Please enjoy this co-authored blog article posted on behalf of Moish E. Peltz, Partner and Co-Chair of the Emerging Technologies & Blockchain and Intellectual Property Practice Groups, Falcon Rappaport & Berkman LLP and Kenneth J. Falcon, Esq., Managing Partner, Falcon Rappaport & Berkman LLP.
Question: What is cryptocurrency?
Answer: A digital decentralized currency where transactions are verified, and records maintained by a decentralized system usually referred to as a blockchain. The security and transparency inherent in blockchains stems from the immutable nature of sequential transaction records, with each “block” in the “chain” mathematically verifying the legitimacy of the blocks that came before. Bitcoin is still the most popular implementation of this method, and its status as the “first” cryptocurrency has given it staying power (and about 50% market share among cryptocurrencies).
Question: Can law firms to accept cryptocurrency as payment for legal services?
Answer: Generally, “yes.” Of course, each law firm will need to evaluate the inherent business risks and ethical rules applicable in their specific jurisdiction, and the circumstances of each proposed cryptocurrency payment.
Question: Are there any ethical or state bar rules addressing this? What does the law say?
Answer: Various bar associations have promulgated opinions generally providing that lay firms may accept cryptocurrency, at under certain circumstances.
In 2017, the Nebraska Lawyer’s Advisory Committee published the first formal opinion on the subject. The Committee stated that lawyers are permitted to receive digital currencies as payment for legal services if certain considerations are taken into account. These considerations include mitigating volatility risks, addressing confidentiality issues, and keeping cryptocurrency held in escrow and trust accounts separate from a lawyer’s own digital assets.
In 2019, the New York City Bar concluded that cryptocurrency payments are generally acceptable if they comply with Rule 1.5(a) (charging excessive fees) and 1.8(a) (“business transactions” between lawyers and clients). Rule 1.5(a) can be satisfied if the payment is reasonable and not excessive. Rule 1.8(a) can be satisfied if the payment is not mandatory and is not structured as a “business transaction.” Alternatively, the firm can structure the transaction as a Rule 1.8(a) compliant “business transaction.”
In 2020, the District of Columbia Bar further referenced compliance with Rule 1.5 and 1.8 in their Ethics Opinion (and also raised Rule 1.1 (Competence) and Rule 1.15 (Safekeeping Property)). They opined that so long as the fee agreement between a lawyer and their clients are objectively fair and reasonable, and the lawyer possesses the requisite knowledge to competently safeguard the client’s digital currency, there is no prohibition against a lawyer accepting cryptocurrency from or on behalf of a client.
Other jurisdictions have weighed in on the issue, and more are certain to in the future.
Question: What are the downsides of accepting cryptocurrency as payment for legal services?
Answer: There are numerous considerations in deciding whether to accept cryptocurrency as a payment for legal services. Central to many of them is the concept that cryptocurrency is complicated, extraordinarily volatile, and self-custodial (at least by default).
Our firm has simplified matters by (in most cases) engaging with a third-party payment processor. The client, at its option, can satisfy a USD invoice in cryptocurrency. The payment processor collects the proper measure of cryptocurrency, which is automatically exchanged by the service provider and deposited into our bank account in USD.
One could denominate legal services in cryptocurrency (i.e., 1 ETH per hour, or .5 BTC flat fee). But price volatility creates the possibility that the fee becomes unreasonable in either direction. Law firms will need to carefully contemplate advance fee deposits held as cryptocurrency until they are earned and how they will custody cryptocurrency (if that’s what they are doing).
Moreover, a firm should conduct sufficient diligence to satisfy any internal conflict checking procedures or applicable know your customer (KYC) process. A firm may also desire to research the client’s on-chain transaction history to assess whether the client has engaged in any high-risk activity. A firm should also consider appropriate disclosures to the client, including the fact that blockchain transactions are generally publicly viewable and may reveal the attorney -client relationship.
Question: What are the upsides of accepting cryptocurrency as payment for legal services?
Answer: We are here to best serve our clients. Many of our clients are building groundbreaking applications on top of permissionless blockchain protocols and believe using cryptocurrencies will revolutionize the financial system. These entrepreneurs truly believe in the social good of this technology. It is not just convenient for them to pay vendors (including law firms) in cryptocurrency, but it is philosophically what they want to do. We are meeting these clients where they are and demonstrating our shared values.
Plus, it’s just good business.
Lower transaction fees lead to cost savings for both firms and clients. Crypto transactions may incur lesser charges compared to traditional payment methods, particularly for large dollar amounts or cross-border payments. Further, digital currencies can ensure faster transactions, eliminating delays on holidays or due to limited banking hours. Your clients will never tell you that your check is ‘in the mail.’ The benefits are particularly acute for international payments which avoid cross-jurisdictional banking issues and foreign exchange rates. Lastly, crypto transactions are irreversible, so say goodbye to chargebacks.
Question: What cryptocurrency should a firm consider accepting?
Answer: The most widely accepted cryptocurrencies include Bitcoin, Ether, and stablecoins such as USDC or USDT (these four combined represent greater than 80% of the cryptocurrency market). The real answer is that you should accept whichever currencies you feel are appropriate, which you are competent to accept, which are convenient for you to accept, or which you want to accept to accommodate a client. We like to analogize, that if a client in Japan came to you and said they wanted to pay their bill in Japanese Yen, what would you say to that client? At the very least, you’re going to talk to your bank and see what you can do.
Question: Are there any issues in accepting only limited cryptocurrencies?
Answer: This depends on your clients - some may feel alienated by a lack of options. For example, certain clients may be developing on a particular network or have an allegiance to a specific cryptocurrency. But this should be a business decision. However, it’s increasingly easy to exchange one cryptocurrency for another, and increasingly possible for law firms and clients to transact in a wide range of options. We hope that this article helps law firms reflect on the payment methods they currently accept. #PracticeManagementandPracticeSupport#FutureandEmergingTechnologies#Firm#Leadership#ProfessionalDevelopment