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November 21, 2019 Articles

The Ethics of Accepting Cryptocurrency as a Payment

How does payment in cryptocurrencies potentially implicate two ethical obligations for lawyers?

By Nika Gigashvili

The role of cryptocurrencies in legal practice has expanded exponentially in the past few years. Simultaneously, cryptocurrencies have emerged as a popular and more reliable payment system throughout the world. Cryptocurrency is a virtual currency that is traded online. It may be considered an electronic asset that can be purchased, sold, or otherwise transferred through the network. Because cryptocurrency is created via peer-to-peer computer networks, it is not backed by any government. For the reasons explored in this article, lawyers may face ethical questions about whether or not to accept cryptocurrency as a payment for the legal services they provide as cryptocurrency’s technology and applications improve and become more widespread.

Payment in cryptocurrencies may primarily implicate two ethical obligations for lawyers. First, there is a prohibition against an agreement on unreasonable fees under ABA Model Rule 1.5. Second, cryptocurrency payments may also implicate the limitation on entering into a business transaction with a client under ABA Model Rule 1.8.

In the absence of concrete guidance, Nebraska was the first state to weigh in, primarily focusing on the requirements of the Nebraska equivalent of ABA Model Rule 1.5 to promulgate ethical rules in cryptocurrency transactions. Nebraska Lawyer’s Advisory Comm., Ethics Advisory Op. for Lawyers No. 17-03. The opinion specifically advised lawyers to convert digital currency into U.S. dollars immediately upon receipt. According to the opinion, considering the volatility of cryptocurrency prices, prompt sale of the cryptocurrency will ensure that the lawyer does not overcharge the client. However, the New York City Bar Association (NYCBA) went further and opined that lawyers must comply with ABA Model Rule 1.8(a) when they accept cryptocurrency as a payment. NYCBA, Comm’n on Prof’l Ethics, Formal Op. 2019-5. ABA Model Rule 1.8(a) states that a lawyer shall not enter into a business transaction with a client or knowingly acquire an interest adverse to a client unless it is excepted under the rule. Specifically, the New York City Bar Association found that a lawyer must meet all the requirements of ABA Model Rule 1.8(a) when the terms of the agreement establish payment in cryptocurrency as the only payment method.

The Nebraska Lawyer’s Advisory Committee’s goal is to protect clients from unreasonable fees. However, the requirement to convert cryptocurrencies immediately upon payment is ineffective to reach the result. The Nebraska opinion fails to account for the fact that the client incurs cost upon payment, and the change in the cryptocurrency price would not affect the client’s cost basis on the transactions already performed. The client’s cost is also independent of the lawyer’s timing of conversion. For example, assume that a contract provides for the payment of 1 BIT (bitcoin) on January 1, 2020, and the price on January 1, 2020, is $200 per bitcoin. Once the client transfers 1 BIT from his wallet to the lawyer’s wallet, he incurs a cost in the amount of $200. If the lawyer converts 1 BIT into U.S. dollars a week later when the price has increased to $300, the lawyer receives $300, but the client’s cost does not change. The client’s cost on January 1, 2020, is also unaffected by the lawyer’s decision to retain bitcoin indefinitely.

Similarly, the requirement to convert immediately upon payment fails to protect the client even in the case of monthly fee payments. The Nebraska Lawyer’s Advisory Committee’s caution toward cryptocurrency is mostly based on the volatility of its price. In multi-payment fee contracts, if the price of 1 BIT changes every month, the client would indeed pay different amounts of dollars for the same service. But the lawyer’s obligation to convert bitcoin into dollars would not affect the client’s cost. Therefore, the rule promulgated by the Nebraska Lawyer’s Advisory Committee would not prevent the lawyer from overcharging the client.

In a way, the New York City Bar’s opinion resolves the aforementioned issue, by focusing on the lawyer’s prepayment obligation instead of the post-payment period. However, the New York City Bar erroneously qualified the payment in cryptocurrency as a business transaction because cryptocurrencies do not resemble the complex stocks, security interests, or similar complex transactions.

ABA Model Rule 1.8(a) applies to multifaceted transactions between a lawyer and a client. Usually, such transactions involve stocks, security interest in the client’s property, mortgage, and goods. NYCBA Formal Op. 2003-03 (2000); NYCBA Formal Op. 88-7 (1988); Murstein v. Caporella, 619 F. App’x 832 (11th Cir. 2015); N.Y. State Bar Ass’n, Comm. on Prof’l Ethics, Ethics Op. 1156 (2018); ABA Model Rule 1.8 cmt. 1. These transactions are more closely scrutinized because they implicate issues outside a mere transfer of ownership between the lawyer and the client. The rationale is that each of these modes of payment creates a separate set of rights that requires the application of complex rules and knowledge. Thus, a lawyer, having specialized knowledge, may easily gain an advantage in negotiating fee arrangements. However, transactions involving cryptocurrency do not create such complex issues. The only issue is the exchange rate and, therefore, the timing of payment. The lawyer does not possess superior knowledge to control or to predict the price fluctuation, nor is the lawyer in a better position to negotiate a favorable exchange rate. The New York City Bar’s main argument is that exchange rates involve complex issues that are beyond the grasp of an average client. But it is generally not the case. For instance, the transaction fee—which the New York City Bar considers to be a part of the complexity—is a very simple and automatic process in bitcoin transactions.

Consequently, the best solution is to make ABA Model Rule 1.5 applicable to all cryptocurrency payments. In his Statement on Cryptocurrencies and Initial Coin Offerings (2017), Securities and Exchange Commission (SEC) Chairman Jay Clayton noted that cryptocurrencies are not securities. While the Internal Revenue Service (IRS) treats virtual currencies as “goods,” the courts have qualified cryptocurrencies as “money” or, at least, as a medium of exchange. IRS Bull. 2014-16; United States v. Petix, No. 15-CR-227A (W.D.N.Y. 2016); United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014); SEC v. Shavers, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013). Similarly, a payment in cryptocurrency should be treated as a payment in money under ABA Model Rule 1.5. To match cryptocurrencies with the qualities of true currency even further, attorneys and clients may also establish limits on the price to account for some degree of price volatility and protect each party’s interest.

By following ABA Model Rule 1.5 and taking these steps, an agreement to pay the legal fee in cryptocurrency will be subject to the reasonableness test noted under comment 3. This approach will balance interest and flexibility for lawyers and clients to exchange payment through cryptocurrency. In addition, it will better protect clients from the volatility of cryptocurrency prices. Even when the agreement provides for the payment of a fixed amount of cryptocurrency, reasonableness would require a price adjustment in the case of extreme changes because legal fees must be reasonable not only at the time of the conclusion of the contract but in operation too. Clark v. GM, LLC, 161 F. Supp. 3d 752, 760 (W.D. Mo. 2015); Greenbelt Homes, Inc. v. Nyman Realty, Inc., 48 Md.App. 42, 49 (1981). In long-term contracts, lawyers would be required to allow price adjustment in case the exchange rate exceeds a certain limit. But when a contract fails to protect the client in this manner, the courts will have the power to assess the reasonableness of legal fees paid in cryptocurrencies without qualifying the payment as a business transaction.

Nika Gigashvili is a third-year law student at Penn State Law in State College, Pennsylvania.

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