The Virginia Supreme Court approved Legal Ethics Opinion 1898 on September 19, 2022, permitting the receipt of cryptocurrency as advance payment for legal services by an attorney. Notwithstanding the relative newness of “consideration,” as in transactions involving an interest in a company or other property, concerns revolve around fairness (to the customer) and informed consent.
In particular, the Standing Committee on Legal Ethics concluded that an Attorney may accept client property, including cryptocurrency, offered as advance payment for the Attorney’s services, provided the Attorney’s fee is reasonable under Rule 1.5 and this commercial transaction with the client satisfies the Requirements of Rule 1.8(a), namely that the transaction is fair and reasonable to the customer, the transaction and the terms are disclosed fully in writing in a manner that the customer will understand, the customer is advised of the opportunity to consult with an independent Advisor to advise, and the consent of the client is confirmed in writing. And as with any other client property, where cryptocurrency is held by counsel as an upfront fee, the requirements of Rule 1.15 regarding the safekeeping of client property apply and require that counsel take reasonable steps to safeguard the client’s property against loss, theft and damage secure or destruction. (Note that such custody is not insurance against fluctuations in value or market volatility).
The hypothesis tested by the committee considered the example of an attorney hired by a client to pursue a contested divorce. In response to the attorney’s request for an upfront fee of $20,000 to complete the mandate, the client is offering the current market equivalent in bitcoin to pay the $20,000 upfront fee.
Before turning to the example, it’s helpful to understand the following:
- Cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. For example, Bitcoin is one of many types of digital or virtual currencies.
- This digital asset is based on a network that is distributed among a large number of computers. This decentralized structure allows the asset to exist outside of the control of governments and central authorities.
- Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It’s a peer-to-peer system that allows anyone to send and receive payments. Rather than carrying physical money around, cryptocurrency payments simply exist as digital entries in an online database (public ledger) that describes specific transactions.
- Cryptocurrency advantages include cheaper and faster money transfers and decentralized systems that don’t collapse at a single point of failure.
- The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities and use in criminal activities.
In response to the hypothesis, the Standing Committee answered the following questions:
1. What are the ethical responsibilities of a lawyer who accepts cryptocurrencies as an upfront payment for legal services??
A lawyer may accept cryptocurrencies as an advance payment for services yet to be rendered. However, the lawyer must ensure that the fee agreement is reasonable and objectively fair to the client and has only been accepted by the client after being informed of its implications and given an opportunity to seek the advice of an independent lawyer, which is all the case is confirmed in writing. In addition, if the attorney accepts cryptocurrency as an advance, the attorney must also take competent and appropriate safeguards to safeguard the client’s property.
That is much.
Firstthe lawyer must ensure that the proposed fee (and how it is to be paid) is reasonable in the circumstances and is properly explained to the client. See Rule 1.5. For example: “Unless an agreement is reached between attorney and client as to when the value of the cryptocurrency payment will be determined, attorney could . . . received an unreasonable stroke of luck due to extreme overpayment – an inflated and unreasonable charge for the value of the legal service.”
Second, paying an upfront fee using cryptocurrency is treated as a “business transaction” with a customer. This triggers a solicitor’s requirement to comply with Rule 1.8(a), which provides that:
An Attorney shall not transact business with a client or knowingly appropriate property, possessions, securities or other financial interests to the detriment of a client unless:
(1) the transaction and the terms on which attorney is acquiring the interest are fair and reasonable to the client and are fully disclosed to the client and communicated in writing to the client in a manner that the client can reasonably understand;
(2) the Customer will be given a reasonable opportunity to obtain independent legal advice in relation to the Transaction; and
(3) The customer agrees to this in writing.
The Standing Committee quoted approvingly from DC Bar Ethics Committee Opinion 378 (June 2020), which recommends the following:
An attorney who accepts cryptocurrencies should consider including a clear statement of how the client will be billed (i.e. in dollars or cryptocurrency); whether and how often the Cryptocurrency held by Attorney is calculated in dollars or otherwise corrected or adjusted for accounting purposes and whether, after such accounting, market increases and decreases in the value of the Cryptocurrency create obligations for either party; how responsibility for paying cryptocurrency transfer fees (if any) is assigned; which cryptocurrency exchange platform is used to determine the value of the cryptocurrency upon receipt and in the case of prepayments with progressive representation (ie with fees earned) and upon their termination; and who is responsible if the cryptocurrency accepted by the attorney to settle the client’s claims depreciates and fails to satisfy third-party liens.
2. Can the attorney keep the cryptocurrency in its digital form or must it be converted into US currency and deposited in the attorney’s escrow account as required by Rule 1.15(a)??
Unless otherwise agreed, the lawyer can Store cryptocurrency in its digital form. Since the payment does not need to be converted into US currency, there is no obligation to deposit monies under Rule 1.15(a) into the Attorney’s escrow account.
3. Is the acceptance of Cryptocurrencies by the Attorney as a prepayment a “commercial transaction” under Rule 1.8(a)?
Yes, the attorney’s acceptance of cryptocurrency as an advance fee is a “business transaction” subject to Rule 1.8(a). Note: Rule 1.8(a) does Not apply when the attorney accepts cryptocurrency as payment for a “earned fee”. (But it must still be reasonable, as set out in Rule 1.5).
4. What actions must the attorney take to hold the cryptocurrency offered to the attorney as an advance fee??
If cryptocurrency is used to pay an advance fee, the attorney should retain the cryptocurrency as the client’s property with the care of a professional trustee and take appropriate security measures to protect the client’s property from theft, loss, destruction or misdelivery. Indeed, the attorney’s competency duty when adopting cryptocurrency requires that they have the knowledge and skills to understand the risks associated with this technology and to guard against the many ways in which cryptocurrency can be stolen or lost. See Rule 1.1, cmt. 6 (the lawyer “should pay attention to the benefits and risks of relevant technology”).
key to take away: Cryptocurrency provides an acceptable method for a client to pay for legal services. However, it is not without risk, and a lot needs to be done early in the engagement to ensure that problems do not arise. In converting the customer’s payment for engagement into a business transaction, LEO 1898 requires extensive planning and disclosure to successfully manage the ethical issues. Enough that an attorney should carefully consider whether to require the upfront payment to be made in US currency (and let the client determine if and when the cryptocurrency is converted).
Jeff Geiger advises attorneys and law firms on issues of ethics, attorney discipline, wrongdoing and professional responsibility. If you have any questions about this post or any other issue, please contact Jeff at (804) 783-7248 or [email protected].
Cryptocurrency ethics update after Cryptoexchange FTX bankruptcy
If there was any doubt about the complications of conducting a business transaction with a client that involves paying a fee using cryptocurrency, recent troubles in the cryptocurrency market have made them clear. Cryptocurrency exchange FTX filed for Chapter 11 bankruptcy protection on Nov. 11, 2022, with filings showing it owes over $3 billion to its top fifty creditors. That’s the case, according to an external valuation of $32 billion. The impact on the crypto market will be felt over the coming months and years, accompanied by government investigations, extensive civil litigation, and likely massive losses for customers.
For lawyers and their clients, this means increased attention got to be in place to meet the requirements for starting a business transaction with a client under Rule 1.8(a) which requires:
(1) the transaction and the terms on which attorney is acquiring the interest are fair and reasonable to the client and are fully disclosed to the client and communicated in writing to the client in a manner that the client can reasonably understand;
(2) the Customer will be given a reasonable opportunity to obtain independent legal advice in relation to the Transaction; and
(3) The customer agrees to this in writing.
To that end, lawyers must clarify – preferably in writing – how the cryptocurrency fee will be handled, including a discussion of the consequences of (and responsibility for) volatility, fluctuations in valuations, etc.
