Recently, we have been advising quite a few clients of all sizes (among them quite a few “old school” companies and businesses) regarding the correct and safe way to implement cryptocurrency as a means of payment in their businesses. Below are a few notes and matters to consider when doing this. While incorrect implementation can create a host of legal and business exposures, correct implementation can be very significant and profitable from a business point of view and attract quite a few customers.
Although cryptocurrencies are not yet widely accepted as a means of payment for goods and services, their growing popularity has recently led to increased interest in their use as a means of payment. However, there are several considerations to be aware of before implementing cryptocurrency as a means of payment.
One of the main legal considerations is – is the use of cryptocurrency as a means of payment legal in the jurisdiction we are targeting. While some countries have legislated (e.g. Brazil and El Salvador) cryptocurrencies and taken steps to regulate their use, others have banned it outright (e.g. China). It is important to be aware of the laws and regulations in the jurisdiction where clients operate or serve and ensure compliance with them at all times.
Another legal consideration is whether cryptocurrency transactions are taxable or not. In many countries, cryptocurrencies are considered a type of asset for tax purposes rather than cash, which means transactions involving them may be subject to capital gains tax. It is important to be aware of the tax implications of using cryptocurrencies as a means of payment and ensure compliance with relevant tax obligations.
In addition, compliance and compliance with legislation and regulation in connection with anti-money laundering (AML) laws and “Know Your Customer” (KYC) obligations in connection with the use of cryptocurrencies should be noted. Businesses that implement cryptocurrencies as a means of payment must comply with obligations in connection with AML and KYC to protect against the risks of money laundering, sanctions evasion, fraud and other financial crimes. This means that there is an obligation to verify the identity of the customers and monitor the transactions for suspicious activity as well as to keep certain documents in compliance with certain conditions related to AML and KYC obligations (usually in connection with the scope of the customer’s transactions but not necessarily) such as copies of passports, driver’s license, accounts of telephone or cable infrastructures (as a means of proof of residential address).
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 changed or reversed. This makes crypto transactions extremely secure, but also presents a challenge to businesses if they fall victim to fraud or in the case of mistakes such as sending cryptocurrencies to the wrong address, which can cause such “wrong” cryptocurrencies to be lost forever (and then the question arises as to who bears the damage). For example when making a refund to a customer who provides an incorrect address.
Finally, another legal consideration is the lack of legal precedents in connection with disputes concerning cryptocurrencies. Because cryptocurrencies in terms of legal history are a relatively young business field and a relatively new technology, the legal system has not yet had the opportunity to fully address the unique issues it raises. This means that one should be aware of the challenge of managing a legal dispute (and in particular the ability to anticipate and manage our steps) in the event of a dispute and take steps to protect the business accordingly (usually based on the use of arbitration and a variety of other mechanisms).
Another issue to consider when implementing cryptocurrencies as a means of payment is the price volatility of cryptocurrencies which is an inherent feature of the cryptocurrency field, especially since almost all businesses price their services and products in FIAT money (shekels, dollars, etc.). This means that cryptocurrency exchange rates relative to FIAT money can change significantly in a short period of time, which can create risk and financial exposure for businesses.
For example, if a business receives payment in cryptocurrency and then later the price of the currency falls before converting the money to FIAT, the business may end up losing money, especially if there is an urgency to redeem the currencies (it should be noted that in transactions where VAT applies, the VAT in time as if it were cash). On the other hand, if the price of the currency rises before the money is converted to FIAT, the business can profit from the increase in the exchange rate.
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Attorney Gil Solomon
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To reduce these risks, a variety of approaches can be taken: Cryptocurrencies received can be converted into stablecoin or FIAT currency as soon as possible to avoid the impact of price volatility. You can also consider setting prices in FIAT currency and converting payments received through a third-party payment service (such as BitPay) during the transaction and payment stage and receiving the payment in advance in FIAT (while rolling over the conversion fees to the end customer). Another approach to dealing with price volatility is by implementing pricing strategies such as dynamic pricing, which adjusts prices in real time based on the current value of the cryptocurrencies the business receives.
One of the ways to address the legal considerations and volatility is by drafting a payment terms policy document individually tailored to businesses seeking to implement cryptocurrency as a means of payment. This policy will define the legal framework for accepting cryptocurrencies and detail the steps the business will take to ensure compliance with laws and regulations.
The policy should include details of how the business handles tax obligations related to cryptocurrency transactions, compliance with Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulations, and other compliance requirements, such as customer identification information and handling of suspicious activities, as well as Conversion of received cryptocurrencies to fiat or stablecoins or use of a third party for conversion purposes.
In addition, the policy should also address the security aspects of the transactions and in the case of refunds, such as implementing smart contracts to ensure automatic refunds in the event of a mistake.
Finally, the policy should provide guidance on how cryptocurrency-related disputes will be handled and should detail the steps the business will take to protect itself in the event of a dispute. By establishing these procedures in advance, businesses can be better prepared to address any issues that may arise and prevent potential legal problems down the road.
While the use of cryptocurrency as a means of payment is becoming more and more popular, it is important to be aware of the legal considerations involved. By understanding the laws, regulations and regulatory framework that apply to cryptocurrencies, you can ensure compliance with them and take steps to protect against the potential risks associated with the use of cryptocurrencies.
A customized framework of legal documents can provide a platform that will give expression to the multitude of legal considerations and regulatory requirements when implementing cryptocurrency as a means of payment, and will help reduce the risks involved, while optimally distributing the burden of risk between businesses and end customers. In parallel with this framework, it is important to ensure compliance with the relevant regulatory frameworks through ongoing and regular compliance.
As long as we do this in a good way, it is possible to realize the enormous potential inherent in the implementation of cryptocurrency as a means of payment and positively affect the profitability of the business.