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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Bitcoin: ready or not…

Bitcoin for legal services remains a conundrum, but it’s one that firms need to reckon with

Can a law firm accept bitcoin for legal services? What was once a purely theoretical scenario has become increasingly feasible. Rather than waiting idly for clarity, lawyers should begin positioning themselves now for the coming age of cryptocurrencies.

On October 3, 1969, the American Bar Association took up, for the very first time, the question of whether to permit payment of legal services through an innovative method: the credit card. Despite the possibilities this modern tool of commerce offered, including greater efficiency with lower transaction costs and fees, the ABA was thoroughly unimpressed: “It is our opinion… that it is unprofessional for a lawyer to subscribe to such credit card plans… as a means of enabling clients to pay his legal fees. Such plans are primarily aimed at facilitating the sales of merchandise and sales of non-professional services. All the publicity is directed to that end. The general public understands this to be the case. It is wrong, in our opinion, to put professional services in those categories.”1 It would take another five years before the ABA revisited its decision and sanctioned the use of credit cards,2 and another 26 years until it did so without strict advertising restrictions.3

While this bit of technological skepticism may seem quaint now, the legal profession today faces a similar question, one with potentially greater implications: Can a law firm accept bitcoin for legal services? What was once a purely theoretical scenario—so much so that when a defense attorney in Texas began accepting bitcoin in 2013 (value: $120), it became national news4—has become increasingly feasible. Gone are the days of cryptocurrencies being used solely for illicit purchases on the “dark web.” Instead, bitcoin is now accepted by major corporations such as Microsoft, Expedia, and PricewaterhouseCoopers, and has become the darling of hedge funds and betting markets: The opening day of bitcoin futures trading, for example, crashed the exchange’s website. Bitcoin is also readily available for purchase at dedicated public ATMs, four of which currently exist in Minnesota.5 Unsurprisingly, law firms have started taking notice, as both private practices and multinational firms have increasingly expressed their willingness to accept digital currencies for services.6

But should they? Pursuant to Minnesota Rule of Professional Conduct 1.5(a), a lawyer “shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.”7 In light of bitcoin’s notorious volatility, which could cause its value to change dramatically between engagement and final payment, would acceptance of cryptocurrencies for legal services create such an “unreasonable fee”? No conclusive answer or consensus has yet to emerge, leaving those of us watching the recent news of bitcoin (now worth $10,000…wait, $14,000…$18,000!) on the sidelines. Rather than waiting idly for clarity, however, lawyers should begin positioning themselves now for the coming age of cryptocurrencies. Doing so requires some understanding of how they work and how they have been treated by the legal community thus far. 

Cryptocurrencies: A primer

Bitcoin was the first cryptocurrency—and remains the most popular—but is now joined by hundreds of alternatives, including Ethereum, Litecoin, and Ripple. Each is founded on the same general principles. To summarize, cryptocurrencies are digital assets that act like regular currencies—they can be purchased, traded, and exchanged. Rather than relying on bank or government control, however, cryptocurrencies are wholly decentralized, allowing anyone to easily transfer funds with few restrictions. Oversight exists solely by virtue of transactions being publicly listed, utilizing a public, universal ledger known as the blockchain. Before a transaction can occur, it must be verified to ensure that the transfer is valid, which includes confirmation that the bitcoins being transferred are not duplicates or counterfeit. Once the transaction is verified, its details (including source, destination, and date/time) form a “block,” which is added to the ever-expanding blockchain. This process repeats itself each time a transaction takes place, thereby removing the need to put one’s trust in a neutral central authority to regulate the marketplace.

Because this verification process requires heavy amounts of computing power and electricity, cryptocurrencies like bitcoin award those individuals who engage in the verification process, known as “mining,” with new bitcoins. But cryptocurrencies have finite supplies, and while the numbers vary for each cryptocurrency, the number of bitcoins available via mining will continue decreasing until the year 2140, at which time there will be 21 million bitcoins in “circulation.” Of course, most lawyers have neither the time nor energy (literal and figurative) to mine for bitcoins. Fortunately, cryptocurrencies are also available for purchase through intermediaries, including Coinbase and Bitstamp, which allow individuals to easily exchange, buy, and sell the currency of their choice. These payment processors also allow individuals seeking to exit the market to convert their cryptocurrencies back into U.S. dollars.

Mined or purchased bitcoins do not exist in any physical space. Rather, transactions involve a complex string of randomly generated letters and numbers, called the private and public keys. Both are necessary to access bitcoins. The public key constitutes an ID number of sorts, as it acts as a bitcoin user’s address, which is shared across the marketplace in order to allow others to send bitcoin to said address. The private key provides the actual user access to the bitcoins, either to spend or transfer, and therefore must be kept extremely secure to protect against theft or, as the Wall Street Journal recently discussed, forgetfulness.8 Both keys constitute a digital “wallet.”

With this background in mind, the benefits of accepting bitcoin become increasingly clear. First, cryptocurrency
payments circumvent the high transaction fees typically associated with bank and credit card transactions, which can run as high as 3-5 percent. Conversely, transaction fees on cryptocurrency exchanges can run as low as 0.25 percent. Additionally, given the increasing popularity and growing acceptance of cryptocurrencies, attorneys willing to position themselves now to accept bitcoin from clients can benefit not only by marketing themselves as willing to be at the forefront of market trends and developments, but can be the first ones to access clients interested in using cryptocurrencies exclusively. This first-mover advantage is not mere speculation, as directories have already been established to help individuals specifically locate lawyers who accept bitcoin.9

To be sure, the potential downsides for law firms in accepting bitcoin are considerable. For one, bitcoin still carries reputational risk, as it continues to be viewed by many as a speculative bubble at best, and a means of conducting illegal transactions at worst. Comments like those from JPMorgan’s Jamie Dimon, who called bitcoin a “fraud,” will certainly do little to convince lawyers considering whether to enter the fray.10 Additionally, given the lack of central oversight in the cryptocurrency market, any issues with fraud, theft, or scamming can often leave victims without recourse. The U.S. Consumer Financial Protection Bureau, for example, has received hundreds of complaints about bitcoin exchanges, and no FDIC-equivalent exists to protect investors.11 Law firms may not be willing to accept this heightened risk, particularly when there is currently no major market for legal services paid for via bitcoin. Finally, given the proactive nature of accepting bitcoin, which may not result in any financial benefits in the short term, firms may balk at the immediate costs of arranging cryptocurrency transfers, including training, infrastructure (creating and securing a bitcoin wallet, for example), and perhaps most importantly, accepting a currency currently working its way through lingering ethical ambiguity.

Ethics of accepting bitcoin: current views

As previously noted, an increasing number of law firms have availed themselves of these benefits (and risks) by accepting bitcoin for legal services.
But whether Minnesota firms can follow suit while meeting their ethical obligations remains an open question, as neither the ABA nor the Minnesota Lawyers Professional Responsibility Board has issued any guidance on the issue. In fact, no formal guidance existed at all until September 11, 2017, when the Nebraska Lawyer’s Advisory Committee issued an opinion on the matter.12 While the committee ultimately concluded that “[a]n attorney may receive and accept digital currencies such as bitcoin as payment for legal services”—an ostensible victory for firms—the actual opinion evokes the same skepticism observed in the ABA’s initial credit card opinions. Citing Nebraska’s equivalent rule of professional conduct concerning unreasonable fees, the committee expressed its concern over bitcoin’s volatility, which “could mean that the client pays $200.00 an hour in one month and $500.00 an hour the next month, which the client could very easily allege as unconscionable.” The committee further noted that the price of bitcoin can also experience a precipitous loss of value, thereby resulting in the attorney being underpaid.

In order to “[m]itigate or eliminate the risk of volatility,” the opinion stated that an attorney accepting bitcoins must convert them to U.S. dollars “immediately upon receipt.” (Emphasis added). Doing so requires a three-step process: (1) notifying the client that the attorney will not be retaining the bitcoin but will instead convert it into U.S. dollars immediately; (2) converting the bitcoin at an “objective market rate[]” through use of a payment processor; and (3) crediting the client’s account at the time of payment. Thus, while an attorney may accept bitcoin in theory, the opinion mandates that it be treated as cash for all intents and purposes.

As legal commentators have noted, the logic underlying the opinion is suspect.13 After all, an attorney accepting a foreign currency for legal services is perfectly acceptable, despite being subject to the same potential fluctuations in market value. Why treat bitcoin any differently? Perhaps bitcoin’s reputation impacted the committee’s decision, as the opinion ominously warns that cryptocurrencies can be associated with “mischief” such as tax avoidance and money laundering, thereby necessitating assurance that the accepted bitcoins are not “contraband.”
But even accepting the opinion’s reasoning, Minnesota lawyers will find the suggested “accept and convert” method particularly difficult to implement, as exchanges like Coinbase, which the committee explicitly stated was licensed by the Nebraska Department of Banking and Finance, have no such license in Minnesota.14 Finally, as no other formal opinion has been issued in Minnesota or any other state, it remains unclear whether Nebraska’s conservative approach will become generally accepted, or if firms will ultimately be provided greater latitude to accept, and hold, cryptocurrencies.

Bitcoin and the future

Taken together, a Minnesota firm seeking to accept bitcoin for legal services must enter a volatile and unregulated marketplace with the added risk of running afoul of its ethical obligations. Absent additional guidance, or at least an increased volume of clients seeking the option of paying via bitcoin, the benefits appear greatly limited. 

But that is changing. As cryptocurrencies become more ubiquitous and feasible—which is becoming less of a prediction and more of an observable trend—the legal field will begin to play a role, as it did when credit cards were first introduced. Indeed, more and more firms continue to announce their willingness to accept bitcoin, and some firms have even preemptively opened bitcoin wallets to pay ransoms for hacked data.15 Rather than play catch-up years from now, it behooves attorneys to commit the time and resources to understanding bitcoin and positioning themselves to accept it from clients.

How? First, attorneys should understand how cryptocurrencies work, including which exchanges are available in their jurisdiction, and how they can safely store and protect their funds. Rather than rely on government or bank protection, firms will need to institute strict protocols to secure cryptocurrencies in their possession. Furthermore, given the near-anonymity of cryptocurrencies—recall that the only market identifier is the public key—firms will need to be vigilant in the due-diligence process to ensure that they are not engaging with criminal clients or accepting unlawful payments. 

Next, firms seeking to accept bitcoin should communicate clearly with clients about the process and risks of doing so, including the possibility of dramatic volatility, and decide who will bear the risk of any such changes in value. More risk-averse firms can implement Nebraska’s conservative approach and only accept bitcoins in order to immediately convert
them into U.S. dollars, assuming a licensed exchange exists, thereby allaying any concerns about volatility. (Alternately, attorneys and clients can agree ahead of time on a price for services in U.S. dollars, but that payment will be made in bitcoin of equal value as determined by the exchange rate on the date payment is due.)
Finally, firms should continue to keep themselves informed of any future guidance by local boards or the ABA in order to assure compliance with all rules and regulations.

Bitcoin and its offspring may make for questionable investments, but the technology is undeniably here to stay. (Remember Jamie Dimon’s “fraud” quote?  He recently apologized for the comment, having had an apparent epiphany that “the blockchain is real.”)16 Now is the time for lawyers and firms to become acquainted with the growing cryptocurrency movement, and take the steps necessary to participate in accordance with Minnesota’s ethical standards. s


JUDAH DRUCK is an attorney in Maslon LLP’s litigation group.  He focuses his practice in the areas of complex commercial disputes, tort and product liability, and employment litigation.


Notes

1 ABA Informal Opinion 1120 (10/3/1969).

2 ABA Formal Opinion 338 (11/16/1974).

3 ABA Formal Opinion 00-419 (7/7/2000).

4 https://blogs.wsj.com/law/2013/05/01/defense-attorney-lets-clients-pay-him-with-bitcoin/ 

5 https://coinatmradar.com/ 

6 https://www.bna.com/law-firms-accepting-n73014464226/ 

7 Minn. R. Prof. C. 1.5(a).

8 https://www.wsj.com/articles/good-news-you-are-a-bitcoin-millionaire-bad-news-you-forgot-your-password-1513701480 

9 http://spendbitcoins.com/places/c/lawyers/ 

10 https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html 

11 https://www.bloomberg.com/news/articles/2017-08-30/bitcoin-exchange-sees-complaints-soar-as-users-demand-money 

12 https://supremecourt.nebraska.gov/sites/default/files/ethics-opinions/Lawyer/17-03.pdf 

13 https://verdict.justia.com/2017/11/06/bitcoin-legal-ethics-lawyers 

14 https://www.coinbase.com/legal/licenses?locale=en-US 

15 http://www.businessinsider.com/law-firms-bitcoin-pay-ransoms-2017-10 

16 https://www.cnbc.com/2018/01/09/jamie-dimon-says-he-regrets-calling-bitcoin-a-fraud.html 

 

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