Will You Accept Bitcoin? Ethical Challenges for Attorneys

by Payne & Fears
Contact

This article was originally published in the Association of Business Trial Lawyers (ABTL) - Orange County Report, Volume XX, No. 1, Spring 2018

The proper use of social media, blogging, cloud computing, and crowdfunding are just a few of the ever-growing tech-related issues that have ethical implications for attorneys.  We must add to the list the cryptocurrency craze influencing the investment markets.  Regardless of your personal feelings towards Bitcoin, Ethereum, Ripple, etc., clearly something big is happening, and attorneys need to pay attention – particularly because attorney ethics panels are starting to take notice and significant ethical implications exist for any attorney who accepts fees in cryptocurrency.

What is Cryptocurrency?

If you ask a typical attorney to explain cryptocurrency, they will probably understand that: (1) it is a form of digital currency that makes it easier to transfer funds between two parties; (2) it is not “issued” or “backed” by any central bank or authority, rendering it less prone to government interference and protection; and (3) the nature of the transactions makes them private and confidential.  But the understanding typically ends there because of cryptocurrency’s novelty and  overwhelming technology.  Having a basic understanding of how this new technology works is important to understand why so many people across industries consider it revolutionary.

Central to cryptocurrencies like Bitcoin is the blockchain it uses to store an online ledger of all the transactions that have ever been conducted using the currency.  The best way to imagine the system in place is to think of a highly encrypted, publicly available “spreadsheet” that is not stored in any single location, but is shared and duplicated by millions of computers.  As transactions take place, the spreadsheet is regularly updated and continually reconciled.  The completed transaction is recorded into blocks and eventually into the blockchain.  The cryptocurrency’s users themselves validate the transactions whenever one person pays another for goods or services.  The clear benefit of the technology is that the transactions eliminate the need for a third party to process or store payments.  Consequently, cryptocurrency transactions are done with minimal processing fees and avoid the fees charged by most banks.

While everyday speculators may invest in cryptocurrency, it is the proliferation of blockchain technology that has led to the boom in this industry.  Apart from its use in cryptocurrency transactions, other industries and governments are finding many potential uses for blockchain’s conceptual framework as a secure, digital alternative to more expensive, bureaucratic, time-consuming processes.  In healthcare, for example, blockchain infrastructure is now being used for clinical trial data, regulatory compliance, and electronic medical records.

What Are the Risks and Benefits Associated with Cryptocurrency Transactions?

There are, of course, a litany of reasons why attorneys should avoid cryptocurrency transactions with clients.  For starters, the market (where growth is based almost entirely on speculation) is prone to wild price swings. In January 2017 alone, the price of one Bitcoin fluctuated between highs of $17,101 and lows of $9,477.  From December 16, 2017 to February 6, 2018, Bitcoin tumbled again from $19,343 to $6,914.  Volatility remains one of its defining characteristics as an investment.

Fueling this volatility is the hack-prone history of the industry.  While the cryptocurrency industry is not alone in its exposure to hacking, unlike with hacks involving traditional financial institutions, it is often impossible to recover stolen cryptocurrency because blockchain transactions are irreversible.

Just this past January, the Japan-based crypto exchange Coincheck was the target of hackers who stole ¥58 billion ($534 million dollars) in customer deposits of NEM, a less well known digital currency launched in early 2015.  The hack, reportedly the largest cryptocurrency security breach in history, affected 260,000 exchange customers and accounted for roughly 6% of NEM’s entire market capitalization.

The risks can be multiplied with newer cryptocurrencies.  In fact, a recent report by Ernst & Young suggests that over 10 percent of the funds generated by initial coin offerings (approximately $400 million) are either misplaced or seized by hackers.  See Ernst & Young, Big risks in ICO market: flawed token valuations, unclear regulations, heightened hacker attention and congested networks (Jan. 22, 2018).  These attacks exploit coding flaws in new cryptocurrencies, which can be rushed to market without meaningful review.  While law firms will typically not have significant amounts in an exchange and can protect themselves from being directly targeted by hackers, no one is immune from the effects of a large hack, which as NEM’s pricing after the hacking incident shows, can result in wild price swings.  Wide-scale hacking can also indirectly create doubt in the viability of the targeted cryptocurrency or even the crypto market as a whole.

Notwithstanding, a growing number of law firms are willing to look past these potential risks and accept payment in Bitcoin and other cryptocurrency.  Most firms do so as a client driven business decision and not as an investment.  Among them are firms who may have a large client base in the growing blockchain industry and want to show their clients that they have a vested interest in the industry or believe in the potential of the technology.  Law firms with high-net-worth clients in the tech industry may increasingly find themselves with clients who are cryptocurrency proponents with the majority of their net worth consisting of Bitcoin.  Law firms may also have international clients who find it more efficient to transact in cryptocurrency.  Other firms may want to delve into Bitcoin for political reasons, and to show their support for the unregulated nature of cryptocurrency.

Are There Ethical Implications for Attorneys When Dealing with Cryptocurrency Transactions?

Yes.  California Rule of Professional Conduct 3-300 prohibits attorneys from entering into a business transaction with a client or knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to a client unless the transaction or acquisition is fair and fully disclosed in writing with the client’s written consent.  Rule of Professional Conduct 3-110 also requires attorneys to have “sufficient learning and skill” before taking on an engagement.  Cryptocurrency implicates both rules and cryptocurrency is now coming to the attention of attorney ethics panels. 

Last September, the Nebraska Supreme Court’s ethics committee issued an advisory opinion that discussed in detail how attorney ethics rules may apply to transactions in digital currency.  See Nebraska Supreme Court Ass’n Advisory Comm., Op. 17-03, 9/11/17.  While the brief, 10-page opinion can at times be lacking in details, it provides commonsense advice that all attorneys can easily follow.

Before the Nebraska committee were three questions:

  1. May an attorney receive digital currencies such as bitcoin as payment for legal services?
  2. May an attorney receive digital currencies from third parties as payment for the benefit of a client’s account?
  3. May an attorney hold digital currencies in trust or escrow for clients?

First, the committee noted that attorneys are expressly allowed to accept property like cryptocurrency in payment of services. Given the fluctuations in value, the committee instructed attorneys to immediately value or convert cryptocurrency to U.S. dollars upon receipt and to credit the client’s account accordingly.  The purpose of this requirement is to protect the client against wild fluctuations in value that could result in charging unreasonable fees.  Although not directly addressed by the committee, doing so makes clear that market volatility risk is transferred to the attorney upon receipt.  Immediately converting the cryptocurrency to U.S. dollars also limits the risk of the cryptocurrency losing significant value; which may otherwise place the attorney in an ethical dilemma of agreeing to work for property that is now worthless.

Critically important is notifying and explaining to the client well in advance the conversion arrangement and its timing.  This includes notifying the client that the conversion will be immediate, the market rates used to determine the conversion, and the identity of the payment processor.  This extra step helps avoid any later dispute about the conversion since there is no single market price for a cryptocurrency, and different payment processors may convert the currency at different prices.  One example of an index that processors may use is the New York Stock Exchange Bitcoin Index (NYXBT).  Ultimately, it is up to the attorney to educate the client about the conversion process to ensure the client provides informed consent to the arrangement, regardless of the client’s familiarity with cryptocurrency.

A second concern addressed by the committee are situations where the client arranges for a third party to pay the client’s fees.  In those cases, attorneys must keep in mind their professional obligations to accept payment from a third party only if the arrangement would not interfere with the attorney’s independence or relationship with the client, nor interfere with the client’s confidential information.  This is particularly important given the history of cryptocurrency, which has allegedly facilitated easy, anonymous payments for illegal conduct and goods.

The committee correctly noted the challenges that arise with identifying a third party payer.  Crypto transactions are pseudonymous in nature.  This makes it nearly impossible for an attorney to determine the source of the funds.  Attorneys who accept payments from third parties should comply with “Know-Your-Customer” (KYC) procedures that include certain verification steps.  For example, while not directly applicable to attorneys who simply receive cryptocurrency payments, the U.S. Treasury Department’s FinCEN has issued guidance for exchanges to prevent and report money laundering activities.  See FIN-2013-G001, Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013).  At a minimum, attorneys should consider larger payment processors and exchanges like Coinbase, which require the payer to comply with KYC verification and actively take steps to prevent money laundering.

Many other situations, however, will require the attorney to request sufficient information from the third party payer prior to acceptance of the digital currency payment.  At a minimum, it is important for attorneys to ask themselves, why does the client want to pay in crypto and is the client trying to avoid something by doing so?  Some firms limit the risks by only agreeing to accept crypto payments from long-term clients or companies, and not from individuals.  If you cannot perform satisfactory due diligence, the ABA suggests you walk away.  See American Bar Association, “A Lawyer’s Guide to Detecting and Preventing Money Laundering”, 2014.

A third concern addressed by the committee is holding digital currencies in trust for clients or third parties.  If a lawyer receives cryptocurrency intended to reflect a retainer to be drawn upon when fees are earned in the future, the lawyer must immediately convert the cryptocurrency into U.S. dollars.  In other trust account transactions, the committee advised lawyers to inform clients that the cryptocurrency is more akin to property and will be held and not converted into U.S. dollars or other currency.  Since there is no mechanism to reimburse clients if a hacker steals them, an attorney opting to receive crypto must take reasonable security precautions.  In State Bar Opinion No. 2010-179, the California Bar advised attorneys to educate themselves about proper security procedures before transmitting or storing confidential client information.  Attorneys likely have similar obligations for holding a client’s cryptocurrency. 

The future of cryptocurrency remains volatile and uncertain.  The Nebraska advisory committee’s opinion has been criticized for its failure to provide new solutions for handling cryptocurrency transactions.  New ethical rules and guidelines seem inevitable.  Attorneys who accept or transact in cryptocurrency must do so well informed, alert to the ethical implications.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Payne & Fears | Attorney Advertising

Written by:

Payne & Fears
Contact
more
less

Payne & Fears on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.