In the rapidly evolving Web3 ecosystem, the task of selecting the right payroll provider has become increasingly complex and critical. This complexity is compounded by the diverse needs of organizations operating in this space, from startups to decentralized autonomous organizations (DAOs). With the emergence of hybrid crypto payroll solutions, companies now face a variety of options, each with its own set of features, benefits, and limitations. This blog dives into the essential considerations for choosing a web3 payroll provider that can meet the needs of globally dispersed teams, aiming to demystify the process and highlight what organizations should look for to meet their unique payroll needs effectively.
It's important to note that not all web3 payroll solutions are created equal. While some have their primary focus on flexibility across various currencies and ecosystems, others provide a more singular service. This can be seen especially in the context of solutions built for token compensation. Although they offer an important product for web3 organizations such as DAOs, which are often singularly focused on compensation using their native token, the services are limited and the hybrid component can be barebones.
Here's what to look for when evaluating payroll and compliance solutions specifically built for web3 organizations as well as global teams who want to get paid in both fiat and cryptocurrencies.
Ease of Currency Conversion
Across hybrid payroll solutions, while options for paying workers in fiat and crypto are often available, not all provide conversion services. This can ultimately lead to difficulties for various reasons.
For one, payments in crypto, especially on a global scale and for full-time employees, can quickly become complicated with regards to compliance with tax and labor laws. Finding a hybrid solution that automatically converts crypto compensation into fiat not only bypasses costly conversion fees but majorly simplifies tax reporting for both employees and employers. It allows for companies to fund payroll in their preferred currency, from USDC in a digital wallet to fiat in a traditional bank account, and does the legwork of converting the USDC to USD.
The followup feature to automatic conversions for payments, from USDC to fiat, is the seamless conversion on the receiving end. Prioritizing a solution that allows workers to easily convert wages received in fiat into the crypto or stablecoins of their choosing is of utmost importance. A hybrid solution that has a built-in conversion feature on the receiving end means that regardless of the currency received, workers can choose how they want to withdraw their wages without needing to go through exchanges or third-party currency conversion service.
Payment and Payout Flexibility
A challenge that represents a barrier to widespread adoption for some hybrid solutions is a lack of flexibility. Providers commonly offer a range of payment options, including both fiat and crypto. However, a notable gap often exists in the flexibility of a solution, as many providers do not allow employees the choice to determine their preferred payout currency.
What this ultimately looks like is if wages are paid in crypto, recipients find themselves limited to withdrawing their paycheck solely in the specific crypto in which their wages were originally issued. This same limitation would be true for payroll funded in fiat currency. The lack of flexibility detracts from some of the main draws of hybrid payroll; rather than giving workers the enhanced freedom to take a paycheck in fiat, crypto, and stablecoins, they end up only receiving wages in the currency determined by their employer.
Similarly, from the company's perspective, they should be able to fund their workforce payments in the most flexible way possible. This means having the option to choose what source of funding their payroll payments will come from. Including options to connect traditional bank accounts for wire transfers as well as their company's shared multi-sig crypto wallets is crucial, especially for crypto-native companies and DAOs whose treasuries may sit in both fiat bank accounts and in digital assets on a blockchain.
Global and Local Compliance
As governments across the globe intensify their efforts to enforce crypto regulation, the need for a hybrid payroll solution that provides compliance services is more important than ever before. From hiring to payments, a comprehensive provider should offer features such as KYC checks, AML, and the handling of global tax forms.
Anti money laundering (AML) refers to a framework of regulations and practices that aims to prevent the illicit conversion of illegally-obtained funds into legitimate income. Its paramount significance lies in safeguarding global financial systems against money laundering, terrorism financing, and other financial crimes. Through the enforcement of stringent due diligence, transaction monitoring, and reporting measures, AML ensures the detection and prevention of suspicious financial activities.
In the world of web3, AML has become a topic of significant importance due to the high rates of money laundered in crypto through centralized and decentralized exchanges. Between 2017 and 2021, cybercriminals laundered $33 billion worth of crypto.
Since most countries have implemented AML standards and regulations, the majority of companies can anticipate compliance requirements. For web3 companies and DAOs that want to ensure that their operations are fully legal and compliant, a balance must be struck between abiding by AML standards without sacrificing principles of anonymity. Working with a hiring platform that explicitly provides compliance services for web3 organizations is a great way to achieve this.
A platform designed around the needs of web3-native entities makes it possible to ensure compliance without exposing a contractor or contributor’s personal data. This is typically achieved by verifying a worker’s information via their on-chain identity; those managing DAO payroll do not have access to more than a wallet address while a third-party web3-friendly platform ensures that a contributor is who they claim to be.
These same ideas run parallel to the need for KYC checks that optimize for contributor anonymity. KYC, or Know Your Customer, is an important process for customer or client identity verification. Its primary focus is verifying and understanding the identity, financial activities, and risk profile of a customer. KYC plays a pivotal role in mitigating financial crimes, such as money laundering and fraud by ensuring that financial entities and other regulated entities have a clear understanding of their customers’ backgrounds and intentions.
In the case of web3 companies, many of which collaborate with a roster of dispersed international contractors and employees, diligence with KYC is crucial for avoiding costly compliance missteps. Because most hiring in the web3 ecosystem is done over the internet with limited in-person interactions, KYC helps to ensure the authenticity of potential hires, confirming their identity matches their claims. A complication that can arise for web3-native organizations, such as DAOs is figuring out how to stay in compliance and run KYC checks while ensuring anonymity for contributors. Going with a payroll provider that is designed to meet the needs of web3-native entities ensures that KYC checks can be executed while anonymity is upheld.
Employee classification can pose unique complications for web3-native organizations. Job descriptions for DAO contributors, for instance, often deviate from the conventional classification system of 'full-time,' 'part-time,' and 'freelance' work. In the face of tax and labor laws, this ambiguity can become a barrier to compliance. This combined with a lack of familiarity with tax documents can result in confusion around whether a worker will require a W2 or a 1099.
Arriving at definitive answers to these questions early on is an easy way to avoid compliance mishaps. The role of a comprehensive payroll provider is to help streamline the compliance process. With proper onboarding, a worker’s status can be determined from the get-go and all subsequent tax documents will be handled by the payroll provider.
Security, Smart Contracts, and Transparent Processes
One of web3’s outstanding features is its heightened level of security. Web3 security systems often leverage decentralized identity solutions, allowing for secure and verifiable identity management. This ensures that only authorized individuals have access to payroll-related data and transactions. An example of one such feature is the RiseID, a unique smart contract minted by every Rise user to introduce an extra layer of security for both the payer and the payee. The RiseID is a professional DID that is necessary for initiating all Rise payroll transactions. Connected to the user’s wallet of choice, it is the mechanism by which companies securely send payments, verifying their identity and authenticity on-chain. The same principles of enhanced security carry over to the payees. In order to cash out a paycheck, the payee must first sign off on the transaction with their RiseID.
Further security comes in the form of cryptographic technologies used for securing data and transactions. Sensitive information surrounding payroll and compliance is encrypted, thus reducing the risk of unauthorized access or data breaches.
When it comes to issuing mass payments to a global workforce, optimizing for the highest level of cyber security is of paramount importance. With a hybrid payroll solution, automation dramatically reduces the margin of human error while cryptographic technologies bring next-level security to all payments issued.
Smart contracts play another key role in boosting security and efficiency by introducing levels of automation that traditional payroll is unable to achieve. Through a hybrid payroll solution that leverages smart contracts for mass payouts, a company can program self-executing smart contracts that have been designed to release funds to workers once a project has been completed according to set criteria. A simple contract can be created with a payer, payee, and an arbitrator. The payee will deposit funds into the contract, once the payee has finished their designated work, they can complete the project to release their funds. If a dispute arises, the payer can call on the arbitrator function to trigger the return of funds.
This system is especially useful for companies working with a wide net of international contractors rather than a roster of full-time employees receiving set monthly salaries. In the former, the issuance of distinct paychecks for each completed project in a given month can become an insurmountable task, with errors and delays in payment commonplace. Smart contracts step in to automate and streamline what is otherwise manual and cumbersome.
One of web3’s founding principles is transparency. This is made possible through public ledger technology, which records all blockchain transactions and makes them visible to the general public. If money is sent between wallets on the Ethereum blockchain, for example, to track a transaction, all one has to do is go to the public ledger, look for the wallet addresses and through this mechanism, confirm when a transaction was initiated and received.
With respect to payroll this feature is highly convenient. Rather than waiting for days to weeks for a check to arrive in the mail or a deposit to be made to an account with no tracking information, instead, transactions can be followed in real time. On the part of the employer, no extra steps are necessary in granting access to tracking one’s funds since web3’s transparency features make this automatic.
Evaluating Providers: What to Look For
The process of selecting a provider that best caters to an organization's needs involves a holistic approach. While compensation features are one element to consider, the addition of compliance services bring an extra layer of security and scalability to global compensation. If a payroll provider offers solely barebones remuneration services, the extra legwork of handling compliance and international tax forms amounts to minimal time savings in the long run.
Choosing an all-in-one solution that streamlines hiring, payroll, and compliance results in measurable time and cost savings as well as improved employee satisfaction. When cross-comparing available solutions on the market, at present few exist that can check all of the boxes. While some will offer token compensation without options for fiat payments, others will not allow the funding of payroll directly from a digital wallet. Ultimately, optimizing for flexibility and the widest breadth of services available sets an organization up for success.
While less common to the majority of hybrid payroll platforms, an additional feature to look out for is the inclusion of on-chain professional decentralized identifiers (DIDs). A key feature of the web3 ecosystem, these unique, blockchain-based identifiers link an individual’s professional identity to a decentralized, secure ledger. Their primary use is allowing individuals to control and manage their professional identity and associated data, which can include credentials, work history, and education, while maintaining privacy and security. On-chain professional DIDs offer a self-sovereign, tamper-resistant, and portable solution for verifying and sharing professional information.
Certain web3 payroll providers, such as Rise, have integrated their own DID systems. In the case of Rise, the RiseID exists as a self-sovereign, on-chain, professional identity minted by all Rise users. Its exceptional levels of composability, limitlessness, and security make it ideal for interacting across a wide range of DeFi and blockchain protocols.
Rather than being owned by Rise, the Rise ID is a self-sovereign professional identity owned by either an individual or company. Each RiseID owner can choose what information to upload to their digital identity, including KYC, educational history, bootcamp certificates, pay history, and beyond. This information is then able to travel across web3 with its user, whether that means authorizing DAO transactions on Safe or taking one’s crypto payout directly to a DEX. The RiseID can connect to a host of wallets including Coinbase Wallet, MyEtherWallet, Metamask, Ledger, and Taurus.
Choosing the right Web3 payroll provider is a pivotal decision for any organization looking to navigate the complexities of digital and fiat currencies. The right provider should offer a seamless blend of flexibility, compliance, security, and transparency, all while catering to the global nature of today’s workforce. As we've explored, the features to look for range from ease of currency conversion and payment flexibility to global compliance, security measures, and the integration of smart contracts and transparent processes.
To further assist in making an informed decision and to delve deeper into solving payroll and compliance challenges in Web3 through hybrid payroll systems, we encourage you to download our comprehensive guide, "Payroll Revolution: A Web3 Guide to Global Workforce Payments in Fiat and Crypto." This guide is an invaluable resource for understanding the intricate landscape of Web3 payroll solutions and what to consider when evaluating software vendors. Equip your organization with the knowledge to choose a provider that aligns with your operational needs and values.