Ethereum. Bitcoin. Dogecoin.
With over 1,300 cryptocurrencies and counting now available, it can be hard to keep track of what’s what. But with the market for cryptocurrencies exploding, your clients may soon want to pay you in bitcoin or other cryptocurrencies, so it’s worth getting educated.
At the 2017 Clio Cloud Conference, Joshua Lenon, Lawyer in Residence at Clio, and Amy ter Haar, President at Integra Ledger Canada, spoke about the variety of ways bitcoin and blockchain affect law firms today. One of the topics Joshua covered was how to accept bitcoin as payment for legal services.
Here are a few tips for accepting bitcoin (or other cryptocurrencies) for payment in your practice.
Note: While there are many, many different types of cryptocurrencies, bitcoin is the most popular by far. As such, we’ll use the terms “bitcoin” and “cryptocurrency” interchangeably for the rest of this article.
Know that bitcoins are treated as assets under the law
Before you accept bitcoin as payment, you should know that courts have been treating the cryptocurrency as “not money” in many cases.
For example, there’s the case of Morici v. HashFast Technologies LLC, where a company that built bitcoin mining computers was forced to declare bankruptcy, and there was a motion on how to handle the bitcoins in the case (i.e., as money or as property).
The decision was that bitcoins are not money. “That was the first real ruling that stated that bitcoins, while they may have aspects of value, are not currency as we treat currency in law,” Joshua said.
Put another way, Joshua added:
You can store value in anything. You can store value in a fine painting. You can store value in a case of wine that you’re aging. You can store value in a stock certificate from Google. So when it comes to cryptocurrencies and helping your clients with them, think of them as stored value, instead of money.
Choose a bitcoin wallet that keeps you compliant
Bitcoins are not money, and they also can’t be stored in a bank. Thus, to handle bitcoin transactions at your law firm, you need to get yourself a bitcoin wallet.
“Just like we’re all carrying wallets to store our cash right now, there are digital wallets that store cryptocurrency,” Joshua explained. “If you’re going to use bitcoins in your law firm, you’re going to need one of these at some point.”
There are two common types of bitcoin wallets available: software wallets and web wallets. Software wallets take your bitcoin information off the internet and store it on a local device. This could be a mobile app, a desktop computer, or even a USB key. Web wallets are cloud-based.
Joshua likes the web wallet Coinbase due to the efforts the company has made to make itself compliant with both federal and state regulations around storing and transacting in bitcoin (Coinbase is also a bitcoin payment processor). That said, do your due diligence before choosing a bitcoin wallet to make sure your provider complies with applicable regulations.
Here are a few other examples of bitcoin wallets:
- Bitcoin Core
- Bitcoin Knots
- BitGo (web version available)
- Green Address (mobile and web versions available)
- ArcBit (mobile version available)
- Jaxx.io (mobile version available)
- Bread (iOS and Android)
- Airbitz (iOS and Android)
- BTC.com (iOS and Android) (web version available)
- Coin.Space (web version available)
Avoid unreasonable fees
According to Nebraska Ethics Advisory Opinion for Lawyers No. 17–03 (released on September 11, 2017), lawyers in Nebraska may accept bitcoin as payment for legal services, but there are a few rules they need to follow. Joshua believes this is a great starting point for any lawyer looking to accept bitcoin (though, of course, it’s important to check your own state’s rules before proceeding).
The opinion from the Nebraska state bar starts with three questions:
A. May an attorney receive digital currencies such as bitcoin as payment for legal services?
B. May an attorney receive digital currencies from third parties as payment for the benefit of a client’s account?
C. May an attorney hold digital currencies in trust or escrow for clients?
We’ll go over how the opinion answered these questions in the remainder of this post.
For question A, the answer is “yes,” but the opinion states that lawyers still have a duty to avoid charging unreasonable fees for their services.
Since the value of a bitcoin can change (and has been changing) drastically over short periods of time, the best way to keep fees reasonable is to convert bitcoins as soon as they’re received as payment.
Think about it. If you had accepted Google stock a decade ago as payment for a divorce, a will, or a parking ticket, and held onto that Google stock, that is one sweet deal for getting paid for helping with something as simple as a parking ticket … under most states’ ethics rules you can’t accept an unreasonable fee.
Here’s how to convert a bitcoin:
Step one: Notify the client you’ll be converting their bitcoin
“First of all, notify the client that you will not be holding their payment as a bitcoin,” Joshua said. “You’re going to immediately convert it to U.S. dollars. Now, Nebraska specifies U.S. dollars because it’s Nebraska, but if you’re an international person you may convert it, obviously, to a different currency.”
Step two: Value the bitcoin at market rates
Once you’ve chosen one of the bitcoin wallets mentioned above, you can take your client’s bitcoin, and you’ll be one step closer to converting it to U.S. dollars. The next step is to find a bitcoin exchange to properly value your bitcoin at market rates.
“The exchange that I recommend for valuing bitcoin is the New York Stock Exchange,” Joshua said. “They have their own bitcoin index and you can access it for free on their website. It tracks a bitcoin’s current value, but it actually also tracks a bitcoin’s value in time.”
Step three: Convert the bitcoin and credit the client’s account
Finally, you’ll need to convert the bitcoin to U.S. dollars, or another currency, using a bitcoin payment processor. As mentioned above, it’s important to make sure you stay compliant with any jurisdictional regulations when converting bitcoin.
“A lot of the cases that we’re seeing in terms of litigation when it comes to bitcoins and other cryptocurrencies come up when people are sending cash back and forth (or value back and forth) and they’re not necessarily regulating the transfer,” Joshua explained.
There are a number of bitcoin payment processors available, such as Coinbase, Bitpay, and Circle. Coinbase is recommended in the Nebraska opinion, and is licensed by the Nebraska Department of Banking and Finance as a money transmitter under Nebraska’s Money Transmitter Act. It’s site also features a list of the licenses it holds in various jurisdictions, which is a good place to start your research if you’re outside Nebraska. “Coinbase actually makes sure that if you are taking a cryptocurrency and converting it into cold hard cash, that you’re doing it with all of the disclaimers and all the filings that need to be done,” Joshua said.
Once you convert the bitcoin to money, then, and only then, can you deposit the funds into your trust account. However, there’s an extra step to consider if you’re accepting payments from third parties: doing your due diligence on the third party involved.
Do your due diligence when accepting payments from third parties
As Joshua explained, there are many ways to transfer value—bitcoin, gems, and metals are all options.
Because these options are not regulated in the same way that currencies are, many industries around the world have been forced to come up with new regulations to ensure they transfer value in a way that doesn’t harm people or encourage dangerous acts. These regulations require what are known as Know Your Customer procedures, or KYC procedures, in the financial industry and beyond.
However, in many cases, lawyers have a duty to protect the anonymity of their clients. How can lawyers adhere to rules of professional conduct while also implementing basic KYC procedures, as recommended in the Nebraska bar’s opinion on accepting bitcoin?
In 2014, the American Bar Association put out A Lawyer’s Guide to Detecting and Preventing Money Laundering. “That’s basically a Know Your Customer activity,” Joshua said. “So if a third party wants to help your client with their legal fees and asks to pay you in bitcoin or another cryptocurrency, I highly recommend you download this white paper. It’s free, and it’ll walk you through the background of Know Your Customer procedures, and a lot of different steps for them.”
For example, steps include identifying the beneficial owner of the bitcoin, and then doing due diligence on the relationship between that person and your client.
“Take the time to research them. Understand their business opportunity, their relationship to your client, and why they are stepping in to pay,” said Joshua. “Say they move to a different cryptocurrency, for example, from bitcoin to Zcash, which is one that is attempting to be more private than other cryptocurrencies out there. Ask yourself why they’re doing that. Are they trying to avoid something? Do you need to dig further? If you cannot conduct satisfactory due diligence, the advisement by the ABA is to walk away.”
When storing bitcoins in trust or escrow, store them the right way
Finally, as a lawyer, you may be asked to hold bitcoins in trust for clients. Unfortunately, since bitcoins are not money, you can’t put them in your trust account.
The Nebraska bar advises on this in its opinion as well.
First off, in this case, you should not convert the bitcoins to fiat currency. Why? Because there’s a chance that you’d be helping your client launder money.
You’ll need to notify your client that you won’t be converting their bitcoin, and explain that their bitcoin may lose value while you’re storing it. “You need to inform the client that, just because they’re storing a bitcoin with you doesn’t mean they’re going to get today’s value of that bitcoin back. If it goes up or down, that’s not your problem. You’re just holding onto the coin itself,” Joshua said.
Then, you need to ensure reasonable security when holding bitcoins in trust or escrow for clients. According to the Nebraska ethics opinion, reasonable security could mean one of the following:
Using cold storage
With this method of storage, you take the bitcoin off the internet. Using one of the desktop or hardware options mentioned above can help with this.
Encrypting the private key required to send bitcoins
Bitcoins cannot be sent without a private key. Encrypting this key is an effective way of keeping stored bitcoins secure.
Using multi-signature accounts
Another option is to require more than one private key for transferring bitcoins. In other words, such accounts allow for up to 15 different signatures that have to be collected before the transfer of the bitcoin is allowed to go forward.
To use this option to secure bitcoins in storage, you’ll need to choose a bitcoin wallet that supports multi-signature accounts (Jaxx.io is one example).
Never fear, bitcoin is here
Accepting bitcoin for your legal services doesn’t need to be scary. Just ask Addison Cameron-Huff of Toronto, or the many other lawyers who are already doing it.
With the right precautions, it is entirely possible to ethically and securely accept bitcoin payments in your practice.