This essay was creatively published in the Association of Business Trial Lawyers (ABTL) – Orange County Report, Volume XX, No. 1, Spring 2018
The correct use of amicable media, blogging, cloud computing, and crowdfunding are just a few of the ever-growing tech-related issues that have reliable implications for attorneys. We contingency supplement to the list the cryptocurrency disturb acclimatisation the investment markets. Regardless of your personal feelings towards Bitcoin, Ethereum, Ripple, etc., clearly something big is happening, and attorneys need to compensate courtesy – quite because profession ethics panels are starting to take notice and poignant reliable implications exist for any profession who accepts fees in cryptocurrency.
What is Cryptocurrency?
If you ask a standard profession to explain cryptocurrency, they will probably know that: (1) it is a form of digital banking that creates it easier to send supports between two parties; (2) it is not “issued” or “backed” by any executive bank or authority, digest it reduction disposed to supervision division and protection; and (3) the inlet of the sell creates them private and confidential. But the bargain typically ends there because of cryptocurrency’s newness and strenuous technology. Having a simple bargain of how this new record works is critical to know because so many people across industries cruise it revolutionary.
Central to cryptocurrencies like Bitcoin is the blockchain it uses to store an online bill of all the sell that have ever been conducted using the currency. The best way to suppose the system in place is to think of a highly encrypted, publicly available “spreadsheet” that is not stored in any singular location, but is common and repetitious by millions of computers. As sell take place, the spreadsheet is frequently updated and ceaselessly reconciled. The finished transaction is available into blocks and eventually into the blockchain. The cryptocurrency’s users themselves countenance the sell whenever one chairman pays another for products or services. The transparent advantage of the record is that the sell discharge the need for a third celebration to routine or store payments. Consequently, cryptocurrency sell are finished with minimal estimate fees and equivocate the fees charged by most banks.
While bland speculators might invest in cryptocurrency, it is the proliferation of blockchain record that has led to the bang in this industry. Apart from the use in cryptocurrency transactions, other industries and governments are anticipating many intensity uses for blockchain’s conceptual horizon as a secure, digital choice to more expensive, bureaucratic, time-consuming processes. In healthcare, for example, blockchain infrastructure is now being used for clinical hearing data, regulatory compliance, and electronic medical records.
What Are the Risks and Benefits Associated with Cryptocurrency Transactions?
There are, of course, a litany of reasons because attorneys should equivocate cryptocurrency sell with clients. For starters, the marketplace (where expansion is formed almost wholly on speculation) is disposed to furious cost swings. In Jan 2017 alone, the cost of one Bitcoin fluctuated between highs of $17,101 and lows of $9,477. From Dec 16, 2017 to Feb 6, 2018, Bitcoin tumbled again from $19,343 to $6,914. Volatility stays one of the defining characteristics as an investment.
Fueling this sensitivity is the hack-prone story of the industry. While the cryptocurrency courtesy is not alone in the bearing to hacking, distinct with hacks involving normal financial institutions, it is mostly unfit to redeem stolen cryptocurrency because blockchain sell are irreversible.
Just this past January, the Japan-based crypto sell Coincheck was the aim of hackers who stole ¥58 billion ($534 million dollars) in patron deposits of NEM, a reduction well famous digital banking launched in early 2015. The hack, reportedly the largest cryptocurrency confidence crack in history, affected 260,000 sell business and accounted for roughly 6% of NEM’s whole marketplace capitalization.
The risks can be double with newer cryptocurrencies. In fact, a new news by Ernst Young suggests that over 10 percent of the supports generated by initial silver offerings (approximately $400 million) are possibly unnoticed or seized by hackers. See Ernst Young, Big risks in ICO market: injured token valuations, misleading regulations, heightened hacker courtesy and undiluted networks (Jan. 22, 2018). These attacks feat coding flaws in new cryptocurrencies, which can be rushed to marketplace but suggestive review. While law firms will typically not have poignant amounts in an sell and can strengthen themselves from being directly targeted by hackers, no one is defence from the effects of a vast hack, which as NEM’s pricing after the hacking occurrence shows, can outcome in furious cost swings. Wide-scale hacking can also indirectly emanate doubt in the viability of the targeted cryptocurrency or even the crypto marketplace as a whole.
Notwithstanding, a flourishing number of law firms are peaceful to look past these intensity risks and accept remuneration in Bitcoin and other cryptocurrency. Most firms do so as a customer driven business preference and not as an investment. Among them are firms who might have a vast customer bottom in the flourishing blockchain courtesy and want to uncover their clients that they have a vested seductiveness in the courtesy or trust in the intensity of the technology. Law firms with high-net-worth clients in the tech courtesy might increasingly find themselves with clients who are cryptocurrency proponents with the infancy of their net value consisting of Bitcoin. Law firms might also have general clients who find it more fit to covenant in cryptocurrency. Other firms might want to excavate into Bitcoin for domestic reasons, and to uncover their support for the unregulated inlet of cryptocurrency.
Are There Ethical Implications for Attorneys When Dealing with Cryptocurrency Transactions?
Yes. California Rule of Professional Conduct 3-300 prohibits attorneys from entering into a business transaction with a customer or intentionally appropriation an ownership, possessory, security, or other financial seductiveness inauspicious to a customer unless the transaction or merger is acceptable and entirely disclosed in essay with the client’s created consent. Rule of Professional Conduct 3-110 also requires attorneys to have “sufficient training and skill” before holding on an engagement. Cryptocurrency implicates both manners and cryptocurrency is now entrance to the courtesy of profession ethics panels.
Last September, the Nebraska Supreme Court’s ethics cabinet released an advisory opinion that discussed in fact how profession ethics manners might ask to sell in digital currency. See Nebraska Supreme Court Ass’n Advisory Comm., Op. 17-03, 9/11/17. While the brief, 10-page opinion can at times be lacking in details, it provides commonsense recommendation that all attorneys can easily follow.
Before the Nebraska cabinet were 3 questions:
- May an profession accept digital currencies such as bitcoin as remuneration for authorised services?
- May an profession accept digital currencies from third parties as remuneration for the advantage of a client’s account?
- May an profession reason digital currencies in trust or escrow for clients?
First, the cabinet remarkable that attorneys are specifically authorised to accept skill like cryptocurrency in remuneration of services. Given the fluctuations in value, the cabinet educated attorneys to immediately value or modify cryptocurrency to U.S. dollars on receipt and to credit the client’s comment accordingly. The purpose of this requirement is to strengthen the customer opposite furious fluctuations in value that could outcome in charging irrational fees. Although not directly addressed by the committee, doing so creates transparent that marketplace sensitivity risk is eliminated to the profession on receipt. Immediately converting the cryptocurrency to U.S. dollars also boundary the risk of the cryptocurrency losing poignant value; which might differently place the profession in an reliable quandary of identical to work for skill that is now worthless.
Critically critical is notifying and explaining to the customer well in allege the acclimatisation arrangement and the timing. This includes notifying the customer that the acclimatisation will be immediate, the marketplace rates used to establish the conversion, and the temperament of the remuneration processor. This additional step helps equivocate any after brawl about the acclimatisation since there is no singular marketplace cost for a cryptocurrency, and different remuneration processors might modify the banking at different prices. One example of an index that processors might use is the New York Stock Exchange Bitcoin Index (NYXBT). Ultimately, it is up to the profession to teach the customer about the acclimatisation routine to safeguard the customer provides sensitive agree to the arrangement, regardless of the client’s laxity with cryptocurrency.
A second regard addressed by the cabinet are situations where the customer arranges for a third celebration to compensate the client’s fees. In those cases, attorneys contingency keep in mind their veteran obligations to accept remuneration from a third celebration only if the arrangement would not meddle with the attorney’s autonomy or attribute with the client, nor meddle with the client’s trusted information. This is quite critical given the story of cryptocurrency, which has allegedly facilitated easy, unknown payments for bootleg control and goods.
The cabinet rightly remarkable the hurdles that arise with identifying a third celebration payer. Crypto sell are pseudonymous in nature. This creates it scarcely unfit for an profession to establish the source of the funds. Attorneys who accept payments from third parties should approve with “Know-Your-Customer” (KYC) procedures that embody certain corroboration steps. For example, while not directly germane to attorneys who simply accept cryptocurrency payments, the U.S. Treasury Department’s FinCEN has released superintendence for exchanges to forestall and news income laundering activities. See FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013). At a minimum, attorneys should cruise incomparable remuneration processors and exchanges like Coinbase, which need the payer to approve with KYC corroboration and actively take stairs to forestall income laundering.
Many other situations, however, will need the profession to ask sufficient information from the third celebration payer before to acceptance of the digital banking payment. At a minimum, it is critical for attorneys to ask themselves, because does the customer want to compensate in crypto and is the customer perplexing to equivocate something by doing so? Some firms extent the risks by only identical to accept crypto payments from long-term clients or companies, and not from individuals. If you can't perform acceptable due diligence, the ABA suggests you travel away. See American Bar Association, “A Lawyer’s Guide to Detecting and Preventing Money Laundering”, 2014.
A third regard addressed by the cabinet is holding digital currencies in trust for clients or third parties. If a counsel receives cryptocurrency dictated to simulate a servant to be drawn on when fees are warranted in the future, the counsel contingency immediately modify the cryptocurrency into U.S. dollars. In other trust comment transactions, the cabinet suggested lawyers to surprise clients that the cryptocurrency is more same to skill and will be hold and not converted into U.S. dollars or other currency. Since there is no resource to repay clients if a hacker steals them, an profession opting to accept crypto contingency take reasonable confidence precautions. In State Bar Opinion No. 2010-179, the California Bar suggested attorneys to teach themselves about correct confidence procedures before transmitting or storing trusted customer information. Attorneys expected have identical obligations for holding a client’s cryptocurrency.
The destiny of cryptocurrency stays flighty and uncertain. The Nebraska advisory committee’s opinion has been criticized for the disaster to yield new solutions for doing cryptocurrency transactions. New reliable manners and discipline seem inevitable. Attorneys who accept or covenant in cryptocurrency contingency do so well informed, warning to the reliable implications.