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  • Inside Track
    August 18, 2021

    Dilemma: Accepting Cryptocurrency as Payment

    Timothy J. Pierce

    Pondering accepting bitcoin or other cryptocurrency for payment of client fees? Disciplinary rules do not prohibit a lawyer from accepting cryptocurrency as payment for legal fees, but the rules do impose certain requirements.
    dollar with bitcoin sunglassesN

    Aug. 18, 2021 – Bitcoin and other cryptocurrencies – lines of computer code that are digitally tracked – are increasingly accepted as payments for business transactions. But can they be used for client fees?

    Question

    I want to offer my clients the option to pay in bitcoin or other forms of cryptocurrency. I did not think it would be much of a big deal as long as the client and I agreed, but another lawyer told me that they thought there might be some problems under the disciplinary rules.

    Do the rules of professional conduct prohibit a lawyer from accepting bitcoin as a payment for the lawyer’s legal fees?

    Answer

    The short answer is no, the disciplinary rules do not prohibit a lawyer from accepting cryptocurrency as payment for legal fees, but the rules do impose certain requirements that lawyers must be aware of if they want to go down the cryptocurrency road.1

    Tim PierceTim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by email or through the Ethics Hotline at (608) 229-2017 or (800) 254-9154.

    What follows is a brief discussion of considerations under Wisconsin’s Rules of Professional Conduct for Attorneys for lawyers who want to enter into cryptocurrency transactions with clients. Considerations of other law and regulations, such as tax law, outside the disciplinary rules are beyond the scope of this article.

    What is “cryptocurrency” and why is this important? This is important because “cryptocurrency” is not currency, at least not in the legal sense. D.C. Bar Ethics Op. 378 defines “cryptocurrency” as follows:

    Cryptocurrency is a virtual asset – digital money – that exists only in electronic form. It is completely decentralized, meaning there is no controlling authority, and it is not issued by any government or backed by any tangible security or real estate. Instead, cryptography (mathematical algorithms that are used to encode and decode information) controls the creation of new “coins” of a particular cryptocurrency and secures and records transactions. The resulting data is maintained in a virtual transaction ledger called a “blockchain,” which is distributed to every computer on that cryptocurrency’s network. The blockchain is a continually-expanding chronological record of transactions; it is comprised of “blocks” of information that include the source of cryptocurrency being transacted, its destination, and a date/time stamp. The most well-known cryptocurrencies are Bitcoin and Ethereum, but there are thousands of others.

    Cryptocurrency, once acquired, may be spent like currency or held as an investment asset, like gold. Its algorithmic existence is “stored” in digital “wallets” maintained by online platforms (“hot wallets”) or offline on a computer’s hard drive, a USB port, or even paper (“cold wallets”). A cryptocurrency wallet also stores private and public keys, which are strings of alphanumeric characters that enable their holder to receive or spend cryptocurrency. The public key is shared to allow others to send currency to a wallet. The private key allows its holder to access her wallet by writing in the public ledger, effectively spending the associated cryptocurrency.

    Why this is important is explained by North Carolina 2019 Formal Ethics Op. 5:

    Virtual currency – most notably, Bitcoin – is increasingly used for conducting business and service-related transactions. Although advocates for and users of virtual currency treat these assets as actual currency, the Internal Revenue Service in 2014 classified virtual currency as property, not recognized currency. See IRS Notice 2014-21, https://www.irs.gov/pub/irs-drop/n-14-21.pdf. Accordingly, for the purpose of determining a lawyer’s professional responsibility in conducting transactions related to her law practice using virtual currency, this opinion adopts the IRS’s position and views virtual currencies as property, rather than actual currency.

    So this means that a lawyer who accepts cryptocurrency as a fee is receiving property rather than currency. This has implications under the disciplinary rules.

    Do the disciplinary rules prohibit lawyers from receiving property as a fee for legal services? No, there is no prohibition, but receiving property rather than currency from a client as a fee for legal services normally requires the lawyer to comply with SCR 20:1.8(a), which states:

    (a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

    (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

    (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

    (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.

    Need Ethics Advice?

    As a State Bar member, you have access to informal guidance and help in resolving questions regarding Wisconsin’s Rules of Professional Conduct for Attorneys.

    Ethics Hotline: To informally discuss an ethics question, contact State Bar ethics counselors Timothy Pierce or Aviva Kaiser. They can be reached at (608) 229-2017 or (800) 254-9154, Monday through Friday, 9 a.m to 4 p.m.

    ABA Comment [1] to SCR 20:1.8(a) explains that the rule “does not apply to ordinary fee arrangements between client and lawyer, which are governed by Rule 1.5, although its requirements must be met when the lawyer accepts an interest in the client's business or other nonmonetary property as payment of all or part of a fee.”2

    So, the lawyer who accepts cryptocurrency in payment of a fee is receiving “nonmonetary property” and the comment indicates that SCR 20:1.8(a) applies to such a transaction.3

    SCR 20:1.8(a) does not prohibit business transaction with clients, but does impose documentation requirements in (1)-(3), and in the case of a lawyer receiving property as a fee, are in addition to the requirements of SCR 20:1.5(b) that apply to all fee arrangements with clients.4 The documentation requirements of SCR 20:1.8(a) are discussed in D.C. Ethics Op. 378:5

    The information that must be disclosed to a particular client in writing under Rule 1.8(a) will, of course, vary. As a general matter, in addition to terms concerning billing rates and frequency, a lawyer accepting cryptocurrency should consider including a clear explanation of how the client will be billed (i.e. in dollars or cryptocurrency); whether and how frequently cryptocurrency held by the lawyer will be calculated in dollars, or otherwise trued-up or adjusted for accounting purposes and whether, upon that accounting, market increases and decreases in the value of the cryptocurrency triggers obligations by either party; whether the lawyer or the client will be responsible for cryptocurrency transfer fees (if any); which cryptocurrency exchange platform will be utilized to determine the value of cryptocurrency upon receipt and, in the case of advance fees, as the representation proceeds (i.e., as fees are earned) and upon its termination; and who will be responsible if cryptocurrency accepted by the lawyer in settlement of the client’s claims loses value and cannot satisfy third party liens.

    The “fairness” requirement of SCR 20:1.8(a)(1) are discussed in the next section.

    Given that all fees must be reasonable under SCR 20:1.5(a), how does a lawyer ensure that a fee taken in an asset that may fluctuate in value over time is reasonable? As discussed, there is no prohibition in the rules to lawyers accepting nonmonetary property in payment of a fee, and lawyers have been doing so for a long time, including receiving property that may fluctuate in value over time, such as stock.6

    D.C. Opinion 378 discusses the requirement of “fairness” under SCR 20:1.8(a), and this discussion also applies to “reasonableness” under SCR 20:1.5(a):

    Once again, Opinion 300, concerning accepting stocks or partial ownership of a client in lieu of fees, is instructive:

    Rule 1.8(a) and the commentary thereto are silent on how fairness is to be determined, and whether it is to be determined only by reference to facts and circumstances existing at the time the arrangement is accepted by the parties, or by reference to subsequent developments (for example, a huge appreciation in the value of the shares received as fees such that the lawyer is effectively compensated at 100-fold the reasonable value of his services). For ethics purposes (and not for purposes of assessing common law fiduciary duties), we believe that the “fairness” of the fee arrangement should be judged at the time of the engagement. In other words, if the fee arrangement is “fair and reasonable to the client” at the time of the engagement, no ethical violation could occur if subsequent events, beyond the control of the lawyer, caused the fee to appear unfair or unreasonable.

    Opinion 300 at fn 5; see also Restatement (Third) of the Law Governing Lawyers § 126, comment e (2000) (“Fairness is determined based on facts that reasonably could be known at the time of the transaction, not as the facts later develop.”)

    In discussing the reasonableness of a fee paid in stock, ABA Formal Op.00-418 states:

    One way for the lawyer to minimize the risk … is to establish a reasonable fee for her services based on the factors enumerated under Rule 1.5(a)and then accept stock that at the time of the transaction is worth the reasonable fee. Of course, the stock should, if feasible, be valued at the amount per share that cash investors, knowledgeable about its value, have agreed to pay for their stock about the same time (footnote omitted).

    So a lawyer may address the requirements of fairness and reasonableness by determining a reasonable fee for the legal services provided and accept the amount of cryptocurrency that corresponds to the monetary value of that fee at the time of the agreement.

    Of course, part of obtaining the client’s informed consent to the essential terms of the transaction requires the lawyer to confirm in writing that the client understands that the value of the cryptocurrency may vary substantially over time.

    Generally lawyers must place advanced fees in a trust account, so what if the lawyer accepts and advanced fee in cryptocurrency? An advanced fee is any fee, regardless of how the fee is structured, paid to a lawyer before the lawyer performs the legal services to earn the fee [see SCR 20:1.0(ag)]. Generally, advanced fees must be placed in the lawyer’s trust account until the lawyer performs the legal services to earn the fee [see SCR 20:1.5(f)] and any unearned portion of an advanced fee must be refunded upon termination of the representation [SCR 20:1.16(d)]. So how does a lawyer place an advanced fee paid in cryptocurrency into a trust account?

    One way around this problem is to use the alternative protection for advanced fees pursuant to SCR 20:1.5(g), which permits lawyer to place advanced fees (but not advanced costs) in the lawyer’s operating rather than trust account provided the lawyer complies with the requirements of the rule.

    If the lawyer uses the SCR 20:1.5(g) alternative, the lawyer need not hold the advanced cryptocurrency fee in trust but would still be responsible for refunding any unearned portion of the advanced fee upon the termination of the representation. But if the lawyer does not want to use SCR 20:1.5(g), how does the lawyer comply with SCR 20:1.5(f)?

    Wisconsin’s trust account rule explicitly contemplates that lawyers may hold property other currency in trust, as set forth in SCR 20:1.15(b)(4):

    Trust property other than funds. Unless a client otherwise directs in writing, a lawyer shall keep securities in bearer form in a safe deposit box at a financial institution authorized to do business in Wisconsin. The safe deposit box shall be clearly designated as a "Client Account" or "Trust Account." The lawyer shall clearly identify and appropriately safeguard other property of a client or 3rd party.

    D.C. Opinion 378 discusses some considerations for what may constitute “appropriate safeguards” for an advanced fee paid in cryptocurrency:

    In the case of cryptocurrency, competence requires lawyers to understand and safeguard against the many ways cryptocurrency can be stolen or lost. Because blockchain transactions are unregulated, uninsured, anonymous, and irreversible, cryptocurrency is regularly targeted for digital fraud and theft. For example, cryptocurrency online wallets and exchange platforms may be fraudulent; legitimate wallets and platforms may be subject to security breaches; and private keys used to transfer cryptocurrency out of a person’s wallet are vulnerable to network-based threats like hacking and malware if stored in a hot wallet (a device or system connected to the internet). Additionally, private keys that are stored in a cold wallet (hardware, offline software, or paper) can be irretrievably lost, in which case the associated digital currency is likely permanently inaccessible. Just as with fiat currency or any client property, a lawyer must use reasonable care to minimize the risk of loss.

    What specific technical measures a lawyer should take to safeguard cryptocurrency is beyond the scope of this article, but a lawyer who wishes to hold cryptocurrency in trust must consider the risks, take reasonable measures to mitigate those risks and be prepared to demonstrate what and why those measures were taken.

    2019 North Carolina Formal Ethics Op. 5 takes the position that currently, there is no way to appropriately safeguard cryptocurrency and that therefore lawyers may not accept cryptocurrency that is required to be held in trust:

    The methods in which virtual currency are held are not yet suitable places of safekeeping for the purpose of protecting entrusted client property under Rule 1.15-2(d). Rule 1.15-2(d)’s reference to “a safe deposit box or other suitable place of safekeeping” demonstrates that the “suitable place of safekeeping” referenced in the Rule is one that ensures confidentiality for the client and provides exclusive control for the lawyer charged with maintaining the property, as well as the ability of the client or lawyer to rely on institutional backing to access the safeguarded property through appropriate verification should the lawyer’s ability to access the property disappear (be it through the lawyer’s misplacement of a physical key, or the lawyer’s unavailability due to death or disability). The environment in which virtual currency presently exists, however, does not afford similar features that allow clients to confidently place entrusted virtual currency in the hands of their lawyers. A February 2019 report found that even knowledgeable users of virtual currency experienced a variety of complications and concerning issues in exchanging virtual currency that threatened the execution of and confidence in the exchange, including sending virtual currency to the wrong individual by inputting the wrong public key, losing their own private key (thereby rendering the user’s virtual currency permanently inaccessible), or being subject to phishing attacks or other attempted hacks to illegally access their digital wallets. See Foundation for Interwallet Operability, Blockchain Usability Report (February 2019).

    A Wisconsin lawyer who is considering receiving cryptocurrency that must be held in trust7 should carefully consider whether the lawyer if confident that the property can be “appropriately safeguarded” as required by SCR 20:1.15(b)(4).8

    Conclusion: Mind the Details

    The disciplinary rules do not prohibit a lawyer from accepting cryptocurrency in payment of the lawyer’s fee, but the lawyer should:

    • ensure that the fee is reasonable under SCR 20:1.5(a);

    • ensure that the documentation requirements of SCR 20:1.5(b) are met;

    • ensure that the requirements of SCR 20:1.8(a) are met;

    • if receiving an advanced fee, ensure that alternative protection for advanced fees under SCR 20:1.5(g) is complied with or the advanced cryptocurrency fee is appropriately safeguarded as required by SCR 20:1.15(b)(4); and

    • refund any unearned portion of an advanced fee paid in cryptocurrency pursuant to SCR 20:1.16(d).

    In Case You Missed It: Read Past Ethical Dilemmas

    Ethical Dilemmas appears monthly in InsideTrack. Check out these topics from recent issues:

    Endnotes

    1 There are three recent ethics opinions from other jurisdictions which provide a useful discussion of the disciplinary implications of cryptocurrency transactions with clients; North Carolina 2019 Formal Ethics Opinion 5 (2019), City of New York Bar Association Formal Ethics Opinion 2019-5 (2019) and D.C. Bar Ethics Opinion 378 (2020). As always with opinions from other jurisdictions, lawyers must be careful to note differences in rules between Wisconsin and the other jurisdictions.

    2 See also SCR 20:1.5(a), ABA Comment [4]; “However, a fee paid in property instead of money may be subject to the requirements of Rule 1.8(a) because such fees often have the essential qualities of a business transaction with the client.”

    3 All three ethics opinions discussed in this article agree that Rule 1.8(a) applies when a lawyer accepts an advanced fee [see SCR 20:1.0(ag)], but the D.C. and New York opinions hold that fees paid for services already rendered, such as a client offering to pay a lawyer’s outstanding hourly bill in Bitcoin, do not trigger the requirements of 1.8(a). New York’s version of the rule differs in material ways from Wisconsin’s rule, but D.C.’s does not. Nonetheless, sound risk management may dictate that a Wisconsin lawyer who wants to accept cryptocurrency in payment of any fee adhere to the requirements of SCR 20:1.8(a), given the language of the Comments and that SCR 20:1.8(a) does not prohibit such a transaction, but merely requires additional documentation. How the Wisconsin Supreme Court will view SCR 20:1.8(a) in connection with cryptocurrency transactions is yet to be determined.

    4 SCR 20:1.5(b) states: “(1) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate as in the past. If it is reasonably foreseeable that the total cost of representation to the client, including attorney's fees, will be $1000 or less, the communication may be oral or in writing. Any changes in the basis or rate of the fee or expenses shall also be communicated in writing to the client. (2) If the total cost of representation to the client, including attorney's fees, is more than $1000, the purpose and effect of any retainer or advance fee that is paid to the lawyer shall be communicated in writing. (3) A lawyer shall promptly respond to a client's request for information concerning fees and expenses.”

    5 D.C’s version of rules 1.8(a) is substantially similar to Wisconsin’s rule.

    6 See, e.g., ABA Formal Ethics Op. 00-418, which in part discusses the requirement of reasonableness when a lawyer accepts stock in payment of the lawyer’s fees.

    7 Note that other transactions, such as a settlement payment, may be required to be held in trust – see, e.g., SCR 20:1.15(b)(1).

    8 The lawyer must also keep full and complete records of all trust property – see SCR 20:1.15(g).




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