Some considerations about Bitcoin for lawyers

Bitcoin is a virtual currency (or crypto-currency) having an equivalent value in real currency (but with great fluctuation) not backed by any country’s central bank or government. The origin of the currency are uncertain and related back to late 2008/early 2009. See more at Man said to create bitcoin denies it; Bitcoin: A Peer-to-Peer Electronic Cash System; Wikipedia. Bitcoin can be traded for goods or services with vendors who accept Bitcoin as payment. Bitcoin-to-Bitcoin transactions are made by anonymous digital exchanges between Bitcoin users, each one having a digital wallet. Bitcoin is becoming increasingly popular because it allows users to do transactions, buy goods and services, exchange money across borders without involving banks, credit card issuers or other third parties (therefore practically at no cost). See more on this.

Governments around the world are looking at the trend under several aspects: (i) money laundering; (ii) taxation (e.g., Canada, Italy, and Norway); (iii) licensing perspective (e.g. New York has recently published a first draft of regulations (including license requirements.)

The IRS treats virtual currency in two ways. On one side, as property. General tax principles applicable to property transactions apply to transactions using virtual currency. In addition, a “payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.” See http://www.irs… On the other side, as real money for federal tax purposes: virtual currency paid by an employer as remuneration for services constitutes wages for employment tax purposes and if received by independent contractors for their services, it constitutes self-employment income (“the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax)”.

Coming to the significance for lawyers, a “growing number of [US] lawyers are making the jump into virtual currency and accepting client fees in the form of bitcoin … despite a maze of unanswered professional, legal and ethical questions about the emerging digital money” (http://www.law360…, http://newsbtc…). Several sources confirm the trend. See http://jurispage…; http://www.abajournal...

The same seems to be true for several other countries, e.g. the UK , Italy, Germany, Spain, Canada, and Israel.

Leaving aside privacy and security issues — which are also a concern as hackers increasingly target lawyers and digital transactions, including bitcoin users, exchanges and online currency wallets — what are the ethical implications of accepting bitcoins in payment of legal fees?

While it is reported that the Israeli Bar specifically approved the use of bitcoins for lawyers, in Canada “[s]ome lawyers have intimated lately that Canadian attorneys cannot accept bitcoin as payment for services” because bitcoin would be susceptible to money laundering and terrorist financing risks. Other Canadian lawyers (Ontario) vehemently objected to this assumption: there would be nothing in the Law Society of Upper Canada’s by-laws prohibiting accepting bitcoins for legal fees “provided that her record-keeping responsibilities are met”(and the Law Society is reported to have informally confirmed this).”

And in the US? Is it ethical for US lawyers to accept bitcoins as legal fees? Probably yes, but with some caveats. Bitcoin poses a number of ethical and legal issues.  First, lawyers may not counsel or assist clients in criminal activity. When lawyers accept cash payments from their clients two issues arise: reporting of cash payments under under 26 U.S.C. §6050I(d) and IRS Form 8300 and participation in criminal activity, particularly money laundering.  Second, when lawyers engage in business transactions with clients, they must comply with the strict requirements of ABA Model Rule 1.8(a).  Ordinary fee agreements are not subject to Rule 1.8(a) but agreements in which lawyers take an interest in client property are subject to the rule.  Based on the recent IRS ruling mentioned above, bitcoin payments are treated as property and therefore may be subject to Rule 1.8(a).  Third, legal fees and expenses must be reasonable.  See ABA Model Rule 1.5(a).   The value of bitcoins has fluctuated widely in recent months, from a high of almost $1200 per bitcoin at the end of 2013 to a current value just under $600.   Unless carefully structured, bitcoin payments could raise issues of unreasonable fees or expenses due to value fluctuation.  Finally, when lawyers receive retainers or other funds that must be held in trust, issues arise about how bitcoin transactions can be handled to comply with trust rules. For more information, see Nathan Crystal, Accepting Bitcoin? In South Carolina Bar, September 2014 (forthcoming). Also, we will publish other blogs in technethics to deal with each of these issues in greater depth.

 

For more information contact Nathan M. Crystal

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