TECHNOLOGY IN THE LAW PRACTICE
BY HERRICK K. LIDSTONE, JR. AND ERIK K. SCHUESSLER
In the early 1970s, the legal community grappled with whether to allow payment of legal fees by then-innovative means: the credit card. Now, attorneys are faced with another cutting-edge method of paying legal fees: virtual currency, also known as cryptocurrency.
While most of us have at least heard of Bitcoin and Ethereum—the two most popular forms of cryptocurrency—few attorneys are comfortable enough with the cryptocurrency concept to start accepting it as payment for legal services. Cryptocurrency is not money, and it is not issued or backed by any government. Cryptocurrency is a virtual asset only existing in electronic form. Coins are merely an entry on a virtual ledger that contains a chronological record of all ownership changes in the coins making up the virtual currency. This ledger, known as the "blockchain," is replicated on servers all over the world.3 The blockchain consists of a series of "blocks" with basic details regarding each transaction (including source, destination, and date/time), and is ever-expanding with each successive transaction. All transactions in the blockchain are verified and publicly viewable at https://blockchain.info.
Benefits of Accepting Cryptocurrency
Transacting business with cryptocurrency has several benefits. Payments are instantaneous. Thanks to blockchain verification, cryptocurrency transactions are transparent and less susceptible to fraud. There are no banking fees, currency conversion fees, or credit card transaction fees (although some of the crypto exchanges do charge transaction fees). Thus, it is not surprising that cryptocurrency is gaining a foothold in the global economy as a common method of payment. As of January 2019, people held nearly SI30 billion in Bitcoin alone, with over 230,000 Bitcoin transactions processed each day.4
As more and more clients and prospective clients are using virtual currency, law firms need to evaluate whether they should join the trend by accepting virtual currency as payment for legal services. The option of paying in virtual currency offers clients considerable payment flexibility, particularly for international clients or tech clients who already use cryptocurrency as their preferred method of payment. Online directories are already directing potential clients to law firms that accept cryptocurrency.5
Ethical and Practical Challenges
Just like credit cards in the 1970s, the new frontier of cryptocurrency presents unique ethical and practical challenges for attorneys. The IRS classifies cryptocurrency as property, not currency.6 The Colorado Rules of Professional Conduct (Colo. RPC) allow attorneys to accept property in payment for services.7 Indeed, lawyers have received property in exchange for legal services for as long as lawyers have provided legal services.8 However, taking property from a client for fees is a business transaction with a client that may be subject to Colo. RPC 1.8(a) in a manner similar to acquiring an ownership interest in a client for fees.9In addition, before accepting cryptocurrency as payment for legal services, attorneys will need to develop and implement plans to (1) mitigate volatility risk, (2) appropriately safeguard cryptocurrency held in trust for clients, (3) properly identify the payer of legal fees, and (4) meet the associated ethical challenges of doing business with a client.
Mitigating Volatility Risk
Cryptocurrency is notoriously volatile. For example, on November 12,2017, a single Bitcoin was valued at $5,953.85. Just over a month later (on December 16, 2017) the value skyrocketed t o an all-time high of $19,190.16. Then one week later (on December 23, 2017) it plummeted to $14,039.59. As of February 9, 2019, it was worth $3,667.76—up in value by about 10% for the year.10 Given these wild swings, an attorney's billing rate could be reasonable when the fee agreement is signed, but then unreasonably high (or unconscionably low) by the time the legal services are performed, billed, and paid. This raises at least two questions:
1. How can an attorney get paid in Bitcoin or other crypto currency without running afoul of Colo. RPC 1.5(a)'s prohibition on charging or collecting an unreasonable fee should the value increase dramatically shortly after payment of the fee?
2. Who will bear the potential risks and rewards of the volatility—the attorney or the client?
First, an attorney should not bill in terms of Bitcoin or other virtual currency, but rather continue to bill in U.S. dollars pursuant to the lawyer's engagement letter with the client. Until crypto currency becomes much more stable, it should only be considered as a method of paying legal fees that have been billed in U.S. dollars. This would eliminate most of the volatility risk over the course of the law firm's billing cycle and provide a basis for the test for the reasonableness of the fee.
Nevertheless, some volatility risk remains if the law firm does not immediately convert the cryptocurrency to U.S. dollars. The only formal ethics opinion to address this topic thus far was issued in Nebraska in 2017. It states that an attorney accepting cryptocurrency should convert the digital currency to U.S. dollars immediately upon receipt and credit the client's account accordingly at the time of payment.11 Even this guidance leaves several questions open:
■ What constitutes "immediate?" If a payment is submitted after hours on a Friday, would it be too late to convert and deposit the funds on Monday morning? Given cryptocurrency volatility, the exchange rate could have dramatically...