The legal ethics issues you need to know
By Aram Desteian and Timothy Greenfield
The term cryptocurrency often evokes images of a shadowy, mysterious, digital currency used on the black market for dark web transactions. Even as making payments with digital assets gains more acceptance, “cryptocurrency” still evokes widespread skepticism amidst very real (and to many investors, very costly) fluctuations in value. Even the most widely used1 forms of cryptocurrency, Bitcoin and Ethereum, can experience overall value losses of nearly $1 trillion in one month,2 adding to lingering concerns about the overall financial downside of the asset as an investment vehicle.
Take the seemingly apocryphal story of computer programmer Laszlo Hanyecz, who in May 2010 agreed to pay 10,000 Bitcoins in exchange for two pizzas.3 At the time, 1 Bitcoin was worth pennies, meaning the purchase equated to roughly $41. Over time, those pizzas became much more expensive (and valuable)—$3.24 million in November 2014, $71,700,000 in November 2017, $140,250,000 in November 2020, and $629,420,000 in November 2021.4 But the cost of Laszlo’s pizzas underwent an even wilder ride in 2022. Between March 7 and March 28, Laszlo’s pizzas would’ve fluctuated between $390,788,600 and $475,751,200. Two months later—between May and June—the pizzas become a relative bargain as their value drops from $377,190,000 to $295,205,240.
Volatility is, for lack of a better term, baked into any cryptocurrency conversion to U.S. dollars. A fee paid in Bitcoin or other digital currency could be worth significantly different amounts over a short period of time. Attorneys and firms considering whether to accept cryptocurrency as payment should keep in mind the fluctuation of value tied to these digital assets.
This naturally raises significant ethical considerations for any firm or attorney confronting this decision. As these solely “digital coins” continue their ascendency into the global economy, any measures put in place to transact, convert, or store a cryptocurrency asset by a firm must at present be made without formal guidance from the Office of Lawyers Professional Responsibility, Lawyers Professional Responsibility Board, or the Minnesota Supreme Court.
In an era of uncertainty—both regarding its valuation and the regulatory environment in which it operates—attorneys are right to be wary about accepting cryptocurrency as a form of payment for legal services. The ethical risks with accepting cryptocurrency payments pose significant and unavoidable challenges. However, a negotiated and reasonable fee agreement can set forth the terms of immediate conversion of the digital asset into U.S. dollars to limit the attorney’s ethical risk.
WHAT IS CRYPTO?
Cryptocurrency is a virtual medium of exchange that exists only electronically.5 Cryptocurrency is not money, and it is not issued, backed, or supervised by any government. Simply put, Bitcoin and other digital assets only have value because people are willing to pay for them.
Unlike traditional banking, the cryptocurrency system operates peer-to-peer, without an intermediary, and uses the digital asset to represent value. Cryptocurrency assets rely on digital encryption technology to record transactions on a distributed, virtual ledger known as a blockchain.6 Cryptocurrency offers instantaneous payment with no transaction fees, near-anonymity, and ease of sending money across national borders7—but with no central bank, no government, and no FDIC-insured equivalent to ensure against loss. In addition, most virtual currency is stored on digital wallets on potentially risky online platforms.8 As acceptance of cryptocurrency becomes more widespread, clients may prefer the advantages these assets provide over traditional methods of payment.
As evidenced by President Biden’s March 2022 executive order,9 proposed rules by the Securities and Exchange Commission,10 and newly proposed bipartisan Congressional legislation,11 there is no lack of interest in creating a framework for regulating digital assets.12 It is too early for comprehensive review of these proposals’ impact. In the meantime, the most important government guidance on these assets is the IRS’s classification of cryptocurrency as property, which requires sellers of cryptocurrency to report gains and losses on their tax return.13
THE WILD RIDE: A HISTORY OF CRYPTOCURRENCY’S VOLATILITY
Bitcoin and other cryptocurrency assets share many of the same characteristics of legal currency.14 Unlike fiat currencies such as the U.S. dollar, which derive their value by government decree, or commodities such as gold and silver, which have intrinsic value, the value of cryptocurrency assets is derived solely from what people are willing to accept as payment. This creates the conditions for which cryptocurrencies are well-known: massive volatility as an investment vehicle, sometimes resulting in intraday gains or losses of 10 to 20 percent.15
Despite its meteoric rise in value leaving early adopters well off, Bitcoin and other cryptocurrencies still experience considerable shifts in their valuation. For example:
- The first Bitcoin crash in 2018 resulted in a loss of nearly $700 billion of total capitalization after its value plummeted by 80 percent.16
- Throughout 2020 and 2021, Bitcoin and other digital assets saw a surge of popular interest, leading to Bitcoin’s market capitalization exceeding $2.4 trillion by May 2021 and reaching its-time USD high of $68,990.90 in November 2021. However, the bust began to follow the boom.
- Beginning in early 2022, the first Bitcoin crash of the year caused Bitcoin to reach a low of $28,825.76 within the same 52-week period as its all-time high, accounting for over $1 trillion in lost value, a sum greater than the infamous 1929 Black Friday crash and a value loss of over 60 percent.17 But the worst was yet to come.
- After failures in the cryptocurrency lending industry18 and amidst global economic uncertainty, the global cryptocurrency marketplace cratered in the summer of 2022, leading to a “crypto winter.”19 Nearly five years of gains were erased, and now the total capitalization of Bitcoin, Ethereum, and other assets trade hovers around $1 trillion, down sharply from its peak value of $3 trillion in November 2021.20 At its lowest in June 2022, Bitcoin traded around $17,800.21 Many of the “retail” investors in cryptocurrency suffered significant losses, particularly if they began investing during the pandemic.22
- Stablecoins (like Terra, Luna, and Tether) were meant to be a more reliable means of exchange with their price pegged to the U.S. dollar.23 However, these stablecoins were not backed by cash, treasuries, or any other traditional assets, and were algorithmically tied to each other—causing a devastating knock-on effect once their values cratered.24
In just one year, predictions of both a burst bubble and rapid adoption have come to fruition. These wild swings and public regulatory skepticism only seem to embolden concerns held by market observers that cryptocurrency assets amount to a type of Ponzi scheme or that the price of Bitcoin will fall to or below $10,000.25 Whatever its trajectory, the volatility should lead attorneys and firms to think carefully about how and whether the digital asset can reasonably represent the value of legal services.
WHAT ARE THE LEGAL ETHICS ISSUES?
Any Minnesota attorney considering accepting payment in cryptocurrency must consider the ethical ramifications of receiving a payment that could be quite different in value from the time the fee is quoted to the time the bill is invoiced. Transactions with fluctuating value for legal services undoubtedly create ethical uncertainty, since any challenge to a fee agreement under the Minnesota Rules of Professional Conduct risks potential discipline by the Office of Lawyers Professional Responsibility.
Issue 1: Rule 1.5, MRPC, prohibits an attorney from making an agreement for, or charging, an unreasonable fee, and imposes stringent requirements for flat-fee agreements.
Because of cryptocurrency’s seemingly inherent volatility, some may question whether a fee paid in cryptocurrency can be considered “reasonable” if wild swings in the valuation occur. An arrangement exchanging Bitcoin or other digital coins for legal services could mean the client is paying $200 per hour in one month and $500 the next. Such variations in value could result in client complaints that the fee charged is unreasonable. Conversely, if the market value of the digital currency used as a payment quickly fell, the attorney could feel underpaid for their services.26
If an attorney wishes to accept cryptocurrency as payment, these risks must be addressed in the fee agreement. A fee or retainer agreement contemplating the use of cryptocurrency as payment must address the timing of converting the cryptocurrency asset, who pays transaction fees, and other allocations of risk between the attorney and client. Most importantly, there should be no ambiguity regarding who holds the risk of gain or loss. Like any fee agreement, the exchange rate from cryptocurrency assets into U.S. dollars can be readily negotiated, but the end result must not be unreasonable or unconscionable.
While Rule 1.5 does not specifically address payment with virtual currencies, the rule does apply to all forms of payment between attorney and client for legal services. Rule 1.5(b) requires the attorney to communicate “the basis or rate of the fee... to the client” in writing.
Rule 1.5(b)(1) addresses flat-fee arrangements. Here, cryptocurrency could be the method of flat-fee payment if “agreed to in advance in a written fee agreement signed by the client.” The virtual asset would then be treated as the lawyer’s property upon payment, but only if the fee agreement complies with Rule 1.5(b)(1). However, because any flat fee is refundable, payment in a volatile asset like cryptocurrency creates considerable ambiguity (and therefore risk) in determining “the unearned portion of the fee” to be refunded (to the extent a refund of any fees becomes required). Until the volatile and uneven cryptocurrency market cools down, the asset should only be considered a method of paying legal fees already incurred and agreed to in U.S. dollars, minimizing the risk to a firm’s billing cycle and compliance with trust account rules.
Issue 2: Does accepting virtual currency trigger the requirements of Rule 1.8(a), MRPC, which governs business transactions with clients?
Because cryptocurrency is considered property, any transaction where the attorney’s fee is paid with cryptocurrency triggers the requirements of Minnesota Rule of Professional Conduct 1.8(a). That rule generally prohibits counsel from entering business transactions with clients or knowingly acquiring a pecuniary interest adverse to a client. Further, while Rule 1.8 normally does not apply to ordinary fee arrangements, its requirements must be met when a lawyer accepts “other nonmonetary property as payment of all or part of a fee.” Thus, given the IRS’s classification of cryptocurrency as property, any payment using cryptocurrency must be treated as an in-kind payment just as if the fee was being paid by exchange of a tractor, snowmobile, or radio advertising. While this method of payment generally raises “no special concerns” with the OLPR, the rules are clear that such payments implicate Rule 1.8(a) and require special consideration.27
Under Rule 1.8(a), before entering into a “business transaction” with a client, a lawyer must (1) provide the client written disclosure of the terms; (2) provide the client an opportunity to confer with independent counsel; and (3) obtain written, informed consent from the client to the agreement. Rule 1.8(a) generally requires that the transaction itself be fair to the client—something that wild swings in the value of a cryptocurrency asset might call into question. Rule 1.8(a) also requires that the transaction’s essential terms be communicated to the client in writing in a manner that can be reasonably understood—something that may be a challenge with an ever-changing regulatory landscape. Thus, attorneys should ensure they meet the requirements of 1.8(a) by using a clear and well-drafted retainer agreement before proceeding with any transaction in which they accept cryptocurrency as payment for legal services.
Issue 3: Does accepting virtual currency as payment for legal services comply with the requirements of Rule 1.15, MRPC?
Minnesota Rule of Professional Conduct 1.15 is critically important when considering whether to accept cryptocurrency as a form of payment for legal services. To begin, because of its status as property, cryptocurrency cannot be directly deposited into banks and therefore cannot be held in a client trust account used by Minnesota lawyers under Rule 1.15. Client trust accounts must be established at eligible financial institutions—“banks or savings and loan associations authorized by federal or state law to do business in Minnesota.” Thus, unless the cryptocurrency asset is immediately converted into U.S. dollars and subsequently held in a client trust account, the asset must be stored as property and therefore cannot be accepted as an advanced payment of fees or costs. On this issue the rules are abundantly clear: Any attorney who accepts cryptocurrency for payment of advanced fees and costs will necessarily violate Rule 1.15(a), which requires client funds held by a lawyer to be held in a trust account.
The only way an attorney can “hold” a client’s cryptocurrency assets is under a non-monetary arrangement—like being entrusted with a client’s files, a work of art, or some other piece of tangible personal property. However, agreeing to hold a client’s digital assets requires technological and financial expertise to ensure the safekeeping of the property. Beyond that, the risk of theft is high and consequently increases an attorney’s exposure to personal liability.
This is because cryptocurrency transactions are unregulated, anonymous, and irreversible, making cryptocurrency a regular target for digital fraud, misappropriation, and theft. Losses from scams and theft on cryptocurrency trading platforms totaled over $10 billion by 2021, and widely publicized hacks, thefts, and misappropriations continue to plague those holding cryptocurrency assets.28 While security systems have improved, cryptocurrency exchanges run on open, unregulated infrastructure, sometimes exempted from traditional regulations affecting banks and conventional money service businesses. Operating without a regulatory safety net is precarious enough, but the growing sophistication in attacks targeting cryptocurrency exchanges and wallets should give attorneys pause before accepting and holding a digital asset. Thus, while there is no per se ban on an attorney holding a digital asset for a client, such an agreement would expose the attorney to substantial risk given the legal and ethical risks associated with the loss of client property.29
EXISTING GUIDANCE FROM OTHER JURISDICTIONS
Minnesota is among many states that have not issued direct ethics guidance on accepting cryptocurrency as payment for legal services. Some jurisdictions, like Virginia and California, are considering or have issued draft opinions on the issue. Other states appear likely to consider further guidance after the May 2022 crash or federal regulation. However, four bar associations have weighed in with their own ethical guidance about whether and how their attorneys can accept cryptocurrency as payment. Generally, the opinions issued in the infancy of cryptocurrency’s acceptance seem to impose more restrictive obligations upon the attorney and firm.
Nebraska: Ethics Advisory Opinion 17-03 (September 2017)
A Nebraska attorney may accept Bitcoin and other cryptocurrencies as payment for legal services but must assure the fee charged remains reasonable.30 Nebraska’s opinion states that lawyers may accept payments in digital currencies but must immediately convert them into U.S. dollars. Any refund of monies is also made in U.S. dollars and not in digital currency. The rate of conversion into U.S. dollars must be based on “objective market rates immediately upon receipt” but the timing of “immediately upon receipt” is not clearly defined.31
North Carolina: Formal Opinion 5 (October 2019)
Provided they meet the requirements of Rule 1.8(a), North Carolina attorneys can take virtual currency as a flat fee for legal services, but not as an advance payment, settlement, or as “entrusted funds to be billed against, or held for the benefit of the lawyer, the client or any third party.”32 Because of the risk inherent in cryptocurrency—the value of virtual currencies “fluctuates significantly and unpredictably from day to day”—there should also be an agreement between the lawyer and client on when the valuation of the virtual currency is determined.33
New York City: Formal Opinion 2019-5 (July 2019)
The New York City Bar Association requires attorneys who accept cryptocurrency as payment to comply with Rule 1.8(a) because of “differing interests in negotiating the fee agreement” between attorney and client once cryptocurrency is involved.34 Rule 1.8(a) applies because of the “drastic market fluctuations” that might affect an attorney’s interest in “conducting the representation so as to maximize the value of the client’s payment” and “compromise the lawyer’s professional judgment.”35
District of Columbia: Ethics Opinion 378 (June 2020)
DC lawyers can accept cryptocurrency as payment for legal services as long as the fee agreement is fair and reasonable, and the lawyer can safeguard the virtual property.36 While the DC bar ethics rules require lawyers’ fees to be reasonable, they don’t preclude accepting “potentially volatile assets” as payment.37 Lawyers who accept an advance retainer in cryptocurrency are subject to Rule 1.8(a), which requires a reasonable agreement with terms that have been explained in writing and that’s fair to the client.38
CHARTING A CAUTIOUS COURSE: ACCEPTING CRYPTOCURRENCY AS PAYMENT
If an asset is worth what people are willing to pay for it, cryptocurrency and other forms of digital assets are here to stay. Before accepting any digital-only asset as payment for legal services, attorneys should create and implement plans to (1) mitigate the volatility risk and follow the requisite ethical obligations to ensure that the risk is shifted away from the client; (2) utilize properly regulated and licensed cryptocurrency exchanges; (3) establish a reasonable but nearly instantaneous time of conversion of the asset into U.S. dollars or some other legal tender; and (4) discuss these issues with the client at the outset as well as in the attorney’s engagement letter and written fee agreements. Of note, issues related to fee agreements are a major contributing source of discipline imposed by the OLPR, so accepting payment in this technologically divergent method should give every practitioner pause and occasion careful scrutiny of their fee agreements.
ARAM DESTEIAN is a shareholder with Bassford Remele, P.A. Aram represents businesses in complex commercial litigation, and also counsels and defends other lawyers against a spectrum of professional liability claims. He serves as Bassford Remele’s associate general counsel.
TIMOTHY GREENFIELD is an attorney with Bassforda Remele, P.A. Tim focuses his practice in the areas of commercial litigation, professional liability, construction, and real estate law. He is licensed in Minnesota and Wisconsin.
Notes
1 Some virtual currencies, like Dogecoin, were created as a ‘meme’ but still experienced rapid growth in value over the last decade. See Caitlin Ostroff & Caitlin McCabe, What Is Dogecoin, How to Say It, and Why It’s No Longer a Joke, The Wall Street Journal, https://www.wsj.com/articles/what-is-dogecoin-how-to-say-it-and-why-its-no-longer-a-joke-thanks-elon-11612820776 (last updated 6/2/2021).
2 Billy Bambrough, $1 Trillion Crypto Meltdown—Huge Crash Wipes Out The Price Of Bitcoin, Ethereum, BNB, XRP, Cardano, Solana, Terra’s Luna And Avalanche, Forbes (5/12/2022) https://www.forbes.com/sites/kamranrosen/2022/05/25/as-markets-crash-and-luna-evaporates-bitcoin-could-slide-as-low-as-15000-heres-why-its-not-time-to-panic/?sh=dfb7af75d6f0.
3 Mark DeCambre, Bitcoin pizza day? Laszlo Hanyecz spent $3.8 billion on pizzas in the summer of 2010 using the novel crypto, Market Watch (5/22/2021), https://www.marketwatch.com/story/bitcoin-pizza-day-laszlo-hanyecz-spent-3-8-billion-on-pizzas-in-the-summer-of-2010-using-the-novel-crypto-11621714395.
4 https://www.coindesk.com/price/bitcoin/.
5 Virtual currencies are a “digital representation of value that functions as a medium of exchange… that [i]n some environments operates like “real” currency” despite solely being available in electronic form.” Virtual currencies, Internal Revenue Services, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies .
6 Sharon D. Nelson, John W. Simek, and Jim McCauley, A View From Virginia: Is It Ethical for Lawyers to Accept Bitcoins and Other Cryptocurrencies?, Slaw, http://www.slaw.ca/2018/05/29/a-view-from-virginia-is-it-ethical-for-lawyers-to-accept-bitcoins-and-other-cryptocurrencies/ (last revised 4/30/2019).
7 Herrick K. Lidstone, Jr., Erik K. Schuessler, Accepting Cryptocurrency as Payment for Legal Fees: Ethical and Practical Considerations, Colorado Lawyer and Colorado Bar Association, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3259281 (last revised 4/30/2019).
8 Id.
9 Exec. Order No. 14067, 87 F.R. 14143 (3/3/2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.
10 https://www.sec.gov/rules/proposed/2022/34-94062.pdf
11 Thomas Franck, Bipartisan crypto regulatory overhaul would treat most digital assets as commodities under CFTC oversight, CNBC, https://www.cnbc.com/2022/06/07/bipartisan-crypto-bill-lummis-and-gillibrand-want-to-empower-cftc-treat-digitals-assets-like-commodities.html (last updated 6/7/2022); see also Lummis-Gillibrand Responsible Financial Innovation Act, https://www.lummis.senate.gov/wp-content/uploads/Lummis-Gillibrand-Section-by-Section-Final.pdf
12 Supra fn. 9-11.
13 Frequently Asked Questions on Virtual Currency Transactions, Internal Revenue Services, https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions (last updated 3/23/2022).
14 Refuting the ECB – The 9 Characteristics That Make Bitcoin Money, TradeBlock (6/18/2013), https://tradeblock.com/blog/refuting-the-ecb-the-9-characteristics-that-make-bitcoin-money .
15 Bitcoin Plunges the Most Since January, Altcoins Extend Losses, Bloomberg News, (5/5/2022) https://www.bloomberg.com/news/articles/2022-05-05/bitcoin-resumes-slide-after-post-fed-optimism-evaporates
16 Sam Ouimet, Down More than 70% in 2018, Bitcoin Closes Its Worst Year on Record, CoinDesk, https://www.coindesk.com/markets/2019/01/02/down-more-than-70-in-2018-bitcoin-closes-its-worst-year-on-record/ (last updated 9/14/2021).
17 Vildana Hajric, Crypto Crash Erases More Than $1 Trillion in Market Value, Bloomberg, https://www.bloomberg.com/news/articles/2022-01-21/crypto-meltdown-erases-more-than-1-trillion-in-market-value (last updated 1/21/2022).
18 Will Gottsegen, Have the Crypto Bosses Learned Anything At All?, THE ATLANTIC, (6/26/2022) https://www.theatlantic.com/technology/archive/2022/06/crypto-market-bitcoin-coinbase-crash/661398/ .
19 Arjun Kharpal, Ryan Browne, This ‘crypto winter’ is unlike any downtown in the history of digital currencies. Here’s why., CNBC, https://www.cnbc.com/2022/07/14/why-the-2022-crypto-winter-is-unlike-previous-bear-markets.html (last updated 7/14/2022).
20 Wayne Duggan, August 2022 Crypto Market Outlook, Forbes Advisorv (8/2/2022) https://www.forbes.com/advisor/investing/cryptocurrency/crypto-market-outlook-forecast/
21 Supra fn. 4.
22 Megan McCluskey, Millenials and Gen Z Invested When It Was Fun. Now They’re Riding Out a Crash, TIME, https://time.com/6152208/crypto-investing-millennials-gen-z/ (May 19, 2022).
23 David Yaffe-Bellany, Erin Griffith, and Ephrat Livni, Cryptocurrencies Melt Down in a ‘Perfect Storm’ of Fear and Panic, New York Times, (5/12/2022) https://www.nytimes.com/2022/05/12/technology/cryptocurrencies-crash-bitcoin.html
24 Id.
25 Michelle Celarier, Why the ‘Big Short’ Guys Think Bitcoin Is a Bubble, Intelligencer (10/17/2021), https://nymag.com/intelligencer/2021/10/why-the-big-short-guys-think-bitcoin-is-a-bubble.html Clem Chambers, Bitcoin, Ethereum Price Crash May 2022. What Next? Forbes (5/16/2022) https://www.forbes.com/sites/investor/2022/05/16/bitcoin-ethereum-price-crash-may-2022-what-next/?sh=7bde429b46b1
26 Neb. Advis. Op. No. 17-03 (9/11/2017), https://supremecourt.nebraska.gov/sites/default/files/ethics-opinions/Lawyer/17-03.pdf .
27 Eric T. Cooperstein, “Reasonablefees.com” – Expect Special Scrutiny, Minnesota Office of Lawyers Professional Responsibility (9/4/2000), http://lprb.mncourts.gov/articles/Articles/Reasonablefees.fees.com%20-%20Expect%20Special%20Scrutiny.pdf .
28 Chavez-Dreyfuss, G. (1/28/2021). Cryptocurrency crime drops in 2020 but ‘defi’ breaches rise, study finds. Reuters. https://www.reuters.com/article/crypto-currency-crime-int/cryptocurrency-crime-drops-in-2020-but-defi-breaches-rise-study-finds-idUSKBN29X1YO
29 Model Rules of Prof’l Conduct R. 1.1, cmt. 8.. Rule 1.1 is the general duty of competence, and it is a recent but well-accepted interpretation that an attorney must have a baseline comprehension of technology used “if for no other reason than to enable an attorney to effectively communicate to a client the pros and cons of its use in the representation.”
30 Supra fn. 21.
31 Id.
32 Id.
33 N.C. Bar Ass’n Comm. on Prof’l Ethics, Op. 5 (10/25/2019), https://www.ncbar.gov/for-lawyers/ethics/adopted-opinions/2019-formal-ethics-opinion-5/ .
34 N.Y.C. Bar Ass’n Comm. on Prof’l Ethics, Op. 2019-5 (7/11/2019), https://www.nycbar.org/member-and-career-services/committees/reports-listing/reports/detail/formal-opinion-2019-5-requiring-cryptocurrency-in-payment-for-legal-services .
35 Id.
36 D.C. Bar Ass’n Comm. on Prof’l Ethics, Op. 378 (June 2020), https://dcbar.org/For-Lawyers/Legal-Ethics/Ethics-Opinions-210-Present/Ethics-Opinion-378
37 Id.
38 Id.