So, you are thinking about accepting crypto as payment…

For several years now, Web3 or crypto has been touted as the wave of the future. Many nonfinancial businesses have started holding crypto in their reserves, and many others have begun accepting Bitcoin or other forms of crypto as payment, including AT&T, the Dallas Mavericks, Microsoft, Overstock, and Starbucks. These companies make up a small but growing minority of the economy, and while crypto adoption is by no means inevitable, a vocal subset of the population would argue that it is.

Whether you are considering crypto as a way to expand your business or at the request of your clients or customers, there are various issues you need to consider before taking the plunge.

What is Crypto?

Put most simply, crypto refers to any digital asset that can be uniquely identified through its connection to a blockchain, a decentralized computer network whose purpose is to generate and track these unique identities of the crypto assets. The keywords in the above sentence are digital, unique, and asset—they are the three qualities most important to you as a business that may find itself in possession of crypto. Those three qualities allow companies to use crypto in a variety of ways, including:

• Non-Fungible Tokens (NFTs), which function similarly to collectibles, like artwork or autographed sports cards
• Tokens, which can work like securities but have not yet been regulated as securities by the SEC (an attempt to do so is likely coming)
• Cryptocurrencies, which are designed to function similarly to currencies. The most well-known name in crypto, Bitcoin, is considered a cryptocurrency. Although the term “cryptocurrency” is commonly used, it is a misnomer because in the United States neither Bitcoin nor any other crypto asset is itself legal tender
• Stablecoins, which are also designed to function as currency and are (usually) collateralized and intended to be pegged to a currency.

Can I Accept Crypto As Payment?

Various digital platforms allow a business to accept crypto as payment, but simply setting up an account with one of these services does not allow seamless use of crypto for a company, and doing so may expose a business to considerable risk if the business is not prepared. In addition, setting aside potential tax and reporting obligations, which may include SEC, CFTC, or other governmental filings as well as transaction fees, a routine crypto transaction has complications that extend beyond simple currency transactions, including bookkeeping and accounting. This is further complicated if a deposit or trust is involved, where accounting rules surrounding holding crypto assets may be complicated and subject to change.

Something Went Wrong. How Do We Fix It?

Unless your business has an account with a secure holding company for crypto (a “crypto wallet”), the first thing your business has to do upon receiving crypto is to convert it into currency. Any payment processor assisting you in accepting crypto can do so for a price. However, every crypto asset is unique, unlike traditional currency, which is designed to be fungible (one dollar is as good as any other). Therefore, unless the party paying you in crypto agrees that they can be paid back in kind rather than with the exact asset they paid, you will not be able to refund the precise asset in the event of any refund or unwinding of a contract. Even worse, unless you agree that the purchase price is to be valued in dollars, you could be required to repay the crypto at a much higher value than you received it, as crypto assets, even stablecoins, can be volatile and are not backed by any governmental entity.

Now We Are In Litigation. What Will Happen?

Some judges, arbitrators, or jurors may be well-versed in crypto. More likely, your attorney will have to explain your dispute in a way that conveys the issue’s essence without getting bogged down in jargon.

The goal of a breach of contract case, to put the wronged party in the position they would have been in but for the breach, is hard to achieve when the parties cannot agree on that position, and the finder of fact may not be able to understand it.

Carefully chosen terms and conditions of your contract are the best way to get in front of that issue, clearly stating the measures of damage and potential outcomes of any breach of contract in a way that judges or jurors can understand. Provisions requiring the conversion of crypto assets to dollars at fixed times or liquidated damage provisions can offer shortcuts to predictable resolutions that limit your risk.

So, Should I Accept Crypto As Payment?

The answer varies with your risk tolerance and your perception of market demand. It can be done, but like all new endeavors, it should be done with thoughtfulness, preparation, and the guidance of your financial advisor and, of course, a good lawyer.

Gordon Wikle is an attorney at Venn Law Group with more than 14 years of experience serving as an Assistant District Attorney with the State of North Carolina. He focuses on commercial litigation and enjoys analyzing problems and finding creative solutions that are in the best interest of his clients. Navigating difficult situations and resolving business disputes are areas where he excels. Gordon earned his J.D. from Duke University School of Law and his B.A. in Economics from Vanderbilt University.