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Cryptocurrency is now a valid, if somewhat rickety, form of payment. Consequently, it has entered the financial remedy practitioner zeitgeist as a relevant and important consideration. It raises particular issues when disclosed by a party, with various points of good practice arising to ensure dealing with the same effectively. But, what of it as a commodity to access legal services?
Would/does your chambers/firm accept payment in non-fiat, digital, crypto form? Would you, your clerking/accounts team know how to accept it or what to do with it once payment was made? If the answers to those are negative, is that commensurate with being a lawyer in the modern, digital world and is that the message you wish to project?
Recently, my firm obtained a legal funding order expressed in cryptocurrency. This was mainly because there was a digital source of funds contained in a wallet discreetly on a piece of hardware and it represented the cleanest means of satisfying our client’s legal funding need. In many ways, it was entirely unremarkable: a source of funds being deployed to purchase a commodity; in other ways, it raised various points of practice which we otherwise would not have needed to give thought to if being paid solely through fiat currency alone. Consider it in terms of both desire and necessity: what if your client or the other side wants to make a payment in cryptocurrency and what if receiving the payment in cryptocurrency is the only means available to meet the relevant need? Given those, and the ever-widening widespread use of digital currency, these points of practice may be of increasing relevance to each and every practitioner.
The starting point is an ethical one and it is caused by the ever-fluctuating nature of cryptocurrency itself. The fluctuation is only referable to a fiat currency comparison, and so purists of the digital currency age reject it as a form of criticism: it is to use a past relic as a stick to beat the arrival of the future. Nevertheless, given bottom lines and our everyday tethers to fiat currencies then so, too, must we consider it as a result.
Let us therefore accept that Bitcoin (‘XBT’) as against GBP fluctuates both a lot and over short periods of time. For example, in just one day, 1 XBT can have a value in GBP ranging from £44,309 to £42,907 (down 1.34%), in a week from £44,386 to £40,634 (up 4.79%), in a month from £44,386 to £37,193 (up 9.92%), in three months from £43,939 to £22,305 (up 52.68%), in a year from £43,939 to £5,327 (up 686.30%) and in five years £43,939 to £298 (up 14,090.92 %). (The figures used here are according to xe.com based on 11 April 2021.)
Put another way, if you had purchased the equivalent in Bitcoin instead of Toy Story 3 on DVD in 2010, you would today have US$10m.
The variance over a long time is/can be huge, mostly heading upwards, and the variance over shorter times can still be significant with 1 XBT changing in value in just one day by £1,402. The significance of this comes from being paid appropriately in money in money’s worth: with the precise time you exchange XBT becoming very relevant. For example, you could start a one-day hearing on legal funding where there is 1 XBT on a USB stick in dispute as an appropriate source to meet a £40,000 legal funding request, where the XBT currency vacillation referable to GBP throughout the day could render the 1 XBT anywhere between sufficient, insufficient or in-excess of the amount required to meet the legal fees in GBP.
This in itself creates an ethical dilemma for lawyers to consider. They may accept XBT in payment for services referable to a particular value in GBP for that payment to later, in short form, to become either more or less than the amount actually quoted. This is clearly a point that could apply to fiat currency as well as digital: what if one accepts payments in AED, where fluctuation can occur between 1 GBP to 4.44 to 5.2 AED (as it did between April 2020 and April 2021), with the main difference being the applicable length of time. The adjustment between quote, invoice, payment being received and payment being encashed is unlikely to be of any material significance here – contrary to the bouncy daily spiking of cryptoassets.
At what point, therefore, does a lawyer become in breach of their professional and ethical duties to the client (and the court) when receiving a payment that, by the time of encashment or conversion, becomes significant and/or materially different to the payment made, quoted or invoiced? What of a transaction in which the client and lawyer have competing and differing interests where the timing of payment could be materially beneficial or detrimental to either depending on the timing of payment or conversion? As the New York Bar Guidance states:
‘Because cryptocurrency can be subject to drastic market fluctuations, the lawyer may have an interest in conducting the representation so as to maximize the value of the client’s payment in cryptocurrency. The fact that the value of the lawyer’s fee paid in cryptocurrency could change from day-to-day could compromise the lawyer’s professional judgment on behalf of the client in the representation: for instance, the lawyer could have an incentive to delay or speed up the representation in order to be paid at a time when the value of cryptocurrency is at a high and the lawyer could immediately convert that cryptocurrency to cash. By the same token, the client has an opposing interest in making payments at a time when the value of cryptocurrency is lower. The same is not necessarily true of an ordinary transaction where the lawyer agrees to accept government-issued currency in exchange for legal services.’ ( Formal Opinion 2019-5: Requiring Cryptocurrency in Payment for Legal Services, p 6)
The USA has some State-specific guidance in New York, Nebraska and Columbia. In the latter, it was concluded:
‘We do not perceive any basis in the Rules of Professional Conduct for treating cryptocurrency as a uniquely unethical form of payment. Cryptocurrency is, ultimately, simply a relatively new means of transferring economic value, and the Rules are flexible enough to provide for the protection of clients’ interests and property without rejecting advances in technologies. So long as the fee agreement between a lawyer and her client is objectively fair and reasonable (and otherwise complies with Rules 1.5 and 1.8), and the lawyer possesses the requisite knowledge to competently safeguard the client’s digital currency, there is no prohibition against a lawyer accepting cryptocurrency from or on behalf of a client.’ (Opinion 378 Acceptance of Cryptocurrency as Payment for Legal Fees)
Nebraska, being the first of those States to issue guidance (in 2019: Nebraska Ethics Advisory Opinion for Lawyers No. 17-03) provided more specific criteria to be met in the attempt to avoid ‘charging unreasonably’ for attorney fees: there is a duty to 1) notify the client that the digital currency will be converted immediately into USD and not retained as a cryptoasset; 2) that such conversion will take place based on objectively appropriate market rates available at the forthwith time of conversion; and 3) crediting the account of the client immediately with the USD amount following 1) and 2) above. This means that the client is given credit for the USD amount of the digital currency at the specific period of the earliest available time for conversion based on an objective market rate at that time, and, following those steps, there could be a deficit, surplus or none depending on the applicable rate of exchange.
Between the earlier guidance of the Nebraska Bar in 2019 and the later of the Columbia Bar in 2020 there appears a principled differential: whereas the Nebraska Bar seeks to avoid ethical issues by not treating the digital currency as an asset in of itself but only with reference to the USD amount that can be purchased with it at the earliest possible time, at the Columbia Bar there seems a willingness to simply treat cryptoassets as just another form of currency where lawyers should be mindful of their professional obligations generally to their clients.
In England, there is guidance from HMRC on the applicable tax on cryptoassets under UK tax law and guidance from HM Treasury on compliance with anti-money laundering regulations when dealing with cryptoassets, but there is no specific guidance from either the Bar Council or Law Society either assisting or regulating practitioners who seek to receive payment in crypto form.
There is a distinction to be drawn between payments received from clients in satisfaction of invoices, payments on account for future work and fees received from third parties to satisfy either a judicially determined or agreed legal service need. A decision needs to be made in England as to whether specific duties are applicable to a legal team receiving payment in cryptocurrency – akin to Nebraska Bar – or whether it should just be considered another form of payment – akin to Columbia Bar. There is merit in both: one could argue that an asset could only be assessed in money’s worth as soon as it can be encashed following a hearing following a reasonable assessment of value during said hearing; alternatively, if the court has assessed a legal services need at a particular GBP point, why should a period of time not be allowed where during said time the cryptoasset should only be encashed when it reaches a specific price point on conversion that would enable the legal services need to be fully met? This requires guidance from either the court, the Law Society, Bar Council or subject to a specific Practice Guidance as to both best practice and applicable legal principle, where presently there is no guidance at all other than from elsewhere as cited above.
Depending on this assessment, it will then follow as to whether cryptoassets could be considered an appropriate payment for retainer or as funds otherwise on account. If the Nebraska Bar principle is followed, this would not be possible but under the Columbia Bar approach, it would subject to there being no inappropriate injustice caused to the client or otherwise breach of professional obligations in the transaction (see, for example, the detailed guidance given by the New York Bar (ibid, above) on steps that could be taken to ensure transparency and independence in any given transaction).
England needs to decide whether cryptoassets are just another form of currency or whether they are a thing to be managed and clients protected from by specific duties. We stand presently atop a blank canvas awaiting guidance from someone. The Nebraska Bar approach could reasonably be considered the most cautious, holding tightly onto the fiat-currency buoy amid the digital sea of cryptoassets; the Columbia Bar approach is arguably more mature, allowing clients and lawyers to trade in assets whilst complying with their applicable professional obligations.
The future for cryptoassets as a commodity for legal services in England remains yet to be written but nevertheless stands as an available and appropriate source for legal fees to be met. We just do not yet know how.
This article first appeared in Family Law Journal
Cryptocurrency is now a valid, if somewhat rickety, form of payment. Consequently, it has entered the financial remedy practitioner zeitgeist as a relevant and important consideration. It raises particular issues when disclosed by a party, with various points of good practice arising to ensure dealing with the same effectively. But, what of it as a commodity to access legal services?
Would/does your chambers/firm accept payment in non-fiat, digital, crypto form? Would you, your clerking/accounts team know how to accept it or what to do with it once payment was made? If the answers to those are negative, is that commensurate with being a lawyer in the modern, digital world and is that the message you wish to project?
Recently, my firm obtained a legal funding order expressed in cryptocurrency. This was mainly because there was a digital source of funds contained in a wallet discreetly on a piece of hardware and it represented the cleanest means of satisfying our client’s legal funding need. In many ways, it was entirely unremarkable: a source of funds being deployed to purchase a commodity; in other ways, it raised various points of practice which we otherwise would not have needed to give thought to if being paid solely through fiat currency alone. Consider it in terms of both desire and necessity: what if your client or the other side wants to make a payment in cryptocurrency and what if receiving the payment in cryptocurrency is the only means available to meet the relevant need? Given those, and the ever-widening widespread use of digital currency, these points of practice may be of increasing relevance to each and every practitioner.
The starting point is an ethical one and it is caused by the ever-fluctuating nature of cryptocurrency itself. The fluctuation is only referable to a fiat currency comparison, and so purists of the digital currency age reject it as a form of criticism: it is to use a past relic as a stick to beat the arrival of the future. Nevertheless, given bottom lines and our everyday tethers to fiat currencies then so, too, must we consider it as a result.
Let us therefore accept that Bitcoin (‘XBT’) as against GBP fluctuates both a lot and over short periods of time. For example, in just one day, 1 XBT can have a value in GBP ranging from £44,309 to £42,907 (down 1.34%), in a week from £44,386 to £40,634 (up 4.79%), in a month from £44,386 to £37,193 (up 9.92%), in three months from £43,939 to £22,305 (up 52.68%), in a year from £43,939 to £5,327 (up 686.30%) and in five years £43,939 to £298 (up 14,090.92 %). (The figures used here are according to xe.com based on 11 April 2021.)
Put another way, if you had purchased the equivalent in Bitcoin instead of Toy Story 3 on DVD in 2010, you would today have US$10m.
The variance over a long time is/can be huge, mostly heading upwards, and the variance over shorter times can still be significant with 1 XBT changing in value in just one day by £1,402. The significance of this comes from being paid appropriately in money in money’s worth: with the precise time you exchange XBT becoming very relevant. For example, you could start a one-day hearing on legal funding where there is 1 XBT on a USB stick in dispute as an appropriate source to meet a £40,000 legal funding request, where the XBT currency vacillation referable to GBP throughout the day could render the 1 XBT anywhere between sufficient, insufficient or in-excess of the amount required to meet the legal fees in GBP.
This in itself creates an ethical dilemma for lawyers to consider. They may accept XBT in payment for services referable to a particular value in GBP for that payment to later, in short form, to become either more or less than the amount actually quoted. This is clearly a point that could apply to fiat currency as well as digital: what if one accepts payments in AED, where fluctuation can occur between 1 GBP to 4.44 to 5.2 AED (as it did between April 2020 and April 2021), with the main difference being the applicable length of time. The adjustment between quote, invoice, payment being received and payment being encashed is unlikely to be of any material significance here – contrary to the bouncy daily spiking of cryptoassets.
At what point, therefore, does a lawyer become in breach of their professional and ethical duties to the client (and the court) when receiving a payment that, by the time of encashment or conversion, becomes significant and/or materially different to the payment made, quoted or invoiced? What of a transaction in which the client and lawyer have competing and differing interests where the timing of payment could be materially beneficial or detrimental to either depending on the timing of payment or conversion? As the New York Bar Guidance states:
‘Because cryptocurrency can be subject to drastic market fluctuations, the lawyer may have an interest in conducting the representation so as to maximize the value of the client’s payment in cryptocurrency. The fact that the value of the lawyer’s fee paid in cryptocurrency could change from day-to-day could compromise the lawyer’s professional judgment on behalf of the client in the representation: for instance, the lawyer could have an incentive to delay or speed up the representation in order to be paid at a time when the value of cryptocurrency is at a high and the lawyer could immediately convert that cryptocurrency to cash. By the same token, the client has an opposing interest in making payments at a time when the value of cryptocurrency is lower. The same is not necessarily true of an ordinary transaction where the lawyer agrees to accept government-issued currency in exchange for legal services.’ ( Formal Opinion 2019-5: Requiring Cryptocurrency in Payment for Legal Services, p 6)
The USA has some State-specific guidance in New York, Nebraska and Columbia. In the latter, it was concluded:
‘We do not perceive any basis in the Rules of Professional Conduct for treating cryptocurrency as a uniquely unethical form of payment. Cryptocurrency is, ultimately, simply a relatively new means of transferring economic value, and the Rules are flexible enough to provide for the protection of clients’ interests and property without rejecting advances in technologies. So long as the fee agreement between a lawyer and her client is objectively fair and reasonable (and otherwise complies with Rules 1.5 and 1.8), and the lawyer possesses the requisite knowledge to competently safeguard the client’s digital currency, there is no prohibition against a lawyer accepting cryptocurrency from or on behalf of a client.’ (Opinion 378 Acceptance of Cryptocurrency as Payment for Legal Fees)
Nebraska, being the first of those States to issue guidance (in 2019: Nebraska Ethics Advisory Opinion for Lawyers No. 17-03) provided more specific criteria to be met in the attempt to avoid ‘charging unreasonably’ for attorney fees: there is a duty to 1) notify the client that the digital currency will be converted immediately into USD and not retained as a cryptoasset; 2) that such conversion will take place based on objectively appropriate market rates available at the forthwith time of conversion; and 3) crediting the account of the client immediately with the USD amount following 1) and 2) above. This means that the client is given credit for the USD amount of the digital currency at the specific period of the earliest available time for conversion based on an objective market rate at that time, and, following those steps, there could be a deficit, surplus or none depending on the applicable rate of exchange.
Between the earlier guidance of the Nebraska Bar in 2019 and the later of the Columbia Bar in 2020 there appears a principled differential: whereas the Nebraska Bar seeks to avoid ethical issues by not treating the digital currency as an asset in of itself but only with reference to the USD amount that can be purchased with it at the earliest possible time, at the Columbia Bar there seems a willingness to simply treat cryptoassets as just another form of currency where lawyers should be mindful of their professional obligations generally to their clients.
In England, there is guidance from HMRC on the applicable tax on cryptoassets under UK tax law and guidance from HM Treasury on compliance with anti-money laundering regulations when dealing with cryptoassets, but there is no specific guidance from either the Bar Council or Law Society either assisting or regulating practitioners who seek to receive payment in crypto form.
There is a distinction to be drawn between payments received from clients in satisfaction of invoices, payments on account for future work and fees received from third parties to satisfy either a judicially determined or agreed legal service need. A decision needs to be made in England as to whether specific duties are applicable to a legal team receiving payment in cryptocurrency – akin to Nebraska Bar – or whether it should just be considered another form of payment – akin to Columbia Bar. There is merit in both: one could argue that an asset could only be assessed in money’s worth as soon as it can be encashed following a hearing following a reasonable assessment of value during said hearing; alternatively, if the court has assessed a legal services need at a particular GBP point, why should a period of time not be allowed where during said time the cryptoasset should only be encashed when it reaches a specific price point on conversion that would enable the legal services need to be fully met? This requires guidance from either the court, the Law Society, Bar Council or subject to a specific Practice Guidance as to both best practice and applicable legal principle, where presently there is no guidance at all other than from elsewhere as cited above.
Depending on this assessment, it will then follow as to whether cryptoassets could be considered an appropriate payment for retainer or as funds otherwise on account. If the Nebraska Bar principle is followed, this would not be possible but under the Columbia Bar approach, it would subject to there being no inappropriate injustice caused to the client or otherwise breach of professional obligations in the transaction (see, for example, the detailed guidance given by the New York Bar (ibid, above) on steps that could be taken to ensure transparency and independence in any given transaction).
England needs to decide whether cryptoassets are just another form of currency or whether they are a thing to be managed and clients protected from by specific duties. We stand presently atop a blank canvas awaiting guidance from someone. The Nebraska Bar approach could reasonably be considered the most cautious, holding tightly onto the fiat-currency buoy amid the digital sea of cryptoassets; the Columbia Bar approach is arguably more mature, allowing clients and lawyers to trade in assets whilst complying with their applicable professional obligations.
The future for cryptoassets as a commodity for legal services in England remains yet to be written but nevertheless stands as an available and appropriate source for legal fees to be met. We just do not yet know how.
This article first appeared in Family Law Journal
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