Digital currency is no longer just a techno-novelty: it is ever more likely that a lawyer, no matter her practice focus, will have to tackle a question arising from the growing use of digital currency, also known as “crypto-currency”. Here is what I’ve learned so far about digital currency, and some of the ethical issues that it presents.
What is Crypto-Currency?
Digital currency is a method of transferring funds without reliance on a central bank. Bitcoin is the most well-known digital currency, but not the only one. Digital currency exists only as entries in a digital ledger, called a blockchain. Blockchain technology permits data to be held in a secure, encrypted way that is both publicly distributed and not subject to alteration. A blockchain records all of the transfers of ownership of every digital coin of that type. Each owner of a “coin” or part of a “coin” is identified on the ledger by the owner’s unique private key number. Each coin owner also has a digital “wallet” with records of the particular owner’s transactions. A “wallet” can be created using a pseudonym, permitting the owner to engage in effectively anonymous transactions using the digital currency.
Digital currency is created by a process known as “mining”. A “miner” deploys massive computing power to solve a complex cryptographic problem, and upon “proof of work”, is rewarded with a digital coin. The process of solving the problem and proving the work simultaneously updates and strengthens the blockchain.
May a Lawyer Accept It?
Knowing little about digital currency, and aware that any technique for transferring value anonymously outside banks attracts criminal enterprises, many lawyers are reluctant to accept it. Some authorities have convincingly argued that lawyers should never accept their fees in crypto-currency. [1] Yet small firms in the technology sector have accepted digital currency for years. In November 2018, the Treasurer of the State of Ohio announced that Ohio would be the first state to accept crypto-currency in payment of business taxes. More recently, law firms like Frost, Brown in Cincinnati, and Steptoe & Johnson in Washington, D.C. have announced their willingness to accept payment in this form[2].
When a prospective new client proposes to pay in digital currency, or proposes a transaction that will involve digital currency, the first question is the old one—do you want to accept this person as a client, and do the work proposed? A firm that is considering accepting digital currency or advising clients that engage in transactions involving digital currency must have “Know Your Client” protocols appropriate to its work, as well as ongoing diligence, to avoid a situation of counseling or assisting in a fraudulent or criminal transaction. [3] Similar practices are required in response to a proposal that someone other than the would-be client will pay the lawyer’s fees.[4]
Accepting digital currency as fees, as a retainer, or as an asset held in escrow presents somewhat different ethical issues than receiving U.S. dollars or other government backed currency. At present, the value of digital currencies are volatile, digital currencies cannot be deposited in a bank, and there are no reliable or insured means to hold digital currencies. Further, the IRS regards crypto-currency as property, not currency.[5]
It might seem that accepting digital currency in payment for past services is straightforward. If the lawyer chose to retain the digital currency, the lawyer would bear the risk of fluctuations in value and the risk of loss. The risk of charging an excessive fee would be avoided provided that the fair market value of the digital currency at the time of the transfer bears a reasonable relationship to the value of the legal services. Although the late and respected legal ethics professor Ron Rotunda adopted this view[6], the only advisory opinion yet to be issued in the U.S. on the subject counsels differently. Nebraska Ethics Opinion No. 27-03 advises lawyers who accept digital currency as a fee to convert it into U.S. dollars immediately on receipt, at objective market rates, through the use of a payment processor and crediting the client’s account accordingly at the time of payment. The Nebraska opinion also advises that a lawyer should notify the client in advance of how the lawyer will handle digital currency, to avoid the client’s assuming that any increase in value would benefit the client.
If a client proposes to pay digital currency to fund a flat fee or advance retainer, immediate conversion to U.S. dollars avoids the myriad issues that would attend holding the digital currency until the work is performed. It is impossible to hold unearned digital currency in an IOLTA account. Further, because of the volatility of the value of digital currencies, it would be challenging to refund unearned fees to a client if work is not performed or not completed or avoid charging an unreasonable or excessive fee. [7]
The Nebraska opinion does not address some of the practical issues embedded in its advice immediately to convert digital currency, including selecting the payment processor and identifying who bears any transaction fee that may be associated with the required conversion. A lawyer who intends to accept a digital currency should address these specifics, as well as the lawyer’s intent immediately to convert the currency to U.S. dollars, in her fee agreement with the client.
Holding Digital Currency for Others
The Nebraska opinion finds that a lawyer may hold bitcoins or other digital currency in escrow or trust for a client or third party pursuant to the ethics rules governing holding property for others. The rule requirements include holding the property separate from the lawyer’s property, safeguarding it and satisfying recordkeeping requirements.[8] The opinion suggests several possible security precautions, including encryption of the private key required to send the bitcoins, requiring multiple private keys to access them, or maintaining the wallet in a storage device that is not continuously connected to the Internet. As in any situation in which a lawyer is holding an asset for others, there should be a written agreement signed by the payor, the payee, and the lawyer. specifying the terms under which the asset is received and should be released. In addition, it is advisable to address bears the risk of loss or changes in value.
Every Practitioner Needs to Know Something About Digital Currency
A competent lawyer needs baseline knowledge about digital currency even if the lawyer or his firm has resolved not to accept or hold digital currency for any purpose. A practitioner that does any work that involves the inventory or transfer of assets must consider the possibility that a party’s assets include digital currency. Thus both civil and criminal lawyers, and those who handle litigation, transactions, estate planning and probate, insolvency, and domestic relations should educate themselves about this form of asset.
[1] See, e.g., John Stark Reed, “Why Lawyers Should Never Accept Their Fees in Crypto-Currency”, https://www.linkedin.com/pulse/why-law-firms-should-never-accept-fees-cryptocurrency-john-reed-stark/ (June 5, 2018). Reed is a former Chief, SEC Office of Internet Enforcement.
[2] https://www.bna.com/law-firms-accepting-n73014464226/ “More Law Firms Are Accepting Bitcoin Payment”, Corporate on Bloomberg Law 9/6/17.
[3] See Ohio Rules of Professional Conduct 1.2(d)(1). For domestic Know Your Client guidelines, see https://www.americanbar.org/content/dam/aba/publishing/criminal_justice_section_newsletter/crimjust_taskforce_gtfgoodpracticesguidance.authcheckdam.pdf. For an international perspective, see https://www.actec.org/resources/fatf-and-the-lawyers-role/.
[4] Payment of a lawyer’s fees by a non-client requires compliance with ORPC 1.8(f ).
[5] Internal Revenue Service Notice 2014-21 (March 25, 2014). https://www.irs.gov/pub/irs-drop/n-14-21.pdf
[6] R. Rotunda, “Bitcoin and the Legal Ethics of Lawyers,” https://verdict.justia.com/2017/11/06/bitcoin-legal-ethics-lawyers.
[7] See ORPC 1.5(a), (d)(3) and Comment [6A], 1.15(a) and (c) and 1.16(e). Fees deemed “earned on receipt” are a special case; per Ohio Board of Professional Conduct Op. 2016-1, such fees should not be deposited into a trust account, although subject to refund under ORPC 1.5(d)(3) and 1.16(e).
[8][8] The Ohio Rule on point is ORPC 1.15.
First published in the Cleveland Metropolitan Bar Journal (Dec. 2018).
