Ian Anderson

In the past year the value of one bitcoin increased 2000 percent. Bitcoin once was considered the currency alternative used by the internet's seedy underbelly. Now, the financial press is buzzing about bitcoin and other cryptocurrencies such as ethereum and litecoin. Publicly traded funds backed by cryptocurrencies are being established. Some lenders will be accepting bitcoin as collateral. Skeptics are writing about a cryptocurrency bubble. Cryptocurrency is the cutting edge.

The legal profession has been known to have trouble with the cutting edges. But in a market where pressure is mounting for lawyers to attract clients through alternative fee arrangements, it should be no surprise that law firms large and small are beginning to offer their services for cryptocurrencies.

Before accepting cryptocurrency as payment, lawyers should consider the ethical issues presented. Receiving cryptocurrency from a client implicates a broad range of ethical obligations, from the duty to not charge an unconscionable fee to the duty of competence. The California Bar has not directly addressed the issue, so California attorneys must look to other jurisdictions and like situations to determine how best to proceed.

The ethics of receiving payment in cryptocurrency is similar to the ethics of bartering for legal services. Bitcoin was created as an alternative to government-backed currency, a product of Silicon Valley's utopian idealism. The IRS does not yet classify cryptocurrencies as legal tender. The IRS classifies cryptocurrency as property. Like the country lawyer accepting a bushel of apples for drafting a will, payment in Bitcoin is payment in property.

Whether an attorney may barter for legal services depends on local ethics laws. Some state bar associations, like Connecticut's, have approved barter either directly or indirectly in connection with barter exchanges, associations formed to facilitate bartering goods and services. Some of these barter exchanges have their own “money” that tracks the value of services provided to the exchange. These opinions stress that the attorney must comply with her ethical obligation to charge a reasonable fee, even when bartering.

In California, attorneys have an ethical obligation under Rule of Professional Conduct 4-200 not to charge an unconscionable fee. This requires that the attorney consider twelve factors that relate to whether the fee is reasonable and also whether the client is knowledgeable enough to give informed consent to the fee. Cryptocurrencies raise particular concerns for determining the appropriate value and whether the client is truly informed as to the nature of the fee.

The Nebraska Supreme Court recently addressed this issue in an advisory opinion on attorneys accepting cryptocurrency as payment. The opinion advised that Bitcoin's price volatility makes determining the fair value of services in Bitcoin difficult. If the value of the cryptocurrency spikes, clients may complain that they overpaid for services. Or if the value of the cryptocurrency plummets, the attorney may be completing a complex engagement in exchange for worthless digital money. Where the cryptocurrency becomes worthless, the attorney may have inadvertently placed herself in a conflict with her client.

To mitigate against this price volatility, the Nebraska Supreme Court recommends advising the client that any cryptocurrency received will be immediately converted to dollars.

At a minimum, the risks presented by cryptocurrency's price volatility should be discussed with the client before an attorney agrees to accept it as payment. If the client does not fully understand the risks attendant to cryptocurrencies, it is the attorney's obligation to educate the client to ensure that the client gives informed consent to the fee arrangement.

As divisible property, cryptocurrencies also present potential ethical issues where an attorney and client each own a portion of the same coin. The value of a single Bitcoin (as of the date of this article) is more than $15,000. The fair value of the attorney's services may not be equivalent to a round number of Bitcoins. If only a fraction of a Bitcoin were transferred in exchange for services, the attorney may end up co-owning a Bitcoin with the client, which might implicate additional ethical issues as an ownership interest adverse to a client or entering into a business transaction with a client. The Nebraska Supreme Court's advice to convert any payment in cryptocurrency immediately to dollars would again mitigate these ethical issues.

Payment in cryptocurrency presents new ethical challenges when an attorney holds cryptocurrency in trust for the client. Cryptocurrencies cannot simply be deposited into a trust account like official currency and would need to be handled as property instead. Under Rule of Professional Conduct 4-100(B), California attorneys must keep client property in a “place of safekeeping” and appropriately labelled. Under the standards issued by the Board of Governors of the State Bar, attorneys must keep of the following records of all property held in trust for clients:

(a) each item of security and property held;

(b) the person on whose behalf the security or property is held;

(c) the date of receipt of the security or property;

(d) the date of distribution of the security or property; and

(e) person to whom the security or property was distributed.

Safekeeping cryptocurrency presents unique technical challenges that attorneys should understand as well before holding any cryptocurrency in trust for clients. The California State Bar has issued several ethics opinions on the interaction between an attorney's duty of competence under Rule of Professional Conduct 3-110 and emerging technologies. Rule of Professional Conduct 3-110 requires that an attorney acquire “sufficient learning and skill before” undertaking any legal service involving matters outside their expertise. In State Bar Opinion No. 2010-179, the bar advised that attorneys should educate themselves about proper security procedures before transmitting or storing confidential client information. Attorneys likely have a similar duty when transmitting or storing a client's cryptocurrency.

Cryptocurrencies also implicate money laundering concerns. The US Treasury Department's Financial Crimes Enforcement Network has taken an interest in cryptocurrency and issued guidance for cryptocurrency exchanges to prevent and report money laundering activities. While these guidelines do not apply to anyone simply receiving payment in cryptocurrency, attorneys should be aware of the risks and accept payment through exchanges that actively take steps to prevent money laundering.

Attorneys should to evaluate whether the added due diligence outweighs the value of accepting payment in Bitcoin. Some attorneys believe it does and that such flexible payment models attract new clients. But for cases with minimal fees or attorney who are not tech-savvy, receiving payment in Bitcoin may be more trouble than it's worth.

Ian Anderson is an attorney in the San Francisco office of Kaufman Dolowich & Voluck, where he defends professional clients including lawyers, accountants, architects, engineers, insurance and real estate agents and brokers, and other businesses covered under professional liability policies. He may be reached at [email protected].