Lately we have been advising clients of the firms which are "old school" companies and businesses about the way to implement cryptocurrency as a form of payment. Below, are a few notes and matters to consider when doing so in a nutshell.
The Challenge
While cryptocurrency is not yet widely accepted as a form of payment for goods and services, its growing popularity has led to an increased interest in using it as a payment method. However, there are a number of legal considerations that businesses and individuals should be aware of before implementing cryptocurrency as a form of payment.
One of the primary legal considerations is the question of whether or not the use of cryptocurrency as a form of payment is legal in a given jurisdiction. While some countries have embraced cryptocurrency and have taken steps to regulate it, others have outright banned it. It is important for businesses and individuals to be aware of the laws and regulations in their own jurisdiction and to ensure that they are compliant with them.
Another legal consideration is the question of whether or not cryptocurrency transactions are subject to taxes. In many countries, cryptocurrency is considered to be a form of property for tax purposes, which means that transactions involving it may be subject to capital gains taxes. It is important for businesses and individuals to be aware of the tax implications of using cryptocurrency as a form of payment and to ensure that they are compliant with their tax obligations.
In addition, there are also concerns around Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulations for cryptocurrency. Businesses accepting cryptocurrency as payment must comply with AML and KYC regulations to protect against money-laundering, fraud, and other financial crimes. This means that businesses must verify the identities of their customers and monitor their transactions for any suspicious activity as well as retain certain AML and KYC related documents such as passports, drivers' license, utility bills (as a means for proof of residential address), etc.
Another legal consideration is related to the finality of cryptocurrency transactions. The decentralized nature of blockchain technology means that once a transaction is recorded on the blockchain, it cannot be altered or reversed. This makes cryptocurrency transactions highly secure but also poses a challenge for businesses if they fall victim to fraud or in case of mistakes such as sending cryptocurrency to the wrong address which can render such cryptocurrency lost forever.
Finally, another legal consideration is the possible lack of legal precedent for disputes involving cryptocurrency. Since cryptocurrency is a relatively new technology, the legal system has not yet had a chance to fully grapple with the unique issues that it raises. This means that businesses and individuals should be aware of the possible lack of legal recourse in the event of a dispute and take steps to protect themselves accordingly.
Price Volatility
Another issue that businesses need to consider when implementing cryptocurrency as a form of payment, since almost all of the businesses denominate their services and products in fiat, is the volatility of the prices of these digital currencies. Cryptocurrency prices can fluctuate significantly in a short period of time, which can create a risk for businesses that accept it as payment.
For example, if a business accepts payment in cryptocurrency and then later the price of that particular cryptocurrency drops, the business may end up losing money. On the other hand, if the price of the cryptocurrency goes up, the business could end up making more money than expected.
To mitigate these risks, businesses can take different approach. They could convert the received cryptocurrency into a stablecoin or fiat currency as soon as possible in order to avoid the impact of price fluctuations. They also could consider setting prices in fiat currency and converting received payments through a third-party payment agent (such as BitPay) at the moment of payment and receive the fiat payment in advance.
Another approach is to manage the volatility is by implementing pricing strategies such as dynamic pricing, which adjusts prices in real time based on the current value of the cryptocurrency.
It is important to note that the volatility of cryptocurrency prices is an inherent characteristic of the digital currencies, especially since almost all of the businesses denominate their services and products in fiat, and as such we should carefully treat and address the potential issues that arise in connection with price volatility when accepting cryptocurrency as a form of payment.
A possible solution
One of the ways to address the legal and volatility considerations mentioned in the article is by drafting a tailor-made terms of payment policy for businesses that are considering implementing cryptocurrency as a form of payment. This policy would set out the legal framework for the acceptance of cryptocurrency and would detail the steps that the business will take to ensure compliance with laws and regulations.
The policy should include details on how the business will handle tax obligations related to cryptocurrency transactions, compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulations, and other compliance requirements such as information about customer identification and the handling of suspicious activities as well as the treatment and conversion of the cryptocurrency received into fiat or stablecoins or the use of a third-party paying agent per the above.
Additionally, the policy should also address the security concerns of the transactions and in case of refund, such as the implementation of smart contracts to ensure automatic refund in case of a mistake.
Finally, the policy should provide guidance on how disputes involving cryptocurrency will be handled and it should set out the steps that the business will take to protect itself in the event of a dispute. By setting out these procedures in advance, businesses can be better prepared to handle any issues that may arise and can avoid potential legal problems down the road.
Going Forward
While the use of cryptocurrency as a form of payment is becoming increasingly popular, it is important for businesses and individuals to be aware of the legal considerations involved. By understanding the laws and regulations that apply to cryptocurrency, businesses and individuals can ensure that they are compliant with them and can take steps to protect themselves from the potential risks associated with the use of this digital currency. A tailor-made terms of payment policy can provide a clear framework for businesses to understand the legal considerations and compliance requirements when implementing cryptocurrency as a form of payment, and mitigate the risks involved while also divide the burden of risk between the businesses or individuals and the respective consumers of their goods and services.
