Client Cryptocurrency Payments May Pose Ethical Risks for Lawyers

* Law firms increasingly accepting cryptocurrency as
payment
* But there are potential risks including how federal regulators
view it, ethics lawyers warn

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.

Riskier Business
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.

Culled from news.bloomberglaw.com