Law firms can accept cryptocurrency as payment or help their clients with initial coin offerings, but they must be mindful of ethics concerns, law firm ethics experts have said.
Cryptocurrencies and ICOs, which have both become popular in recent years, were a key discussion topic on a panel at the Legal Malpractice & Risk Management Conference in Chicago.
Cryptocurrency is a digital currency where transactions are recorded on a public digital ledger called a blockchain and trade on exchanges that operate like stock exchanges. Popular forms of cryptocurrency include Bitcoin and Ethereum. An ICO is a method of funding projects through the creation and sale of cryptocurrency.
Paid in Crypto
Despite the risk and volatility associated with crypto markets, law firms, including Big Law players, appear to be accepting cryptocurrency as payment for services more and more.
Matthew K. Roskoski, deputy general counsel for Latham & Watkins, and one of the panelists, said lawyers in general may want to accept cryptocurrency to show “we’re hip and cool and on top of stuff.” He said that despite cryptocurrency’s downsides, lawyers are in the client-service business, so if a client asks for the option, attorneys may dive in.
But besides being a potentially risky bet financially, accepting cryptocurrency as payment for legal services has possible ethical pitfalls. These risks are driven by two factors, the panelists said.
Roskoski explained that one issue is that cryptocurrency appreciates in value over time, unlike cash, so lawyers who accept it from clients may decide they don’t want to spend or liquidate it.
This is not a problem if a lawyer accepts it as payment for a bill. In that case, the firm can do what it wants with it. But if cryptocurrency is accepted as a retainer, which is money that’s placed into a trust and is client money until earned by the lawyer, the situation gets trickier.
“Cryptocurrency does not fit with the model for trust funds — lawyers should not accept cryptocurrency as trust money,” Roskoski said.
Richard Supple, general counsel for Hinshaw & Culbertson, noted the second issue, which is that at least in the eyes of the IRS, cryptocurrency is property, not actual currency.
And Rule 1.15 requires lawyers to safeguard client property.
Both factors come into play when a lawyer decides to accept cryptocurrency as payment of fees. In this case, Supple said, the lawyer could be deemed by regulators to be making a deal with a client with respect to the client’s “property” (of uncertain or varying value). Supple said this would probably trigger the requirements of Rule 1.8(a) like a stock-for-fees arrangement.
If a lawyer enters into an agreement under 1.8 (a)—which allows a lawyer to enter into a business transaction with the client if the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client—the lawyer has to make sure everyone understands their role in the deal and that they’re not the client’s attorney in this deal, Supple said.
The lawyer should insist the client has a second lawyer before making this agreement, he said.
“1.8(a) is scary because deal has to be ‘reasonable’ and ‘fair,’” Roskoski said.
How should the lawyer judge a reasonable value for cryptocurrency? The lawyer should recite in the agreement what the fairness considerations are like the risks of depreciation, for instance, he said.
Only one state, Nebraska, has issued an ethics advisory opinion providing guidance on accepting cryptocurrency for payment, according to the attorneys.
In 2017, Nebraska said that these payments are fine to accept as long as they are sold or liquidated right away.
Roskoski said that a riskier proposition is helping a client who wants to put together an ICO, due to regulators’ statements on this category of offering.
ICOs have drawn controversy since they emerged a few years ago. ICO funding saw a large downturn last fall, which has been linked to increased U.S. Securities and Exchange Commission attention to these offerings.
SEC Chairman Jay Clayton said in 2018 that an ICO is a securities offering. He’s called lawyers the gatekeepers of securities law, a statement that Roskoski said suggests Clayton believes lawyers should police the space.
Roskoski admitted that the many unknowns around the regulation of ICOs make him “nervous.”
“Working in ICO space is subject to risk and a liability scheme we have no track record in,” so it’s hard for lawyers to know what transactions are safe and what are risky, he said.
"[But] there’s real money to be made there so people don’t want to wash their hands of it entirely.” Roskoski said.
The SEC has taken action against numerous companies relating to ICOs, including Paragon Coin over allegations of an unregistered offering of tokens. It’s also targeted celebrities like boxer Floyd Mayweather Jr. and music producer DJ Khaled, who the SEC said promoted ICOs on social media without disclosing the amount of compensation received from the issuer for the promotions.
As a result of this uncertainty, Roskoski said lawyers who decide to work on an ICO, should vet clients with more care and have a higher threshold on whether to move ahead with the deal.