How to Use Crypto for Payroll

In this episode, we’re joined by Megan Knab, CEO of Franklin Payroll–a crypto-native full service payroll company. Megan and Mark discuss the gap in the market for crypto-native payroll solutions, the upsides and downsides of getting paid in crypto, and how more web3 workers opting for compensation in crypto will affect the crypto/web3 economy. Megan also discusses compliance and tax considerations for getting paid in crypto, why stablecoins are a popular choice, and the infrastructure needed for wider adoption. 

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Transcript

Mark:
I am super excited to talk about payroll and paying people in crypto. Believe it or not, I find it a very interesting subject, which I know you do too, though probably people won't initially realize why payroll is so interesting. So, I'm really excited to talk about it with you.

Megan:
Amazing. Yeah, I'm really excited to get to chat with you as well.

Mark:
The reason that I think it's so interesting is because a lot of times, we talk about traditional finance and crypto disrupting traditional finance, but what we don't talk about is an emerging crypto economy of its own. Maybe we don't even need to disrupt traditional finance. Maybe crypto has its own GDP. There's a lot of things that happen in it, whether it's gaming or collectibles or what have you. And then there's financial services for that, just like there's financial services in traditional finance. And that can be kind of something that snowballs and gains momentum on its own. And core to that is paying people. An economy pays people. That's one of the key things that happens. And so I'm really curious how that happens, how people are starting to pay people in crypto today. And it sounds like you're an expert on the matter.

Megan:
I started working in Ethereum specifically around 2016. And during that time, there was lots of discussion and excitement around institutional adoption, and what does that mean for crypto? And that's really going to be the thing that takes this industry to the next level. And in many ways, for the past couple of years, it's just been this trope where the institutions are coming, particularly on the financial services side of crypto.

Mark:
Yeah, it's this huge narrative where this is what's going to change everything.

Megan:
Yeah.

Mark:
And I don't know if that's... That's not all there is.

Megan:
Right. I think that sometimes it's been said a lot by early adopters, and builders in the space, to validate in some ways the technology that's being built, that this is not just a bunch of nerds on Twitter, all building things for ourselves and this idea that a bank would be interested in stablecoin or holding Bitcoin in a retirement account, or what have you is validating emotionally perhaps. But yeah, to say that it needs to be integrated in some ways. And I would actually say that, but it's not to say that crypto in itself doesn't have its own sort of unique value propositions that don't need to exist in a web2 world. When we think about how does that economy work operationally and logistically, certainly paying people and figuring out how to reward and incentivize people is one of the fundamental things of public blockchains, and also a wider crypto economy. But it's complicated. There's a lot of red tape around how to pay people and how to protect retail investors, as I know you know with your work on taxes and all of that good stuff. So yeah, it's a nuanced conversation.

Mark:
Great. Well, I'm excited to learn all about it. As a first step, could you help me and the listeners understand what makes you such a credible expert in guide on this subject?

Megan:
Yes, sure. So, I'm an accountant by trade. I worked in an accounting office for a couple of years out of college. I learned about Ethereum actually when I was going to business school at night for my MBA and thought that Ethereum was this amazing sort of open source accounting tool that could solve corporate greed on Wall Street, and got very, very excited about it. Dropped out of business school to be able to go to Devcon where I was completely out of my element, certainly. And yeah, I think that it was certainly this sort of transformative experience going to Devcon for myself to say this is a technology or an environment that I really want to spend time in, and I think that I have something to offer. It's quite unique, the community around this. It's polar opposite of being a young woman working on Wall Street.
It was very welcoming. People are more excited about ideas than perhaps your pedigree or where you went to school. So, all those things attracted me to it in the first place. And I think that we're sort of going through this renaissance almost in accounting technology in general, certainly in the crypto world, and also in the Web2 world as well, where over the past 10 years or so, small businesses and startups have this now plethora of options that they could use to decide to onboard to be able to run their business better. Professionally, I worked at a project out of Consensus first doing crypto accounting things, got my feet wet there and sort of developed a little community of crypto accounting nerds to talk about, how do you reconcile a transaction like this? How do we think about holding this kind of asset on the balance sheet?
And certainly was, and very much still is, a sort of wild west of thinking through, how do we take the gap or accounting principles that we have and apply them to crypto assets in a way that makes sense and is also authentic to reflect the true health, financial health of a company? Certainly, there's a lot of room to improve there on the policy side. But yes, so I've done a couple things there. I worked on a company called [inaudible 00:05:50] Ledger, which was a crypto accounting general ledger software, which was super fun to start up. And then from there. Went to build out a crypto trading desk at a equities broker. And from there, ended up as VP of finance at a company called Serotonin, which is the largest web3 marketing agency out there. They're fantastic. It was started up by Amanda Cassatt, who used to be the chief marketing officer at Consensus.

Mark:
And disclosure, Shipyard Software is a client of Serotonin. They do great work.

Megan:
Fantastic. Yeah, that's amazing. At Serotonin, it's this sort of beautiful environment to be able to work in because there's a lot of ideation on how do you think about running a Web3 business matter. So, we had a pretty global workforce, serotonin still has a global workforce, and we had an interesting sort of revenue mix where we would get paid in cash in stablecoins, in other tokens, and we had staff that we wanted to pay in kind as well. We had global contractors that wanted exposure to the US dollar. We had staff in the United States who just wanted to get paid, have it direct deposited into their paycheck, and other sorts of compensation things. We wanted to be able to distribute tokens to some of the staff. And so as the person running the financial back office there, it was really a nightmare in some ways, where [inaudible 00:07:16]

Mark:
Yeah, sounds like a nightmare.

Megan:
Yeah. So, anybody that I think is operating a company in the web3 world, so to speak, I think understands this, and also in the web2 world too, where you are working with a smattering of payroll providers to try to stay compliant, you have to do all this cash movement, and then your cash is locked up for 10 days while it goes through a long complicated ACH processing situation. If you're paying people in crypto, it's very manual, very error prone. And so we started prototyping, how can we do this better? And eventually, Franklin was sort of born out of that project.

Mark:
And so Franklin is essentially a crypto payroll provider. And so it sounds like what you've done is taken a bunch of those learnings and some of that infrastructure and providing it to other companies who have similar problems.

Megan:
So, we are a little bit interesting, I think compared to some other payments tools out there in that we can facilitate crypto payroll. So, you want to pay your staff in stablecoins, you want to distribute tokens to them, we can help you with that, but we can also do all of the sort of normal kind of vanilla bread and butter cash processing, and we can mesh it together to do both. So for myself, as an example, I get paid in half cash and half stablecoins, and that really works for me.
And we can enable those kinds of payment types for other workers, other companies that want to pay their staff that way. And one of the things that I think has been missing in this environment, which is a little bit of a take on how we open this conversation, is how do we have these web3 primitives and be able to pay people natively, while also understanding and operating in the context of a web2 world? So, in the United States, as an employer, you have to remit tax payments every pay period to local, state, federal authorities. There's not really rails to do that in crypto. And so that's sort of where we have tried to come in there to the market to be able to say, "Sure, pay people in crypto. We'll help you streamline all those back office processes and enable a web2 experience in a web3 context."

Mark:
Makes sense. It sounds like a nightmare. Already, everyone knows on their W-2 they have to pay FICA and FUDA and Medicare tax and income tax that's withheld, and then you have to apply at the end of the year if you deserve a rebate. And then if that's remitted in various assets, it's like, okay, well, what's the value of them at the date that you receive payroll? And is it the market? Where do you get in the market? And then what if it's some long tail token that's associated with a project that you're actually a client on, well, is there even a evaluation for that? Maybe you need a 409A. There's just a whole laundry list of things.
And then if you think about, okay, well, internationally, because a lot of these teams are distributed internationally, you've got to figure out all the various rules and regulations everywhere else. It's like a lot of crypto. It kind of doesn't inherently have to adhere to laws because it can just process on chain. But if you don't adhere to laws, the people themselves still live in the real world, and so they face penalties. And so in practical terms, of course you have to obey the laws.

Megan:
Yeah.

Mark:
And that creates a... That's hard.

Megan:
Yeah. Right. A lot of the customers that we work with now, they're venture funded founders. They are builders, and they know that they have an obligation to their investors to say, "We are doing everything above board." And it's too hard, honestly, operating in web3, to be able to run a compliant business. And so that's frustrating to me. That's what motivates me, as somebody who focuses on a lot of this nitty gritty sort of tax compliance, accounting compliance. A lot of this stuff can be automated, and we, as a community of builders, should be enabling builders should build. And so to the extent that we can eliminate or ameliorate some of that complexity, that's the goal.

Mark:
I'm really curious, if you think about your clients and the companies you've worked with and the employee base that you're paying out, what do they paying in? What are the companies like paying in? And what do employees tend to want to be paid out in?

Megan:
Yeah.

Mark:
Does everyone sign up for just cash in a bank account, or just most people do what you do or take half in USDC? And if it's half in USDC, why do you think? And then do people want to get paid in Bitcoin and eth? I'm just curious what you see actually happening.

Megan:
Yeah, I think that there are a lot of flashy things happening in this industry at the moment where we've seen things like the mayor of Miami, mayor Suarez say, "I'm going to take my paycheck in Bitcoin." Or in my hometown of New York City, Eric Adams is saying, "Oh, I'll take it in Bitcoin too." And these are just flashy political whatevers to try to make it seem like these jurisdictions are friendly to tech companies or friendly to crypto companies. So, there's one element of that, and I think that there's some bluster around Bitcoin in particular where there is this, I don't know if extreme is the right word, but sort of party line sort of belief in Bitcoin in its original mission as a peer-to-peer payments technology. And so I think that there's small but vocal group of guys on Twitter that would say Bitcoin is the way to get paid.
On the ground, what we see is something that is a little bit more moderate. So, we work with a lot of employers based here in the United States, and there are a lot of rules around how people can get paid. And I think about this a lot in the context of having gone through the sort of 2017 ICO boom and bust where lots of projects out there wanted to compensate their workers in their tokens. And those tokens were sort of analogous to equity, but they didn't really work like that, and there were some maybe sometimes perverse incentive structures that existed then. If we were to rewind back in history, there's a bunch of case law precedent in the United States around essentially coal miners that worked in Appalachia, that lived in these coal miner towns and would get paid in coal miner company coupons. And that kind of closed economy did not allow for them to be able to leave.
And so I think it was in West Virginia was one of the first states to say this is exploitative, and they created laws to say, if you're an employer in this jurisdiction, you have to pay in a USD equivalent currency. And so those laws still exist. So when an employer signs up for Franklin, we will take a look at their worker population and say, "This state explicitly says no crypto to get paid in. They can only get paid in cash for their W-2 wages." So, there's one element of that, which is a pretty specific use case for companies here in the US.

Mark:
In web2, you have stock options. So, how does that play into the requirement to compensate W-2 employees in the U S D equivalent?

Megan:
Yeah.

Mark:
Because Google, Facebook, Tesla, whatever, they actually have big stock-based compensation line items.

Megan:
Yeah. Right. Right. And for anybody who works at a startup, you want to have stock upside. Hopefully, that's an attractive part of how you should get paid.

Mark:
Yeah.

Megan:
Yeah. I think that one of the things is there's just a difference in employment law between salaries and other types of income. So, stock is income, but it's not your salary. Certainly in the web context, you can have a salary paid in stablecoin or USD or other fiat currency, and then you can also have a sort of other income type, which could be token distributions, it could be stock auctions, it could be NFTs. I don't know any companies that are paying their staff in NFTs yet, but it's conceivable. And so that's sort of how we think about it. And the complexity then is it increases. So if you have some sort of token issued, we have to evaluate what is the nature of that token, and how do we think it would be taxed?
And then we can run it through our software to ensure that all those calculations are being made properly, and then the taxes associated with it are getting remitted. But as we think about other types of companies and other types of workers outside of the us, there are pretty robust developer communities in countries like Argentina and Venezuela, for example, that have real, very serious problems, macro economically, and these workers that want exposure to USD currency. Even some workers in the UK who were during the sort of reign of Liz Truss where the pound just took an absolute beating, were trying to renegotiate with their employers to say, "What's going on here? I don't want to get paid in pounds anymore." This is an unfortunate reality that we live in. And so it may be a topic that has been discussed quite a bit in crypto, but I still think it hasn't really been cracked, which is just stablecoins or other crypto as a form of remittance.
This is a big deal. And as we think about how companies pay people and incentivize people outside of the western world, there is a lot of innovation going on in East Asia and sub-Saharan Africa, places where digital payments are already sort of the norm. And so how do we think about building on top of some of those trends there to enable a better experience where you can eliminate predatory payday lenders, you can create a more competitive environment for employers to be able to incentivize their staff, and you have a local sort of economy that uses these payment primitives?

Mark:
So, it sounds like most of the demand from employees is in stable coins as opposed to more volatile assets, except in so far as it's the project token of their project. And it's non-salary compensation?

Megan:
Yes. So in the web2 context, you get paid your salary, and that can be automatically split into a four program or whatever other kind of investment situation that you set up. The same thing can be done in crypto as well, and it can be done actually much cheaper and efficiently, which is to say, okay, I'm getting paid in. I want 10% of that to be transferred automatically into some sort of yield generating protocol. That's another thing that we can do, where you skip all of these intermediaries that are taking fees along the way from your hard-earned money, and you can generate yield off of it. So, there's like the requirements of, okay, you have to be paid a certain way at certain times, but once you're in this web3 economy, so to speak, there's a lot more that can be automated and that you could do with your earnings.

Mark:
Let's say you're in a country that doesn't have good on-ramp or off-ramps to crypto. Historically, the only way you can get in is you meet up with someone in the coffee shop and give them cash and they transfer you some sort of crypto, or you run a [inaudible 00:19:13] and you're essentially converting your electricity into crypto, and then you have money in this crypto economy. But increasingly now, you can sell your labor and get paid in. And now that is within the crypto economy, and now you can access the kind of financial services that exist in de-fi. You can access upside. You can trade around... And you never actually had to go through the on-ramp, off-ramp that would've had to before. You can enter this economy through labor.

Megan:
Yeah.

Mark:
So, why do you take half your salary in USDC?

Megan:
Yeah, well, I think that the reason for that is that I do have some liabilities in cash. I would take the whole thing in stablecoin if I could pay all of my bills in stablecoin.

Mark:
Well, fair, fair, but I'm curious why you... Half is a lot. So, why do you want more in the form of USDC?

Megan:
Well, I think that part of it is that I am perhaps a above average user of the web3 economy or participate in the web3 economy. So, I do use stablecoin to transact, which is fun. I also do like to invest in different sort of assets within the crypto economy. And so it works well for me for my personal financial profile. And our team similarly will take different allocation sizes of crypto as well. And I think that historically, there's been some maybe waffling around if you work in web3, you have to go a hundred percent all in. And one of the things is like you can be partially allocated to it, and we can automate that and make it easy.

Mark:
I'm with you.

Megan:
Yeah, it's based off of everybody's personal profile. So at Franklin, we offer the option to get paid up to 50% of your salary in stablecoins, as long as it's compliant with the jurisdiction that you are working in. For other companies, they may decide that a different type of compensation profile works well. And I think that rather than being prescriptive about how you should pay your staff, we can just offer the flexibility and there's a sliding scale. Just pick where on the spectrum you want to be, and that's what we want to help enable.

Mark:
Okay. And so when employees are receiving stable coins around the world, how technically adept do you think they are?

Megan:
Yeah.

Mark:
Do you think they are self [inaudible 00:21:56] on a ledger or do you think they're using something like ZenGo, which is an easy MPC wallet and they really don't have to be very technically sophisticated in order to use it, or are they just keeping it a decentralized exchange?

Megan:
Yeah, I think that for now, because I think we are still in pretty early days of people getting paid in crypto around the world, a lot of people do choose to self custody. And you would never want to pay a worker of yours if they have really never interacted with crypto. It's not really something for a kind of crypto tourist or a first time user. This is important. This is your livelihood. You want to make sure that you know what to do with it and are responsible for it. And that can come with a downside if you're irresponsible or if you don't know what you're doing. But that's also part of the Web three ethos to some extent, is you have ultimate responsibility for your assets. So, it's not like you're calling up Chase or JP Morgan to be like, "Hey, I lost my keys."
That's part of the thing that we accept when we decide to transact or participate in this economy. I do think that there's some infrastructure that just is still in the midst of being built to be able to more easily access some of those on and off-ramp, like semi custodial, or even just MPC wallet situations. So, most exchanges will not interact with a smart contract, and there is progress being made there where some exchanges are working on certain smart contract integrations. And for us at Franklin, we're a non-custodial payroll platform on the crypto side, so we're paying via smart contracts. And right now, that ability to be able to offer it onto an exchange is just not there, but we think it'll be there in the next six months or so, and that opens up a much wider audience.

Mark:
And what about non U S D Stablecoin. There's Euro stablecoins, there's Yen stablecoins, there's GBP, there's UK stablecoins, but these really haven't gotten much traction. So when you see people overseas who want part of their salary in crypto, and it sounds like most of that is stablecoin, do they always tend to want it in USDC or do they want it in the native currency that they're in? And if not, why don't they want that?

Megan:
Yeah. Putting crypto aside, there's generally a desire for exposure to USD outside of the United States. As the world's reserve currency, in lots of countries USD is accepted alongside other local currencies. So, that's one thing. And Stablecoins, whatever USD denominated stablecoin there is, they offer quick, very cheap access to that kind of exposure. There was a company that I was working with where the company had made an offer to a worker. The salary was denominated in USD, but they had to be employed locally. And so we went through this terrible sort of true up process where every quarter we were calculating the slippage in FX rate, and then we're topping up their salary in that local currency to try and get them to the USD offer. That's like a mess to deal with, and it's super expensive. And so that's one thing.
I also think that for these other sort of fiat pegged stablecoins, it is a little bit like earlier days. In the US, Circle is was one of the earliest crypto companies out there that was an issuer. Circle themselves have started to wade in, I guess, to other sorts of fiat stablecoins. So, I think that part of it is just us was a little bit earlier there, or at least got a little bit more traction earlier. But I do think that fiat pegged stablecoin will be a thing. Bank of England, I think, released a paper last week talking about how they think about implementing CBDCs, or Central Bank digital Currencies, and how that would affect the retail user of a country issued digital currency. So, we're sort of still in this white papery phase to some extent. But overall, I do think that we'll see more adoption there.
The thing that I wonder, I'm kind of curious, because I know that you have a background working with stablecoins as well, do we think that these CBDCs will actually trickle down to the retail user, or will they just be used for interbank settlement to streamline the sort of process there and the fee structure? What do you think?

Mark:
Yeah, personally, I think they're just going to be for interbank settlement purposes. The Fed and central banks are really a wholesaler. They're not good at customer service to individuals and dealing with errors that individuals have or bugs or confusions about how money is working. They don't want that, they're not set up for that, and no one wants the government dealing with that. If anyone's been to the DMV, you know-

Megan:
Yeah.

Mark:
They're not the best at customer service.

Megan:
Imagine going to the Fed DMV to ask about your paycheck. That would be an absolute nightmare.

Mark:
Oh my God. Terrible. An absolute nightmare. Yeah. So, I think the CBDCs will be wholesale, and the banks will use them to settle more quickly between them, which is important because [inaudible 00:27:37] can take time. And then stablecoins will be the retail end where they kind of translate from wholesale to retail and they actually interact with the customers, just like banks today largely serve, the purpose of the Fed is wholesale, and the banks are the retail arm, and then they interact with customers, and that's how you get money out into the system. So, I think it'll be somewhat similar. And I have a thought, but does that answer your question?

Megan:
Yeah. No, I think that it closely aligns with what I think too. CBDCs will be this thing that we don't really see, and that is part of something that happens under the hood in our financial system. So, I'm with you there.

Mark:
What I think is so important about this is that payroll is an on-ramp. People talk about on-ramps to crypto. And the dissonance that I've always felt exists in crypto around we're going to bank the underbanked is like, okay, but in order for the underbanked to access your financial services, they need to on-ramp through banks. And if they can on-ramp through banks, then they're not the underbanked.

Megan:
Yeah.

Mark:
So, how are you actually going to reach the underbanked? And I think this is an answer, which is payroll,

Megan:
Yeah.

Mark:
You pay them for work. They have phones, increasingly have phones. It's easier to get phones, smartphones than it is to get financial services in a lot of places. And so payroll is an on-ramp. And to me, if I think about is crypto doing its job? It's like are companies like yours paying an increasing number of employees partially in crypto, stablecoin is fine, but in crypto so that they are on-ramped into this crypto economy. So, I'm very excited to see that, and one day see a payrolls report on crypto payrolls as a way to proxy how crypto GDP is growing.

Megan:
Yeah. Yeah. I think that-

Mark:
Are you going to publish that? That would be a great PR move. You should do that.

Megan:
Yeah. Well, yeah, I think that there are a lot of emerging trends in how web3 companies in particular think about compensating their workforce. And so maybe we have some unique insights to be able to offer about how we see those trends coming out. To me, it's the most simple, and also biggest unlock to increasing web3 adoption as well, just generally beyond our sort of already industry participants, where we do see demand for, especially younger workers. Younger millennials, gen Z, they want exposure to these assets. There's no good way for them to get it via their jobs, and it's an easy thing to unlock, and it's just is bizarrely early.

Mark:
What other, I don't know, interesting trends or nuggets do you see, since you're into the weeds on how people are getting paid in crypto? Anything you want to share with us that you think is amusing, entertaining, or thought provoking?

Megan:
Well, I think that it's a little bit less on the payment side, and it's actually about how companies decide to construct their teams. So with COVID happening, world changed very quickly, and this advent of remote work is it became the norm as opposed to a cool thing that some tech companies would offer. And it's offered a lot of opportunity. So, who's to say, if I'm starting up a company or I'm prototyping an idea, or I want to scale my company, that you have to do it the same way that it has usually been done, where you either find people in your city to do it, or you set up a satellite office, or you outsource it to a third party contractor in a totally different jurisdiction.
Now, you can have companies that are extremely diverse, all collaborating together as sort of one unit. And I also think that this notion of workers being tied to one company like they have been historically is starting to change as well, where you have a little bit more optionality in how you choose to work, and also who you choose to work for. So, I think that that's something that we definitely see with some of the companies that we work with, is not everybody's going to be setting up in Silicon Valley anymore, or even New York. These are much more sort of diverse teams. And hopefully, I think that we'll see, at least in the tech industry, perhaps more interesting products being developed because we have a much more sort of diversity of people building them.

Mark:
Well, thank you so much for joining us today, Megan, really appreciate it. Before we tie off-

Megan:
Yeah.

Mark:
... could you share how people can follow you and your company if they want to learn more? And I also want to ask you to just shill for your company a bit, so people who are listening, who have problems that you can solve, understand exactly how you can help the,?

Megan:
For sure. Yeah, well, check us out @franklinpayroll on Twitter and on LinkedIn. We have a small but very sassy social media presence, so we'd love to interact with you all there. And then, yeah, Franklin is built for builders. We are passionate about helping early stage companies be able to streamline their back office. So, if you have a desire to pay your staff, you should talk to us because we want to help you.

Mark:
Awesome. For those listening, if you enjoyed this episode, please leave a review and tell us what you like and don't like, and also what you want to hear and learn more about, because we'll go out and find experts like Megan who can teach us about them. So, thank you very much, and I hope everyone has a very nice day.