Bitcoin and the Legal Ethics of Lawyers

Posted in: Technology Law

Most people understand that “bitcoin” is a computer-generated virtual currency. There are other virtual currencies out there (e.g., Ethereum, Litecoin), but, for purposes of simplicity, let us refer to “bitcoin” as a stand-in for all of them.

Once we get past the idea of a virtual currency, fewer people fathom what is going on, and think that only nerds understand. I’m not a nerd (although I aspire to be one), and we lawyers must understand the basics—at least what is necessary for legal ethics purposes.

In September 2017, the Nebraska bar issued Ethics Advisory Opinion, 17-03 (Sept. 11, 2017) concluding that lawyers may receive digital currencies as payment for services subject to various conditions (such as, “immediately” convert the bitcoin to dollars). Frankly, these requirements have nothing to do with legal ethics or lawyer’s fees given the fundamentals of bitcoin.

First, bitcoin, and then the Nebraska Ethics Opinion.

Some Background on Bitcoin

The US dollar is legal tender in the United States, but bitcoin and the Euro, gold bullion, or a Rolex watch, are not. However, it’s a free country and people can accept these other forms of payment if they wish. Gold vending machines are operating in some European countries. When I was in Ukraine a while back, the preferred currency was a crisp $100 bill. Some years ago, when it was about 5 a.m. (and all the banks were closed), I was in the visa line in Bangkok, where I learned that I had to pay an exit fee in Thai baht, an amount that was about $5. I had no Thai money, so I gave the customs official a $10 U.S. bill and he gave me a $5 bill in change. I was returning from Cambodia, where everyone preferred dollars to Cambodian currency.

Why treat bitcoin so differently from other forms of payment? For example, there is no ethics issue if you drafted a simple contract for a foreign visitor and she offered to pay €500 instead of $590 in cash. You can accept the Euros or not. There is always the issue whether the fee is reasonable, but that is not a function of the manner of payment.

You could require this foreign client to convert the Euros to dollars at the local bank, but she may prefer to avoid the transaction fee. And, if you are planning a trip to Europe in the future, you might wish to avoid the transaction fee yourself. There is no issue of legal ethics if you accepted the €500 and did not “immediately” convert it to dollars. If you wait to convert it, the value of the €500 may rise or fall against the dollar, but so what? Deciding to take that risk is a business decision, not one of legal ethics.

A Rolex can be money. In the movies, for example: in Marathon Man (1976) Dustin Hoffman trades a Rolex for taxi fare and some change; in Rain Man (1988), Tom Cruise uses his Rolex for currency; and in Crossroads (1985), a Rolex buys a guitar and hat. In all these cases, competent adults accept the trade and the risks of the transaction costs in converting the Rolex to dollars, or Euros, or whatever. The lawyer has to report as income the fee that the client paid him whether in cash, in barter, or in bitcoin. Not recording the income is an issue of tax fraud, not a function of the medium of exchange.

Some people think that bitcoin is used primarily by drug lords and those who wish to hire hitmen on the dark web. However, many legitimate businesses, including a large number of law firms in the United States and Europe, accept bitcoin. Dish Network, Expedia, and all accept bitcoin.

As for the cartels, a study done for the European Union found that the “use of cryptocurrencies by criminal groups—other than hackers—is fairly rare.” Drug lords and terror groups prefer cash. The European Union report concludes that the “knowledge and technical expertise” required for virtual currencies like bitcoin “has a dissuasive effect on terrorist groups.” In contrast, as of June 2017, the “level of TF [terrorist funding] threat related to cash couriers is considered as very significant.”

The FBI has made some significant arrests of criminals using virtual currencies, which do not provide the anonymity that some people desire. “The past and present ownership of every Bitcoin—in fact every 10-millionth of a Bitcoin—is dutifully recorded in the ‘blockchain,’ an ever-growing public ledger shared across the Internet.” What is hidden are “the true identities of the Bitcoin owners: Instead of submitting their names, users create a code that serves as their digital signature in the blockchain.”

Bitcoin is simply a method of transferring “money” without a central banker. I can pay you in cash, by delivering it to you, but that requires the two of us to be within a handshake of each other, and it’s awkward if we are transferring large amounts. Consider that $100,000, in $100 bills, weighs 2.2 pounds. And there is also the risk of theft.

I could mail you a check, but that requires a bank fee and delay. I could pay by credit card, but the transaction fee is even greater. For international transactions, bank fees and currency conversion add even more to the cost of the transaction. Virtual currencies eliminate the middleman, the transaction costs, and the delay. Bitcoin, like the internet, has no central authority, no central bank. It is similar to me giving you €100 or $100, but I do not have to be within arm’s reach.

Bitcoins are not “held” anywhere, not even in a bitcoin “wallet.” Bitcoin balances are kept in a public key and a private key. Each key is a long string of numbers and letters linked through the mathematical encryption algorithm used to create them. One might think of the public key (the address that the world sees) as a bank account number and the private key as similar to an ATM pin, which you need to transfer money from your account. This private key authorizes the transmission of the bitcoin to the other person.

The blockchain does more than that, however. First, you no longer have access to the bitcoin once you send it to the other person. You cannot use your bitcoin “ATM pin” again. Second, the recipient can only access the amount you authorized (e.g., one bitcoin). Finally, this transfer is completed without the need for a “trusted central authority, or mint that checks every transaction” to prevent “double spending.” There are no wire fees or other transaction fees.

If you want to buy or sell bitcoin, get one of the apps for doing that, and install it on your smartphone. Then, you can buy, hold, or sell bitcoin by exchanging your legal tender for this virtual currency.

The computer code limits the total number of bitcoins to 21 million. One can divide each bitcoin: the smallest divisible amount is one hundred millionth of a bitcoin, which is called a “Satoshi,” named after its creator, a person (or persons) going under the anonymous name of Satoshi Nakamoto.

Bitcoin is like gold, in the sense that it is worth whatever people pay for it. However, while doomsday aficionados hoard gold, it also has other uses, such as for jewelry or electric conductors. In contrast, bitcoin’s value is entirely based on agreement. Its value fluctuates more than gold, more than a Coney Island roller coaster. For example, on Sept. 19, 2017, one bitcoin was worth $5,647.53. A month earlier, it was worth $ 1,637.50. On Nov. 30, 2013, it was worth $1,082.23. Three weeks later, on Dec. 19, 2013, it was worth $645.63. On July 20, 2015, it was worth $278.66. (By the way, some stock technical analysts note that bitcoin’s rallies, since its 2013 high have followed a pattern, where each new leg up corresponds to a percentage increase as predicted by the Fibonacci series.)

Bitcoin and Legal Ethics

Because bitcoin is merely a medium of transferring money without using a banker and without paying a fee, it raises no ethics issues unique to it. Yet, the Nebraska Ethics Opinion requires that lawyers must “mitigate the risk of volatility and possible unconscionable overpayment for services” by not retaining the digital currency and by converting it “into U.S. dollars immediately upon receipt.” A commentator also advises, “accepting payments from clients or third parties” in bitcoins raises “unique ethical issues” that the lawyer can avoid by assigning the risk of keeping the bitcoins to the client.” Pray tell, why?

Assume the lawyer agrees to accept payment in bitcoin, e.g., 10 bitcoins per month for four months for legal services managing legal problems for the client’s apartment building while the client is away. The client (perhaps a foreigner) wants to set the fee in bitcoins to avoid a currency risk. The client transfers the 40 bitcoins to the lawyer’s trust account, and she withdraws 10 per month. If the value of the bitcoins rise, the lawyer’s fee (in dollars) would increase, ditto for any decrease in value. It’s a business decision, not a question of legal ethics, if the informed client and the lawyer agree to shift the risk of volatility to the lawyer.

Assume that the lawyer and the client agree that the lawyer will draft a sales contract today and the client will pay two bitcoins in one month’s time. If that fee is reasonable at the time, what difference does it make if the lawyer takes the risk of not receiving the bitcoin for a month? It is no different from the client agreeing today to pay the lawyer (in one month) an ounce of gold, or 100 Euros, or a contingent fee. If the original fee is reasonable, the fact that the value of the bitcoin decreases or increases (or the contingency proves to be particularly lucrative or unprofitable) does not make the agreed upon fee unethical.

The Nebraska Opinion acknowledges that a drastic fall in the exchange rate of bitcoin means the lawyer “would be underpaid for services.” Lawyers can agree to take that risk. Indeed, they can work for free if they want. Lawyers are adults and if they wish to hold the bitcoin and risk a fall in value, there is nothing unethical about that.

Assume the client pays the lawyer’s fee in public stock. The client transfers to the lawyer (in payment for a fee), $29,808, in the form of of Vanguard 500 Index Fund shares, on Thursday morning, Oct. 15, 1987. The lawyer may decide to keep his fee in the form of the mutual fund shares. Monday, Oct. 19, he panics as the financial news reports “Black Monday,” so he converts the shares to cash and only receives $22,484. How is that fact situation “unethical”?

The Nebraska Opinion warns us that a third party can pay the client’s fee in bitcoin as long as there is no interference with the lawyer’s independent judgment. OK, but that rule applies whether the third party pays the lawyer in dollars, bitcoin, diamonds, or compliments.

Finally, the Nebraska Opinion discusses holding bitcoins in trust. “The property must be held separate from the lawyer’s property, be properly safeguarded,” with careful records. One does not place bitcoins in a real wallet or a box. It is a computer ledger. However, “if a lawyer receives bitcoins intended to reflect a retainer to be drawn upon when fees are earned in the future, the lawyer must immediately convert the bitcoins into U.S. dollars,” according to this Opinion.

Why is it a matter of ethics to “immediately convert” the bitcoins to dollars? One would think that the arrangement should be up to the adult client and adult lawyer. If the client and lawyer agree that the lawyer will be paid at the rate of two bitcoins per month for six months, and if that fee is reasonable when the agreement is made and the bitcoins are held in trust by the lawyer, why must the law forbid the lawyer from assuming the risk that the value of the bitcoin will fall or rise? As far as the client is concerned, the changing value of the bitcoin is of no concern to her once she transfers the bitcoins to the lawyer to hold in trust. If there is full disclosure and the lawyer is willing to take the risk, no legal rule forbids that. The lawyer is not entering into a business relation with the client: the lawyer and client are simply agreeing that the lawyer’s fee will be two bitcoins per month (or two gold bars per month), for six months.

The lawyer may not want to take the risk of bitcoin’s volatility. If so, the lawyer can tell the client that the fee is not two bitcoins per month but $10,000 per month. But the Nebraska Opinion states that the client, as a matter of lawyer’s ethics, must assume the risk of volatility. There is no such ethical rule. That is no different from the lawyer telling the client, “I will be available for these three months, for the agreed-upon retainer of 500 Vanguard 500 Index Shares each month, no matter what the market does.”

The future will bring us increasing change and an increase in the rate of change. We must examine the impact of these changes on lawyers, but we should not impose special rules on novel tools that are simply a new way of engaging in a traditional endeavor. Bitcoin is akin to an electric typewriter replacing a manual typewriter. We write the same things, but we do it faster.

One response to “Bitcoin and the Legal Ethics of Lawyers”

  1. jcjasik says:

    Bait for cashless society and total control… do tell.