Legal Ethics Update: The Virginia Supreme Court Approves Acceptance of Cryptocurrency as an Advance Payment for Legal Services

Click here for a Cryptocurrency Ethics Update Following the Bankruptcy of Cryptoexchange FTX.

The Virginia Supreme Court approved on September 19, 2022, Legal Ethics Opinion 1898, which permits a lawyer’s receipt of cryptocurrency as an advance payment for legal services. Notwithstanding the relative novelty of the “consideration,” as with transactions involving an interest in a business or other property, the concerns revolve around fairness (to the client) and informed consent.

Specifically, the Standing Committee on Legal Ethics concluded that a lawyer may accept client property, including cryptocurrency, offered as an advance payment for the lawyer’s services, provided the lawyer’s fee is reasonable under Rule 1.5, and this business transaction with the client meets the requirements of Rule 1.8(a), namely, that the transaction is fair and reasonable to the client, the transaction and terms are fully disclosed in writing in a manner the client understands, the client is advised of the opportunity to consult with independent counsel, and the client’s consent is confirmed in writing. And as with any other client property, when cryptocurrency is being held by the lawyer as an advance fee, the requirements of Rule 1.15 regarding safekeeping client property apply and require that the lawyer take reasonable steps to secure the client’s property against loss, theft, damage or destruction.  (Note that such safekeeping does not insure against swings in value or market volatility).

The hypothetical considered by the Committee considered the example of a lawyer hired by a client to pursue a contested divorce. In response to the lawyer’s request for an advance fee of $20,000 to handle the engagement, the client tenders the current market equivalent in Bitcoin to pay the advance fee of $20,000.

Before addressing the example, it is helpful to understand that:

• Cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. For example, Bitcoin is one of many types of digital or virtual currencies.
• This digital asset is based on a network that is distributed across a large number of computers. This decentralized structure allows the asset to exist outside the control of governments and central authorities.
• Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It is a peer-to-peer system that enables anyone anywhere to send and receive payments. Instead of carrying physical money around, cryptocurrency payments exist purely as digital entries to an online database (public ledger) describing specific transactions.
• Advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
• Disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.

In responding to the hypothetical, the Standing Committee answered the following questions:

1. What are the ethical obligations of a lawyer who accepts cryptocurrency as an advance fee for payment for legal services?

A lawyer may accept cryptocurrency as an advance fee for services yet to be performed. However, the lawyer must ensure that the fee arrangement is reasonable, objectively fair to the client, and has been agreed to by the client only after being informed of its implications and given the opportunity to seek the advice of independent counsel, all of which is confirmed in writing. In addition, if the lawyer accepts cryptocurrency as an advance fee, the lawyer must also take competent and reasonable security precautions to safekeep the client’s property.

This is a lot.

First, the lawyer must make certain that the proposed fee (and how it is to be paid) is reasonable under the circumstances and properly explained to the client. See Rule 1.5. For example, “Unless an agreement between the lawyer and client is reached on when the value of the cryptocurrency payment is determined, the lawyer could . . . receive an inappropriate windfall due to an extreme overpayment—an excessive and unreasonable fee for the value of the legal service.”

Second, the payment of an advanced fee with cryptocurrency is treated as a “business transaction” with a client.  This triggers a lawyer’s requirement to comply with Rule 1.8(a), which provides that:

A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interests adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) the client consents in writing thereto.

The Standing Committee quoted approvingly from the DC Bar Ethics Committee Opinion 378 (June 2020), which recommends that:

a lawyer accepting cryptocurrency should consider including a clear explanation of how the client will be billed (i.e., in dollars or cryptocurrency); whether and how frequently cryptocurrency held by the lawyer will be calculated in dollars, or otherwise trued-up or adjusted for accounting purposes and whether, upon that accounting, market increases and decreases in the value of the cryptocurrency triggers obligations by either party; how responsibility for payment of cryptocurrency transfer fees (if any) will be allocated; which cryptocurrency exchange platform will be utilized to determine the value of cryptocurrency upon receipt and, in the case of advance fees, as the representation proceeds (i.e., as fees are earned) and upon its termination; and who will be responsible if cryptocurrency accepted by the lawyer in settlement of the client’s claims loses value and cannot satisfy third party liens.

2. May the lawyer keep the cryptocurrency in its digital form, or must it be converted to US Currency and deposited in the lawyer’s trust account as required by Rule 1.15(a)?

Absent an agreement to the contrary, the lawyer may keep the cryptocurrency in its digital form. By not having to convert payment into US currency, this avoids the obligation to deposit the funds in the lawyer’s trust account pursuant to Rule 1.15(a).

3. Is the lawyer’s acceptance of cryptocurrency as an advance fee payment a “business transaction” subject to Rule 1.8(a)?

Yes, the lawyer’s acceptance of cryptocurrency as an advance fee is a “business transaction” subject to Rule 1.8(a). Note: Rule 1.8(a) does not apply if the lawyer accepts cryptocurrency as payment for an “earned fee.”  (But it still needs to be reasonable as set forth in Rule 1.5).

4. What actions must the lawyer take to safekeep cryptocurrency tendered to the lawyer as an advance fee?

If cryptocurrency is used to pay an advance fee, the lawyer should safekeep cryptocurrency as client property with the care of a professional fiduciary and take reasonable security measures to safekeep the client’s property from theft, loss, destruction or misdelivery. Indeed, in accepting cryptocurrency, the lawyer’s duty of competence requires that she have the knowledge and skill to understand the risks associated with this technology, and safeguard against the many ways cryptocurrency may be stolen or lost. See Rule 1.1, cmt. 6 (the lawyer “should pay attention to the benefits and risks of relevant technology.”).

Key Take Away: Cryptocurrency offers an acceptable method for a client to pay for legal services. However, it is not without risk and much must be done at the outset of the engagement to insure that problems do not arise. In transmuting the payment by the client for the engagement into a business transaction, LEO 1898 mandates extensive planning and disclosures in order to successfully navigate the ethical issues. Enough such that a lawyer should consider strongly whether to request that the advanced payment be in US currency (and let the client determine whether and when to convert the cryptocurrency).

Cryptocurrency Ethics Update Following Bankruptcy of Cryptoexchange FTX

If there was any doubt as to the complications in engaging in a business transaction with a client involving the payment of a fee using cryptocurrency, recent troubles in the cryptocurrency market have highlighted them. Cryptocurrency exchange FTX filed for Chapter 11 bankruptcy protection on November 11, 2022, with filings indicating that over $3 billion is owed to its top fifty creditors. This is after having an outside valuation of $32 billion.  The reverberations to the cryptomarket will be felt in the coming months and years, accompanied by government investigations, extensive civil litigation, and likely massive losses to customers.

What this means for lawyers and their clients is that heightened attention must be given to meeting the requirements for engaging in a business transaction with a client under Rule 1.8(a), which requires that:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) the client consents in writing thereto.

In order to do this, lawyers will need to make clear—and preferably in writing—how the cryptocurrency fee will be handled, including a discussion on the consequences of (and responsibility for) volatility, valuation fluctuations, etc.