Cryptocurrency has legal ethics implications for lawyers who accept it as payment, store it for safekeeping on behalf of a client, or assist in an initial coin offering.
But lawyers have remarkably little guidance on how to stay on ethical footing when dealing with cryptocurrency and other blockchain technologies, members of the Association for Professional Responsibility Lawyers said at a recent panel discussion.
The APRL panel addressed a trio of questions:
- What is cryptocurrency?
- Why would anyone own or use it?
- May lawyers accept it as payment for their fees?
“Cryptocurrency is a way to transfer funds without utilizing a central bank,” panelist Alecia Ruswinckel explained. Ruswinckel is Professional Standards Assistant Division Director for the State Bar of Michigan.
Cryptocurrency isn’t money and isn’t issued or backed by any government, but instead is a virtual asset, existing only in electronic form, Ruswinckel told the audience. Its units are commonly referred to as coins. Bitcoin is the most famous, though far from only, form of cryptocurrency.
“A coin is an entry on a [digital] ledger,” Ruswinckel said. That ledger, she said, is a record of every coin owned by anyone. “Each person who owns a coin, or a portion of a coin, has his own private key number,” she said. “The ledger contains a chronological record of all [ownership] changes in the coin,” is known as the “blockchain,” and is replicated on servers all over the world, she said.
Because every server has the same information, the record is very secure, moderator Noah D. Fiedler said. Fiedler is a partner with Hinshaw & Culbertson LLP in Milwaukee. “If one server goes down, everyone else has the information,” he said. “You can hack twenty servers, panelist Craig Singer added, “and it still doesn’t affect the integrity of the blockchain.” Singer is a partner with Williams & Connolly LLP in Washington.
Another Block in the Chain
Blockchain transactions are recorded down to a ten-millionth part of a coin, Ruswinckel said. “Miners,” using very powerful servers, produce new coins by competing to solve complex mathematical puzzles and are rewarded for doing so with coins. In the process, the miners confirm the cryptotransactions. Once a transaction is confirmed—which occurs almost instantaneously—“no one can reverse the transaction.”
Although the blockchain is publicly accessible, “everyone’s name is not on the [ledger] sheet,” Ruswinckel continued, because a person may use a pseudonym to open an account to hold Bitcoin or other cryptocurrency. Nevertheless, she told the audience, authorities are gaining expertise in tracing the identities of the pseudonymous owners, dealing a blow to those who would use cryptocurrency for money laundering.
Conducting financial transactions using cryptocurrency is gaining traction because it carries significant advantages, Ruswinckel said. Cutting banks out of the transfer chain, she said, cuts costs. Credit cards, for example, commonly carry a two-percent transaction fee, a “hefty” levy when transferring sums in the thousands. International cryptocurrency transactions are easy, instantaneous, and free from currency conversion fees, she added.
The Marshall Islands has recently made a cryptocurrency legal tender, she said, and some states are considering legislation to permit its use for payment of taxes. Fiedler added, “The list of companies that will accept Bitcoin is pretty long.”
Money or Property?
Panelist Richard Palmatier, Jr., who is assistant general counsel for the State Bar of Arizona, said cryptocurrency is “a new shiny toy that nobody knows how to deal with.” Nebraska is the first and—to date—only state that has issued an ethics opinion [No. 17-03] on whether lawyers may accept cryptocurrency as payment for their fees and, if so, whether they must take any additional steps to comply with the ethics rules, the panel told the audience. [See 33 Law. Man. Prof. Conduct 528 (2017).]
Fiedler noted that the Nebraska opinion assumes that cryptocurrency is property. “Does that make sense?” he asked the panel.
Ruswinckel said it did. Under Michigan’s trust account rules, she said, lawyers must keep currency in an IOLTA account if it is part of an unearned retainer. But “you can’t put cryptocurrency into an IOLTA account, so we can’t treat it as currency,” she said. “The easiest way is to consider [cryptocurrency] as property” so it must be safeguarded but not deposited into the IOLTA account, she concluded.
Palmatier said accepting fees for legal services in bartered property, whether chickens or cryptocurrency, “has always been part of practicing law.” He referred the audience to Model Rule 1.8, which governs business transactions with clients and requires full disclosure of terms and informed consent from the client.
But the Nebraska opinion, he said, treats cryptocurrency differently from other property that might be used for the payment of legal fees in requiring lawyers to convert it to currency immediately upon receipt to mitigate the risk from its volatility. “Is it so volatile that it inserts an impermissible risk and unfairness to the client?” he wondered.
From the audience, William Hodes asked, “Why is it an ethics matter that the property is volatile? It’s a business transaction, so as long as there’s disclosure ,why does it matter? Any property is potentially volatile.” Fiedler responded, “I don’t see any reason why you can’t inform your client that Bitcoin is volatile, you’re going to keep it, you benefit if it goes up” and are hurt if it goes down. He asked rhetorically, “Why don’t lawyers have to immediately go out and sell other kinds of property? Why just Bitcoin?”
Audience members called out more questions, including, “Why not just tell your client ‘you convert it to cash’?” and, “How do you refund a fee of five crypto tokens?”
Singer said “The right answer is to put it into the engagement letter.” He advised, “Be specific on how you are going to value it for purposes of billing your time and what gets refunded if you don’t use it up.” Palmatier agreed: “You need to preplan and put it in the engagement letter.”
The panelists had other advice for lawyers considering accepting cryptocurrency for fees. Ruswinckel cautioned that once a cryptotransaction is completed, “it is irreversible.”
Scams and More Scams
Referring to recent news articles, Singer cautioned the audience “A lot of cryptocurrency deals are scams.” He said lawyers may be subject to “the most catastrophic liability problems” if they are representing a client who is found to have engaged in fraud. “Do your due diligence on clients,” he said. “[M]ake the limits of your representation clear if you are representing someone in a transaction so you are not blamed” if the transaction later proves to have been fraudulent.
Lawyers considering whether to represent parties in cryptocurrency offerings, Singer said, should be aware of some special risks. First, he said, the Securities and Exchange Commission has generally classified cryptocurrency as securities that require registration as such. “Giving an opinion to your client that an ICO [Initial Coin Offering] is not a securities issuance is a huge risk” for the lawyer, he said, but “many clients would want that.”
Additionally, cryptocurrency volatility “makes it particularly susceptible to securities fraud suits when many investors lose their shirts.” Representing clients in the cryptocurrency industry, he said, “may require multidisciplinary expertise,” including an understanding of securities law, commodities law, broker-dealer law, tax law, and, potentially criminal and money laundering laws. Lawyers who do not understand the underlying technology are particularly at risk, he said. “Make sure you are dealing with a legitimate, reputable enterprise,” he urged.
Ruswinckel added that lawyers representing divorcing couples should add questions on cryptocurrency to their routine intake and discovery questions. She said unhappy spouses are increasingly seen using marital funds to purchase cryptocurrency and holding it under pseudonyms. “It’s a competency issue. Make sure you are looking for this asset, just like any other transfer of assets out of the marriage.”
The session, “New Money/Old Rules,” was held Aug. 4 as part of APRL’s annual meeting in Chicago.