants choose on their own within a brokerage window. Another congressperson wrote to Fidelity asking for an explanation of how Fidelity will protect investors who use a cryptocurrency option.
Cryptocurrency is getting significant attention in the press. It’s at an interesting point in its evolution where the friction between old laws and regulations clashes with this new and different type of financial vehicle. There are still many questions to be answered, and the situation will bear watching as it continues to evolve.