Mankiw Research: Is cryptocurrency payroll really just "a different way of paying wages"?

Improper operation can easily turn "innovation" into "violation".

Author: Shao Jia-Dian, Attorney at Law, Mankiw Blockchain Legal Services

Cover: Photo by Wesley Tingey on Unsplash

In the past two years, with the rise of Web3, remote teams, and DAO employment models, more and more companies have begun to try using stablecoins (such as USDT and USDC) to pay employees or contractors.

The reason is simple: fast cross-border transfers, simple procedures, and global circulation—these advantages have made cryptocurrency payroll a rapidly growing trend.

On the surface, this seems like a natural trend. But legally, it's far more complex than simply "changing the way wages are paid."

From a regulatory perspective, issuing cryptocurrency for salary payments touches upon multiple systems, including currency exchange, payment settlement, anti-money laundering, labor law, and tax compliance .

Improper operation can easily turn "innovation" into "violation".

Three Main Modes of Encrypted Payroll

Based on Mankiw's practical observations, there are currently three main models for cryptocurrency payouts:

1. Self-funded

The company holds its own stablecoin wallet and directly pays salaries to its employees' wallets.

2. Outsource delivery to a third party.

Companies entrust wages (in fiat currency or stablecoins) to a payroll platform, which then distributes them on their behalf.

3. Hybrid Mode

Companies convert fiat currency into stablecoins through overseas entities or payment partners, and then distribute them to their employees.

The three models may seem similar, but their regulatory focus is completely different:

• Self-funded: Relatively simple, but requires dealing with tax and labor law risks;
• Outsourcing payment: Service providers may trigger payment license requirements such as VASP (Virtual Asset Service Provider) or MSB ;
• Hybrid model: Involves cross-border payments and anti-money laundering supervision.

The regulatory focus of these three paths is completely different, and the key lies in whether you are "handling crypto assets for others".

Regulatory Basis in Various Regions: The Legal Boundaries of Cryptocurrency Payroll

1. Hong Kong: There is currently no licensing framework for "encrypted payroll".

Hong Kong currently lacks a specific regulatory framework for cryptocurrency payroll. The two existing main frameworks— the MSO (Money Services Operator License) and the VA 1 license —do not directly cover this type of business.

First, MSOs cannot access virtual assets.

According to the Anti-Money Laundering and Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) and the Hong Kong Customs Licensing Guidelines, MSOs are only permitted to conduct the exchange and remittance of fiat currencies . Virtual assets (including USDT and BTC) are not considered "currency," therefore MSO licensees are prohibited from operating any cryptocurrency exchange, transfer, or payroll services. The current practice of some OTC merchants exchanging USDT under the guise of MSOs has drawn regulatory attention, and the FSTB and SFC are planning to establish a separate "Virtual Asset OTC License" system.

Secondly, the VA1 license does not cover payroll services.

The VA1 license issued by the SFC is primarily for virtual asset brokerage or trading platform services . The scope of authorization is limited to matching trades or executing buy/sell orders for clients, excluding payment scenarios such as salaries and bonuses. If a brokerage firm distributes salaries to employees in USDT on behalf of a company, it will be considered to be exceeding the scope of its licensed business.

Conclusion: As of now, there are no existing licenses in Hong Kong that legally support "crypto payroll". Companies wishing to conduct cryptocurrency payroll in Hong Kong should choose either self-payment (employers pay in stablecoins, with the contract denominated in Hong Kong dollars) or offshore payment (through entities regulated by Singapore's PSA-DPT, the EU's MiCA-CASP, or the US's MSB), while strictly addressing labor law, tax, and anti-money laundering issues.

2. Singapore: The PSA has covered the core aspects of encrypted payroll, requiring a DPT license.

Singapore has a clear regulatory framework for cryptocurrency payments. The Payment Services Act (PSA) defines virtual assets as "Digital Payment Tokens (DPTs)," and businesses engaged in the buying, selling, transferring, custody, or exchange of DPTs must obtain a license from the Monetary Authority of Singapore (MAS).

Therefore, if a company or service provider in Singapore converts fiat currency into stablecoins on behalf of its clients and then distributes salaries , this activity is considered a DPT service and requires a Standard or Major Payments Institution (SPI/MPI) license .

In addition, while the Employment Act does not prohibit the payment of wages in crypto assets, employers are still required to pay in fiat currency with the employee's written consent and file income tax returns.

Conclusion: To provide encrypted payroll services in Singapore, one must hold a DPT license under the PSA or cooperate with a licensed institution; otherwise, it constitutes an illegal payment business operation.

3. United States: Encrypted payroll is subject to multiple regulations; payroll agencies need MSB and state licenses.

The United States does not prohibit companies from using cryptocurrency to pay salaries, but the regulatory requirements are complex.

First, the Fair Labor Standards Act (FLSA) and most state labor laws require wages to be paid in US dollars in cash or in the form of notes payable at face value .

Therefore, if a company wants to pay in cryptocurrency, it usually needs to first ensure that its employees have reached the minimum wage in US dollars and obtain written consent to convert a portion of their net salary into cryptocurrency.

Secondly, if a company uses its own encrypted assets to pay its employees, it is considered a "user" activity and does not require a financial license.

However, if a third-party organization collects fiat currency, converts and issues virtual currency on behalf of others , it constitutes a "money transmission service" and must register as a Money Services Business (MSB) with FinCEN and obtain a Money Transmitter License (MTL) in each state.

For example, Bitwage is registered with FinCEN and fulfills its BSA anti-money laundering obligations.

For tax purposes, the IRS considers virtual currency as property , and employers must calculate wages based on the market value of the US dollar on the day of payment and withhold income tax.

Conclusion: The United States allows encrypted payroll, but it must meet the requirements of labor law, tax law, and FinCEN regulations; unlicensed payroll agencies are operating illegally.

4. EU: MiCA clarifies CASP licensing obligations; cross-border payments remain a regulatory focus.

The EU's Crypto Asset Markets Regulation (MiCA) will be implemented in phases starting in June 2024:

• The stablecoin issuance (ART/EMT) will take effect on June 30, 2024;
• The Crypto Service Provider (CASP) rules will be fully applicable from December 30, 2024.

MiCA Article 60 states that "transferring crypto assets on behalf of a third party" is one of the CASP activities.

Therefore, if a company or platform provides services in the EU that distribute cryptocurrency salaries on behalf of its clients , it must obtain a CASP license and comply with the Anti-Money Laundering and Travel Rule requirements.

Labor laws in member countries still require wages to be paid in legal tender. If cryptocurrencies are paid, they must be denominated in legal tender and the employee must give written consent.

For tax purposes, employers must calculate and withhold individual income tax and social security contributions based on the market price on the payment date. If there is any capital gains tax after the employee sells the property, capital gains tax must also be paid.

Conclusion: Operating Crypto Payroll in the EU requires CASP qualification, and salary payments can only be used as a supplementary incentive. Fiat currency pricing and tax reporting remain the core compliance points.

5. Mainland China: Encrypted salary payments are considered illegal.

Mainland China explicitly prohibits any form of cryptocurrency payment. According to the "Notice on Further Preventing and Handling Risks of Virtual Currency Trading and Speculation in 2021" issued by the People's Bank of China and ten other ministries, "Virtual currencies shall not circulate in the market and shall not be used as currency."

Article 50 of the Labor Law of the People's Republic of China and Article 5 of the Interim Provisions on Wage Payment require that wages be paid in RMB and may not be paid in kind or securities.

Therefore, if a company pays its employees in the form of USDT or BTC, it may be deemed to be in violation of labor laws and foreign exchange management regulations , and in serious cases, it may constitute illegal business operations.

In practice, some Web3 projects pay their employees in China by signing contracts with overseas entities and issuing currencies overseas, but this model still carries the risks of foreign exchange evasion and criminal charges .

Conclusion: Paying salaries directly in cryptocurrency within China is illegal; if overseas structures are involved, contracts and exchange routes must be carefully designed to avoid crossing regulatory red lines.

Five core compliance risks

Paying salaries with cryptocurrency is a complex activity that involves finance, taxation, labor law, and foreign exchange. If the operational path or legal characterization is misjudged, companies can easily fall into a gray area or even violate regulations. The following five types of risks are realities that any company considering "paying salaries with cryptocurrency" must face.

1. Regulatory risks: Has payroll become a "financial business"?

The most common misconception about crypto payroll is that companies believe it's "just paying salaries" and that regulators won't intervene. However, if a company or its service provider collects fiat currency on behalf of the employer, exchanges it for stablecoins, and then transfers it to the employee's wallet—this constitutes "funds transfer or payment services" in most jurisdictions.

• In Singapore , this falls under the DPT ( Distributed Payment Services) category under the Payment Services Act (PSA) and requires a license to operate.
• In the United States , this role is considered a Money Transmitter and requires registration as an MSB and a state-level license .
• In the EU , this falls under CASP services according to Article 60 of MiCA.

The conclusion is straightforward:

If you "issue cryptocurrency for others," you are already engaged in financial business.

No matter how pure the starting point, the "license" issue must be resolved first.

2. Anti-money laundering risks: On-chain transfers ≠ regulatory blind spots

The cross-border flow of virtual assets is easily abused for money laundering. Companies that fail to fulfill KYC (Know Your Customer) and transaction verification obligations may be considered to be assisting in money laundering .

Common misconceptions:

• The company or service provider failed to verify the employee's identity and the ownership of their wallet;
• No payroll records or on-chain transaction proofs were saved;
• There is no mechanism for reporting suspicious transactions.

Regulators in various regions have included encrypted payroll in the scope of AML:

• The EU TFR rules require the transmission of the identity information of both parties in a transaction (i.e., the "Travel Rule").
• Both Singapore's MAS and Hong Kong's FSTB require virtual asset service providers to conduct ongoing due diligence.
• FinCEN in the United States requires MSBs to establish a Suspicious Activity Reporting (SAR) system.

Recommendation: Even if you are self-paying, you should establish a basic KYC and record-keeping system so that you can prove your innocence in case of tax, audit, or bank inquiries.

3. Tax risks: Issuing tokens does not guarantee tax exemption; fluctuating token prices increase the risk of errors.

Regardless of currency changes, "wages" must still be denominated in legal tender for tax purposes .

If a company fails to determine the exchange rate and withhold taxes on the day of issuance, it may be guilty of tax evasion or accounting inaccuracies.

• In the United States , the IRS considers virtual currency as property, and virtual wages must be recorded in W-2 form based on their dollar value and withheld for income tax purposes.
• In the EU and Singapore , employers are also required to convert taxes at the exchange rate of the day and withhold personal income tax and social security contributions.
• If a company uses its own encrypted assets for payment, it also needs to confirm whether a capital gain is generated.

Practical issues are more complex:

Currency price fluctuations may lead to instability in salary amounts in accounting, and the time difference between employee declarations and company accounting can also result in tax mismatch.

suggestion:

• Prices are uniformly denominated in legal tender, with the currency serving only as a medium of delivery.
• Record payment time, amount, and exchange rate;
• Hire an accountant familiar with the tax system for virtual assets to handle the annual audit and tax return.

4. Labor law risks: Employee consent does not guarantee legality.

In most jurisdictions, wage payment methods are subject to mandatory regulations.

• In mainland China and most states in the United States, wages are required to be paid in legal tender.
• Hong Kong's Employment Ordinance also requires that wages be denominated in Hong Kong dollars or the currency agreed upon in the contract;
• Cryptocurrencies, if not legal tender, cannot typically be directly considered as wages.

Therefore, unless the employee gives written consent and it is ensured that the wages are denominated in legal tender and paid in a reasonable proportion, the employer may still be deemed to have failed to pay wages in accordance with the law .

Common disputes:

• Employees claim "insufficient salary payment" due to the drop in cryptocurrency prices;
• Social security and housing provident fund cannot be calculated as encrypted assets;
• Labor arbitration does not recognize on-chain transaction certificates.

suggestion:

Establish a compliance foundation using the three-piece set of "fiat currency pricing + employee consent + supplementary agreement".

At the same time, retain the transfer records and the original agreement to ensure that the salary amount can be restored in case of a dispute.

5. Cross-border Funding and Foreign Exchange Risks: On-chain Freedom ≠ Funding Freedom

Cryptocurrency payroll often involves cross-border teams, but cross-border cryptocurrency transfers are not the same as legitimate remittances .

• In mainland China , any overseas currency transfer that bypasses the banking system may be considered evasion of foreign exchange controls or illegal payment.
• In Hong Kong and Singapore , if the recipient of the salary is located overseas, the company is still required to fulfill the obligations of declaring the source of funds and AML (Anti-Mallocate Mutual Aid).
• Banks are tightening their risk controls , and once they identify "frequent on-chain fund withdrawals by enterprises," accounts are very likely to be frozen.

A common gray area practice is "overseas parent company issues tokens on the blockchain → domestic employees receive tokens". It seems flexible, but in fact it triggers foreign exchange, tax and criminal risks at the same time.

suggestion:

• Payroll should be paid through regulated entities located overseas (PSA-DPT, MiCA-CASP, MSB, etc.) whenever possible.
• Preserve the source of funds, transaction hash, and employment contract;
• Avoid directly exchanging, remitting, or receiving encrypted salaries from mainland accounts.

In short:

Blockchain can be borderless, but funds always have borders.

Global Compliance Reference Cases

Crypto-based payroll is not a "regulatory no-go zone" that no one has tried; rather, it has already entered a controlled pilot and compliance innovation phase in some jurisdictions.

The following examples and case studies demonstrate how companies worldwide can legally distribute encrypted payroll within a regulatory framework.

What they have in common is that they are licensed, leave a record, are verifiable, and can be held accountable —this is the only way for Crypto Payroll to truly escape the gray area.

In summary: Paying salaries with cryptocurrency is a trend, but also a regulatory challenge.

The future of cryptocurrency payroll is undeniable—it will become the mainstream payment method for cross-border employment.

However, in order to exist in the long term, it must first overcome three hurdles:

• Licensing hurdle – Does your business model constitute a regulated service?
• Anti-money laundering hurdle – Can the source and flow of funds prove innocence?
• Labor Law and Taxation – Can Your Payment Method Be Regulated as “Wages”?

Compliance is not an obstacle, but a license to go.

In today's environment of increasingly stringent regulations and strengthened bank risk control, issuing cryptocurrency and paying salaries in compliance with regulations is not an option, but a bottom line .

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