A Lot of Lawyers Claim That They Accept Bitcoin… But Are They Doing It Wrong?

A lawyers’ ethics committee appointed by the Nebraska Supreme Court issued an opinion regarding whether lawyers in that state could receive payments in bitcoin; receive payments from third parties in bitcoin; and/or hold bitcoin for their clients.  This applies to any digital currency.  The committee was clearly well-informed and wrote in a tone that was neither evangelical nor panicked when it comes to virtual currency.  Note, this Opinion does not control in other jurisdictions however it is suggested that lawyers compare the wording of their local rules to the Nebraska rules in order to assess how persuasive or helpful this Opinion may be outside of Nebraska.

 

The questions presented were: (1) can a lawyer accept bitcoin as payment; (2) can a lawyer receive payment in bitcoin from third parties for the benefit of a client; and (3) may a lawyer hold digital currencies in trust/escrow.  The answers to all three questions is “yes” with some instructions.

 

The full Nebraska Ethics Advisory Opinion for Lawyers 17-03 is here.

 

Before we get the substance, the 10-page opinion (calmly) walks the reader through the basics of blockchain technology and makes points which are often missed:  (1) bitcoin is not anonymous (an all too frequent mistake to claim that it is); (2) bitcoin is used by “legitimate business”; (3) bitcoin is “subject to extensive regulation”; and (4) there are levels of precaution a holder of digital currency can take, up to cold storage. For example, while I was once guilty of it myself in a 2014 article, the Opinion avoided the frequent (but weak) comparison of bitcoins to tulips.

 

1.  Can a lawyer accept bitcoin as payment?

 

Yes.  The main concern is the client paying in bitcoin and then the price dramatically changing which might trigger a violation of the “unreasonable fee” rule.  The Committee stated that the lawyer must (1) notify the client that the lawyer is immediately converting the digital currency to dollars; (2) make the conversion through a [legitimate] payment processor; and (3) credit the client’s account at the time of payment.

 

BE CAREFUL: although not mentioned in the Opinion, I could foresee a situation where a lawyer in the firm has a bitcoin wallet and accepts the bitcoin from a client, converts it into dollars, and then pays the firm.  Depending on your local laws, that could be illegal money-changing (even though it seems innocuous since the lawyer would not be “gaining” anything other than expediting payment for the firm).

 

2.  Can a lawyer accept bitcoin from third parties for client’s benefit?

 

Yes.  It is not unusual that a third party pays someone’s legal bill.  As just a few narrow examples, think about insurance companies, indemnity agreements, and family law scenarios.  The Committee held that Rule #1 above applies and that the lawyer needs to avoid interference with the independent attorney-client relationship and without losing any client confidential information.  Both of those are required no matter what the form of payment.  The Committee also indicated that law firms must implement basic know your client (KYC) procedures to identify the payor.

 

BE CAREFUL: the concern here is that a lawyer accepts payment from some unknown (or criminal) source.  This concern might be heightened, as an example, in states where marijuana is legal and lawyers represent entities in that industry.

 

3.  Can a lawyer hold bitcoin in trust or escrow for a client?

 

Yes, but the funds must be separate from other bitcoins or property.  The lawyer must use commercially reasonable safeguards and keep records.  Interestingly, since bitcoins are property according to the IRS, they cannot be deposited [co-mingled] in a trust account.

 

BE CAREFUL: the “take away” here is that Nebraska is following the IRS in treating virtual currency as property.  I can’t really see “depositing” bitcoin into a trust account as is, but I could see a lawyer agreeing to receive bitcoin into his/her account and not segregating that virtual currency from the lawyer’s own assets in the wallet.  A dollar is a dollar but bitcoins are treated like property and the lawyer would need to segregate them from personal/firm bitcoins and give the exact same bitcoins back (not the exact amount, the exact same bitcoin string).

 

For further reading, here is the Norfolk Daily News Story about the lawyer who requested the opinion.

 

Image credit: Pixabay

 

 

cbh