Although cryptocurrency payroll has certain advantages, it does indeed face many legal risks in the current legal and regulatory environment in China.
By Rao Weitong
Some time ago, a friend came to me excitedly to show off, saying that he had found a very lucrative job. I said, "Brother, wealth and honor…" After continuous questioning, he confessed that he was actually working for a Web3.0 project overseas in China, with high work flexibility, and the boss directly paid him in the form of the cryptocurrency USDT as his salary, which was not only generous but also received in full.
I shook my head, unable to resist this wealth and honor.
Using cryptocurrency to pay salaries is becoming the norm
In today's global cryptocurrency craze, more and more blockchain companies are starting to pay salaries in cryptocurrency (mainly in USDT). After all, the benefits of doing so are obvious:
On the one hand, for cross-border payments, cryptocurrency makes international payments fast and cheap, reducing costs and eliminating the need for cumbersome foreign exchange procedures. Typically, cryptocurrency projects will agree with employees on a specific amount of USDT as their monthly salary. When paying salaries, the finance department only needs to transfer funds through the blockchain, pay a small Gas Fee, and the funds will be quickly credited, just like Elon Musk's tweets, so fast;
On the other hand, cryptocurrency is a virtual currency that uses blockchain technology. Unlike traditional paper and coin currencies, cryptocurrency relies on complex encryption technology to ensure extremely transparent and secure payment transactions, with all transactions recorded on the blockchain, eliminating concerns about clandestine operations. After the finance department pays the salary, they provide the employee with a transfer hash, and the employee can use the hash to find specific data on the corresponding blockchain browser. Everything is open and transparent, and no one can play tricks.
Although it may seem that paying salaries in cryptocurrency has many advantages… but in China, this could land you in trouble.
Legal risks are ever-present
For both Web3.0 project parties and ordinary workers, using cryptocurrency as a means of salary payment may bring a series of unexpected legal risks.
Chinese law does not recognize virtual currency as a form of salary payment
First of all, Chinese law does not recognize these virtual currencies; the Renminbi is the only legal currency. Specifically, the Chinese government has a cautious attitude towards cryptocurrency and strict regulation. There is a saying in the cryptocurrency community: "The leeks are not cut off, and the spring breeze blows again," but in China, the "spring breeze" of cryptocurrency is not easy to come by.
So, the answer to the question of "using cryptocurrency to pay salaries" in China is: Sorry, this is not feasible under Chinese law. According to the "People's Bank of China Law," "Interim Provisions on Wage Payment," and the "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions," the Renminbi is the only legal currency, and virtual currencies such as Bitcoin, Ethereum, and Tether do not have legal tender status, and should not and cannot circulate in the market as currency.
At the same time, because most Web3.0 projects are overseas, there may also be issues related to foreign exchange management. In this regard, China has strict regulations on cross-border cryptocurrency transactions, and using it for payment may lead to legal issues. China's State Administration of Foreign Exchange has strict control over foreign exchange flows, and the anonymity and decentralization of cryptocurrency can easily be mistaken for money laundering tools. Recently, the Shanghai Procuratorate issued the "2023 Shanghai Financial Procuratorial White Paper," which, combined with the illegal operation of financial crimes in the past three years, inevitably discovered a large number of methods for money laundering, cross-border asset transfers, and other activities. In such cases, the corresponding regulatory efforts are also increasing year by year.
What impact does paying salaries in cryptocurrency have on employees?
With the project being overseas, and development and technology being handled by domestic personnel, this is the current situation for most Web3.0 projects. So the question is, are you sure that the company has established a labor relationship with you?
According to China's "Labor Contract Law" and related regulations, only overseas enterprises that are lawfully registered and have obtained a business license in China belong to the employer in the sense of Chinese labor law and can establish a labor relationship. In addition, the labor relationship also needs to be determined based on the specific terms of the contract, but in the context of the common employment models in the Web3.0 industry, contracts are often not signed, and even if they are signed, they are simple nominal company or consultant agreements. In this case, if a dispute arises from paying salaries in cryptocurrency, the employee needs to provide other materials to prove the existence of a factual labor relationship, otherwise the labor relationship cannot be confirmed, and their rights will naturally not be legally protected.
Of course, you might say, "Are you sure you have established a labor relationship with the company?" Then new problems will arise:
Unstable income
Although the mainstream method of paying salaries is stable coins (such as the aforementioned USDT, because it is pegged to the US dollar and has minimal price fluctuations), some projects may use other types of cryptocurrencies, which are characterized by large price fluctuations. The salary received today may shrink by 20% tomorrow, and one's quality of life will be on a roller coaster ride. Imagine, yesterday you were the "King of the Crypto," and today you have become a "Leek Brother." Who can bear such a life?
Tax troubles
Most cryptocurrency projects do not have a domestic entity and do not handle taxes for employees. Therefore, most employees need to declare and pay taxes on their own. According to current tax laws in China, income generated from the transfer of Bitcoin and other virtual currencies may involve the payment of individual income tax. However, cryptocurrency transactions are complex, making tax reporting a challenge. "It's better to earn less than to violate the rules." If tax issues are not handled properly, one may end up being fined, no matter how much they earn.
Difficulties in safeguarding rights
Labor law requires wages to be paid in Renminbi, so paying salaries in cryptocurrency may not receive legal protection. In the event of unpaid wages or bonuses, it may be difficult to provide evidence, making it difficult to safeguard one's rights in case of disputes.
Security risks
After receiving virtual currency, employees often need to exchange it through illegal channels or trade it for legal tender in order to use it in daily situations. However, there is uncertainty about where the money from the trading counterparty comes from. Once one receives funds related to illegal activities such as gambling or fraud, it is highly likely to trigger account freezing. After all the hassle, the money is not retained, and there may even be criminal risks such as aiding cybercrime activities or concealing criminal proceeds.
What impact does paying salaries in cryptocurrency have on companies?
Compliance and tax risks
Paying salaries in cryptocurrency by companies may lead to compliance issues, resulting in fines, penalties, and even affecting normal operations. The tax policies for cryptocurrency are also unclear, and companies may need to make additional tax payments and fines. The accuracy of tax records is also difficult to guarantee. Imagine, the finance department is busy all day, only to be heavily fined due to cryptocurrency payments, is this not a case of "penny wise, pound foolish"?
Risk of making retroactive payments
Paying salaries in cryptocurrency violates legal provisions. For companies, if they use cryptocurrency to pay salaries, once a dispute arises, it is often deemed invalid due to the fact that cryptocurrency is not legal tender (as mentioned earlier), and the company faces the risk of making retroactive payments, ending up with nothing, truly a case of "stealing a chicken only to lose the rice."
Security risks
The "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions" explicitly states that "participating in virtual currency investment and trading activities carries legal risks. Any legal person, unincorporated organization, or individual who invests in virtual currency and related derivatives, in violation of public order and good customs, will have their relevant civil legal acts declared invalid and will bear any resulting losses; if suspected of disrupting financial order and endangering financial security, relevant departments will handle it in accordance with the law." When a company holds a large amount of virtual currency and pays salaries in this form, if not handled properly, there may also be risks of disrupting financial order and being held accountable under relevant laws.
Case analysis
On May 20, 2019, Shen joined a certain network company and signed a labor contract with them. The labor contract stipulated that Shen worked on a flexible schedule, with a monthly salary of 50,000 RMB, and 14 months' salary paid annually, with a target performance bonus of 50,000 RMB per half year and an annual target bonus of 50,000 RMB. During the performance of the labor contract, after deducting social security and housing provident fund, Shen's monthly salary was actually paid in the form of 2574 RMB + the virtual currency USDT, with 2574 RMB paid until October 2020, and USDT paid until September 2020. On October 17, 2020, Shen resigned for personal reasons and believed that the network company owed him wages, performance bonuses, and overtime pay. He then applied for arbitration with the Labor Dispute Arbitration Committee. Dissatisfied with the arbitration decision, Shen filed a lawsuit with the court.
The final judgment of the court held that the act of paying wages in the form of virtual currency violated legal provisions and should be deemed invalid. The employer should pay the employee in RMB in accordance with the labor contract and national regulations, and the fourteen-month salary and bonuses agreed upon by both parties should also be paid in RMB.
The focus of the dispute in this case is whether the employer can pay wages to the employee in the form of virtual currency. As mentioned earlier, Chinese law does not recognize virtual currency as a form of salary payment. According to the "Interim Provisions on Wage Payment," wages should be paid in legal tender; the "People's Bank of China Law" stipulates that the legal tender of the People's Republic of China is the Renminbi; and the "Notice on Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Transactions" stipulates that virtual currency does not have legal tender status, and therefore should not and cannot circulate in the market as currency, nor be used as remuneration.
This case also involves the issue of companies making retroactive payments, which is one of the risks of paying salaries in cryptocurrency described earlier. In this situation, the company needs to bear the adverse consequences, as the act of paying wages in the form of virtual currency was deemed invalid, and the company should pay the employee in RMB in accordance with the labor contract and national regulations.
Conclusion
Although paying salaries in cryptocurrency has certain advantages, it does indeed face many legal risks in the current legal and regulatory environment in China. Both companies and employees should carefully consider and comply with laws and regulations to avoid legal disputes and economic losses. For us, understanding these risks helps protect our rights and make wiser choices.
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