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Should the Government Pay Contractors with US government Cryptocurrency?

Digital assets or cryptocurrency are becoming an increasingly popular payment method around the world. Many people refer to it as “bitcoin,” but that name is actually a brand. These days, Bitcoin, Dogecoin, Ethereum, Binance, and other cryptocurrencies are all flooding the news feed, claiming that their value has gone up.

The news about digital assets may have been making the mark lately, but it has been on the market for quite some time. In fact, since the usage of “bitcoin payments” is in high demand, the United States decided to establish its central bank for digital currency (CBDC).

Although CBDC would handle the virtual currency, there are still national security challenges posed in their nature. One example is that a central bank-issued virtual currency could be used for money laundering or finance terrorism.

Despite the given national security challenges posed, the Biden Administration is looking at the possibility of having crypto payments to speed up the payment of federal agencies to government contractors and producing crypto payroll to pay employees of the entire government entity.

The current Administration is taking a cautious approach to this development. But the question is, should the government pay employees and government contractors with virtual currency? Read along as you are about to know the potential effects of digital assets and the information about this plan.

What is a Central Bank Digital Currency?

What is a Central Bank Digital Currency?

 

Digital assets, virtual currency, crypto, digital tokens, or bitcoin, whatever people may call it, the crypto made by the U.S federal is controlled by the Central bank, thus calling it Central Bank Digital Currency. This virtual currency is linked to the value of the nation’s fiat currency – dollars.

As being supported by the government and controlled by a central bank, crypto assets would provide consumers, firms, and families with a secure way of trading digital currency.

CBDCs are not just used in the United States alone; some other nations have already implemented them. But since many countries are looking forward to using this method, it is critical to thoroughly understand what their nature is and how it can affect the entire society.

What is the purpose of Central Bank Digital Currency?

What is the purpose of Central Bank Digital Currency?

 

According to the Federal Reserve, approximately 5% of Americans do not have bank accounts. About thirteen percent of the population uses costly alternatives of money order services, payday loans, and check-cashing businesses.

With all those issues in mind, the CBDCs are made to give consumers accessibility, convenience, security, portability, and financial stability. These characteristics make CBDCs an excellent tool for improving compliance, reducing operational costs in the entire financial system, and providing customers with lower-cost alternatives.

However, using digital currencies in its current situation entails several security and stability concerns that the law enforcement agencies would address. Another is that virtual currency is highly volatile with the constant changes in its conversion rate.

The inconsistent conversion rate may strain the financial health of the economy since many consumers are not used to doing crypto conversions.

Which cryptocurrency is backed by the government?

Which cryptocurrency is backed by the government?

 

The CBDCs have two types: wholesale and retail CDB. Wholesale CBDCs are primarily used by financial organizations. On the other hand, customers and companies use retail CBDCs to substitute physical currency.

Retail CBDCs

The retail CBDCs are the digital currencies backed by the government, providing direct access to consumers. Retail digital assets that are accessible to everyone are essential, especially nowadays, where the current era has rapid innovation and the use of cash is slowly declining.

Wholesale CBDCs

The wholesale CBDCs are intentionally made for financial institutions or companies holding a reserve deposit fund with the central bank. The central bank then creates an account for them so these institutions can settle their transactions.

The wholesale CBDC does not just help both financial institutions improve payments and securities settlement, but it also allows them to reduce counterparty credit and liquidity risks. With the wholesale CBDCs, central banks can then affect lending and set interest rates through monetary policy tools like reserve requirements or interest on reserve holdings.

Can you pay for services with Bitcoin?

As of this moment, the federal department has not yet approved virtual currency for crypto payroll or payment for goods and services. Firstly, the fair labor standards act requires employers to pay employees in cash. Therefore to answer the question if it is possible to pay for services with Bitcoin? The answer is no. However, given the increasing popularity and demand of crypto, it is possible that the fair labor standards act would change, especially since the Biden administration released an executive order for the usage of digital assets on its transactions.

In an article published last January 2022, the current President, Mr. Joe Biden, is preparing to issue an executive order for digital assets and asked federal agencies to analyze the potential dangers and advantages digital assets could offer.

If the use of crypto currency has been finalized, here are its possible benefits of it as a payment method:

Pros of using crypto

Cheaper and a faster way to receive payment

When using crypto, users do not have to pay tax for wire transfers or credit card processing; instead, a user-pay fee of less than a penny is charged per transaction. Another good thing about virtual currency is that it can be converted straight into cash or deposited into a bank account. That being said, it can reduce the time it takes to get paid. Accepting crypto payments for compensation, profit, or wage may get companies paid faster than traditional paper checks.

Simple international transactions

Consumers of crypto all over the world can use the currency to avoid exchange rate calculations and convert cash into various currencies. Individuals may conduct business with the same money and exchange it for their domestic currency, making cross-border payments more manageable. Other platforms provide QR code to make it easier for the transacting parties to transfer payment and funds.

As previously stated, the market determines the value and conversion rate of crypto currency. That being said, vendors and consumers have complete control over the funds in their crypto accounts, giving them the chance to wait for the value to rise before withdrawing.

Easier for federal agencies to pay government contractors

Because the government would be paying in cryptocurrency, it would make it much easier for them to keep track of the money. In addition, they would not have to worry about conversion rate when paying contractors who are based in different countries.

Good for enhancing public image

You will be more perceived to be up-to-date if you’re one of the first businesses to start accepting cryptocurrency. It may even assist you in attracting new customers interested in using crypto but have nowhere to spend it.

Cons of using crypto

With all the given benefits of using digital assets to pay employees and procured government contracting products or services, there is no wonder why the current Administration is taking risks in studying how to manage the new currency successfully.

Speaking of risks, there are many disadvantages that anyone should know before jumping into the virtual currency field. Here are some of them:

Highly volatile

The value of cryptocurrencies can change rapidly, leading to losses for businesses that accept them. For example, if you price your goods in crypto and the value of the currency falls, you might not be able to cover the cost of your inventory.

No federal regulations in place

As of this time, when you make a cryptocurrency transaction and it goes wrong, there is no central authority that can file a complaint, and there’s no guarantee that you’ll get your money back. In addition, since the government does not regulate crypto, there is a higher risk of fraud.

Anonymity might be seen as suspicious

Some people might see the anonymity of cryptocurrency transactions as suspicious. It is easy to create an account in cryptocurrency, so others may choose to remain anonymous, and this could be perceived as being up to something nefarious.

Prone to hacks

Cryptocurrencies are often stored in digital wallets, which can be hacked. As a result, there may be a financial loss for businesses that accept crypto payments.

No payment protection for every transaction

There is no legal protection for businesses that accept crypto payments. Once you have sent the money, you can no longer get it back if the buyer decides to cancel the transaction.

Subject to gain tax

Any crypto transactions may be subdued to tax at a taxable fair market value when the cash is received. When a vendor receives the money, they must keep accurate records of the currency’s value.

On top of that, they have to pay capital gains taxes if the market value increases. The taxable income derived from these values must be recorded and reported in your company’s financial statement.

Whenever you take a leap and get into a new field, there are always advantages and disadvantages. That is why it is crucial to weigh the pros and cons before deciding because what is effective for one company may not be effective for another.

How can my employer pay me in crypto?

How can my employer pay me in crypto?

You can get paid in three ways with cryptocurrency:

Through non-custodial wallets

Both parties must first create a wallet to keep their coins to send crypto directly through the decentralized blockchain network. Different currencies have distinct wallets that may not be mixed and matched. These wallets aren’t custodial, which means you have complete control over the wallet address and its private keys.

Because the blockchain requires computing power to be added, a fee is charged. The prices of data transfers also vary considerably by the hour, so keep that in mind.

The infrastructure for bitcoin transactions has advanced considerably. Providers like BitPay can automatically generate and transmit standardized crypto invoices, reducing the time to complete transactions.

You own the cryptocurrency after it’s delivered. Nobody else can move these funds without your secret key, so it should be kept secure.

Using custodial wallets to trade

Alternatively, custodial wallets that exchange transactions reduce network costs and simplify the payment procedure. A crypto exchange will give you an address to use with a custodial wallet, but they will store the key.

DIY crypto pay

Consider an employer who doesn’t offer crypto as a form of payment. If so, you can buy crypto from an exchange and convert your paycheck dollars into crypto. But if you would be doing this, you shall be mindful of extra charges associated with blockchain transactions. A credit card charge is usually incurred when buying crypto.

Should the federal use cryptocurrency for its financial needs?

The federal government is looking into the potential of paying contractors with cryptocurrencies. However, given the current status of the crypto sector, numerous concerns must be addressed before this can become a reality.

So, should the Administration pay their contractors with crypto? As of this moment, the industry is still growing, and using crypto takes a lot of risks. But many businesses are already accepting crypto as a form of payment. So, there would not be any hindrance for the federal agencies and authorities to do the same.

It may take lots of effort to understand the possible outcome of using crypto entirely, but once the Administration successfully establishes law enforcement and logistics for digital assets, the financial transaction will move to a new level.

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