Over the past decade, the use of so-called cryptocurrency has increased substantially for business transactions and for personal investment. Not surprisingly, lawyers have been involved in these developments, and this has raised a number of ethical issues. A number of jurisdictions have issued advisory opinions on the subject, including Nebraska (Advisory Opinion No. 17-03), New York City (N.Y. Formal Opinion 2019-5), North Carolina in 2019 (Formal Opinion Oct. 25, 2019), the District of Columbia (Opinion 378), Virginia (Draft Opinion 1898), and Ohio (Opinion 2022-07).

The opinions issued by these various jurisdictions deal with a number of questions:

1. Is it ethical for a lawyer to accept cryptocurrency as payment for services?
2. If a lawyer accepts cryptocurrency as payment for services is it subject to Rule 1.8(a) as a business transaction between a lawyer and a client?
3. If a lawyer accepts cryptocurrency as payment for services, may the lawyer retain the payment as cryptocurrency and, if she may retain it, when and how is it to be valued?
4. May cryptocurrency be deposited in a lawyer’s trust account?
5. How is Rule 1.15 on protection of client property to be applied to cryptocurrency?
6. May a lawyer hold cryptocurrency on behalf of a client for escrow and other purposes?

We will look at how these advisory opinions answer each of these questions below.

Before looking at the answers to these questions, it is useful to look at some definitions of cryptocurrency. N.Y. C. Op. 2019-5 defines it in this manner:

Cryptocurrency has been described as a form of virtual “currency” that exists in electronic form. Cryptocurrency is employed as a means of peer-to-peer exchange whereby users log transfers on an electronic distributed “ledger book” known as the “blockchain” which records the transfer of the cryptocurrency from the sender to the recipient. A record of all changes is stored on each node of the blockchain network, and any additional change must be confirmed against existing copies of the record. Several options for cryptocurrency storage exist, but one common means is a software “wallet,” where the owner of the cryptocurrency has a “public key” which is similar to an account number and a “private key” which is a code known only to the sender and used to transfer the cryptocurrency from sender to recipient.

Unlike actual currency such as U.S. dollars, cryptocurrency is not backed by any government. Any transaction to convert cryptocurrency to actual currency can involve a number of variables. For instance, depending on the type of cryptocurrency being exchanged, certain processing fees may apply. Also, the market for cryptocurrency has been volatile, with significant surges and drops in any given month. Thus, an agreement to value a transaction in cryptocurrency or convert cryptocurrency into traditional currency on a certain date carries potential risks for both sides. Finally, the regulatory scheme for cryptocurrency is unclear and state and federal agencies are largely still determining how to best regulate cryptocurrency.

The definition provided by Ohio in Op. 2022-07 is:

Unlike actual currency such as U.S. dollars, cryptocurrency is not backed by any government. Any transaction to convert cryptocurrency to actual currency can involve a number of variables. For instance, depending on the type of cryptocurrency being exchanged, certain processing fees may apply. Also, the market for cryptocurrency has been volatile, with significant surges and drops in any given month. Thus, an agreement to value a transaction in cryptocurrency or convert cryptocurrency into traditional currency on a certain date carries potential risks for both sides. Finally, the regulatory scheme for cryptocurrency is unclear and state and federal agencies are largely still determining how to best regulate cryptocurrency.

Some of the essential aspects of cryptocurrency that are different from fiat currency (currency issued by a sovereign government) is the fact that is privately created, has no governmental backing, does not exist in a traditional physical form, and has a changing value that depends upon volatile markets.

The first question presented by the advisory opinions is whether a lawyer may accept cryptocurrency in payment for legal services or in escrow for client. With the exception of North Carolina, all jurisdictions noted above answered “yes.”

The second question is whether, if a lawyer may accept a client payment in cryptocurrency, that payment is a transaction subject to Rule 1.8(a). Rule 1.8(a) requires that when a client enters into a “business” arrangement with a client, the lawyer must ensure that certain client protections are in place and that the transaction is fair to the client. Generally, the opinions answer that an agreement to pay future fees to a lawyer or paying an advance fee to a lawyer in cryptocurrency does fall within the purview of Rule 1.8. The New York City opinion gives the most detailed analysis of this issue. It poses three hypotheticals involving advance payments:

1. The lawyer agrees to provide legal services for a flat fee of X units of cryptocurrency, or for an hourly fee of Y units of cryptocurrency.
2. The lawyer agrees to provide legal services at an hourly rate of $X dollars to be paid in cryptocurrency.
3. The lawyer agrees to provide legal services at an hourly rate of $X dollars, which the client may, but need not, pay in cryptocurrency in an amount equivalent to U.S. Dollars at the time of payment.

The opinion notes that under the New York version of Rule 1.8(a), an agreement for payment in cryptocurrency would constitute a business transaction under Rule 1.8(a) in the first and second hypotheticals, but not in the third:

In the third scenario, however, where the client is simply given the option of paying in cryptocurrency based on some rate of exchange existing at the time, we do not believe that Rule 1.8(a) applies. In this scenario, the fee agreement is, in our view, an ordinary one where the lawyer is simply agreeing as a convenience to accept a different method of payment but the client is not limited to paying in cryptocurrency if it is not beneficial to do so. The lawyer and the client do not have to resolve terms as to which they may have differing interests. Cryptocurrency functions merely as an optional way of transmitting payment. Cf. NYSBA Formal Op. 1050 (2015) (recognizing that payment of legal fees by credit card as permissible and generally accepted).

The District of Columbia opinion and draft Virginia opinions generally follow and cite the New York City opinion.

The third question, regarding when and how cryptocurrency is to be valued to comply with the reasonableness requirements of Rule 1.5 and the fairness requirements of Rule 1.8(a), also requires looking at several hypothetical situations. The difficulty with valuation is caused by the volatility and market-based value of cryptocurrencies.

The New York City opinion explains the dangers posed by market volatility in cryptocurrency:

The lawyer’s interest is in negotiating terms that are most favorable to the lawyer and the client holds the opposite interest. There may also be differing interests even after the representation commences. 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.

The opinions differ on how this problem should be handled. The Nebraska opinion requires a lawyer to convert the cryptocurrency immediately upon receipt:

To mitigate or eliminate the risk of volatility, it is possible to value or convert bitcoins and other digital currencies into U.S. dollars immediately upon receipt. The conversion rate would be market based such as from an exchange or based upon the New York Stock Exchange Price Index, for example. In this way, the bitcoins would serve to credit the client’s account and there would be no risk to the client of value fluctuation. As part of this process, a law office would need to disclose to the client that the firm would not be retaining the bitcoins but converting them to cash upon receipt. Through this method, the client is informed that an increase in the value of their bitcoins will not additionally fund their outstanding account. In addition, clients need not be concerned if the value of the bitcoins they sent for payment suddenly dropped.

Such a process should include (1) notifying the client that the attorney will not retain the digital currency units but instead will convert them into U.S. dollars immediately upon receipt; (2) converting the digital currencies into U.S. dollars at objective market rates immediately upon receipt through the use of a payment processor; and (3) crediting the client’s account accordingly at the time of payment. Providing the client the notifications described in this opinion can best be accomplished by including the appropriate notifications in the fee agreement between lawyers and client. Under this framework, the client is properly informed, the use of bitcoins as payment would not result in unconscionable fees to the attorney, and the receipt of bitcoins as payment to the attorney would conform to the Nebraska Code of Professional Conduct.

The draft Virginia opinion takes a different approach:

At What Point in the Engagement is “Fairness” and “Reasonableness” to be Determined?

This question is important when analyzing the fairness of a fee arrangement in which a volatile asset like cryptocurrency is being offered for services not yet rendered. In ABA Formal Opinion 00-418, supra, concerning accepting stocks or partial ownership of a client in lieu of fees the committee opined that:

For purposes of judging the fairness and reasonableness of the transaction and its terms, the Committee’s opinion is that, as when assessing the reasonableness of a contingent fee, only the circumstances reasonably ascertainable at the time of the transaction should be considered.

The District of Columbia Bar agrees with this approach:

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.

See also Restatement (3d) 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 facts later develop.”).

Therefore, any fee arrangement that charges fees in cryptocurrency, or that allows or requires a client to either provide an advance fee or accept a settlement payment from a party in cryptocurrency, should be assessed for fairness at the time that it is agreed upon, based on the facts then available.

(Emphasis added.)

As to whether cryptocurrency may be deposited in a lawyer’s trust account, the opinions agree that it may not because it is a form of property that banks and other financial institutions do not accept into such accounts. Since the opinions agree that a lawyer may accept cryptocurrency in payment for services or in escrow, but may not be deposited in a trust account, then lawyers accepting cryptocurrency must fully comply with the requirements of Rule 1.15 on protection of client property. Although states have different versions of Rule 1.15, all agree that lawyers must take reasonable steps to protect the property in their safekeeping and keep it separate from personal or firm property. The intangible nature of cryptocurrency makes this a difficult task.

The Ohio opinion, issued in August 2022, discusses how lawyers should protect cryptocurrency they receive:

There are several recommended methods to safeguard cryptocurrency held in escrow (e.g., cold storage wallets, encryption and back up of private keys, multi-signature accounts) that should be thoroughly researched and carefully considered by lawyers before accepting cryptocurrency. Additionally, a lawyer should inform clients of the apparent and inherent risks of holding and transferring cryptocurrency and explain the steps the lawyer will undertake to safeguard the client’s property. Prof.Cond.R. 1.4(a).

The District of Columbia opinion also provides a warning to lawyers:

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.

The Ohio opinion also warns lawyers who accept cryptocurrency in escrow for clients that they must be concerned about the possibility of participation in illegal activities:

Because of the relative anonymity of cryptocurrency transactions, the use of a lawyer’s escrow services may be sought after by persons seeking to engage in money laundering or other fraud. In order to prevent unknowingly assisting in illegal activity, a lawyer should require a detailed written escrow agreement that identifies the parties to the transaction (possibly using know-your-customer identity verification methods) as well as the underlying transaction for which the escrow account will be used. See Prof.Cond.R. 1.2(d)(1).

Any lawyer considering accepting cryptocurrency for any purpose should go back to the original opinions and study them carefully. They should also keep informed of other and new relevant authority in the jurisdictions in which they practice. The ethical implications of accepting cryptocurrency are complex, and the treatment of these issues varies among jurisdictions. We may expect this complexity and variation to cause confusion and problems for lawyers who do not take adequate steps to learn the changing rules in this field.

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References:

1. Although fiat currencies have changing values as compared to other fiat currencies, their values do not change in their own jurisdiction except when the government itself chooses to alter the value of the currency. Cryptocurrency values change based not upon government intervention, but, rather, market fluctuations.
2. The North Carolina opinion permits lawyers to take a “flat fee” in cryptocurrency, but prohibits a lawyer from taking cryptocurrency as an advanced payment:” A flat fee is a “fee paid at the beginning of a representation for specified legal services on a discrete legal task or isolated transaction to be completed within a reasonable amount of time[.]” 2008 FEO 10. With client consent, a flat fee is considered “earned immediately and paid to the lawyer or deposited in the firm operating account[.]” Id. Rule 1.5(a) prohibits a lawyer from making an agreement for, charging, or collecting an illegal or clearly excessive fee. Comment 4 to Rule 1.5 states that “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…” and “An advance payment is “a deposit by the client of money that will be billed against, usually on an hourly basis, as legal services are provided[.]” 2008 FEO 10. The advance payment is “not earned until legal services are rendered” and therefore must be deposited in the lawyer’s trust account, with the unearned portion of the advance payment refunded to the client upon termination of the client-lawyer relationship. Id. Virtual currency is property and not actual currency; accordingly, virtual currency cannot be deposited in a lawyer trust account or fiduciary account in accordance with Rule 1.15-2. Instead, virtual currency – and all other non-currency property received as entrusted property – must be “promptly identified, labeled as property of the person or entity for whom it is to be held, and placed in a safe deposit box or other suitable place of safekeeping.” Rule 1.15-2(d)… 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. “
3. N.Y Rule 1.8(a), as quoted by the opinion states: Rule 1.8(a), which is derived from judicial decisions under the common law of contracts, provides as follows:
   A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise professional judgment therein for the protection of the client, unless:
   (1) the transaction is fair and reasonable to the client and the terms of the transaction 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. Note that the Kansas and Missouri versions of 1.8(a) are somewhat different.
4. The Virginia draft opinion states that a client payment of an earned fee does not fall under Rule 1.8(a): “Rule 1.8(a) does not apply if the lawyer accepts cryptocurrency as payment for an earned fee.” Presumably, in this case the valuation of the payment is done at the time it is made so that there is no volatility as there would be in an advance payment or an agreement to pay in the future.

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