• Matthew Crist

BITCOIN AND THE LAW - PART 1 OF ∞

I have published a few blogs on the intersection of automation in the law. As I look forward over the next decade, I think 2 of the major challenges that the legal community will face are automation making its way into our practice and also payment systems utilizing either Bitcoin or other blockchain-style payment technologies.

IS BITCOIN ETHICAL?


The American Bar Association has released some guidance and analysis as to the ethics of receiving Bitcoins as payment for legal fees. I can foresee several ethical issues in receiving Bitcoins, however, I think most of those ethical issues are shared with other forms of payment. The ABA guidance, and other articles that I have read, generally focus on topics surrounding the reasonableness of a fee for legal services.


The ABA also mentions an implication on the limitation of entering into a business transaction with a client under Rule 1.8. I was completely stymied by that implication, and I do not understand how it could be any different in receiving any other payment. However, it is important to know their guidance.


It seems to me one of the core flaws of the ABA, and other, ethical guidance on receiving Bitcoins for legal services is the assumption that the client will be less sophisticated than the attorney. I see no reason to believe such will be the case. In fact, any client who is willing to pay Bitcoin for services is almost certainly far more experienced in using Bitcoin than an average attorney, with no insult intended to myself or my colleagues.


That ethical implication would flip on its head if, for example, the attorney coaxes a client into paying in Bitcoin; but that holds true for gold, silver, securities, or anything else. If the attorney is initiating or encouraging a payment outside of the norm that the client is comfortable with, I think the ethical klaxon should be sounding. But I think it is unhelpful to analyze payments via Bitcoin through that reference frame.


I think everyone should educate themselves about what Bitcoin is, but it is almost certainly unhelpful to read the technical explanations. I have seen Bitcoin hodlers who will just throw technical papers at the uninitiated as if that helps.


WHAT IS BITCOIN?


Put simply, Bitcoin is both a reference to a medium of exchange, that is, the coin itself, and to the system that handles, records, and verifies the transactions.


Unique numbers or signatures move a certain quantity of Bitcoin in person-to-person transactions, well, wallet-to-wallet. This system is new because credit card, debit card, or check payments are not truly a person-to-person transaction. All those payments go through banks, at some level or another, and those banks almost exclusively require settlement in USD, or some other central-bank note. Even handing cash to a person still involves the relevant central bank.


The Bitcoin system operates outside of that paradigm and publicly, yet anonymously, records all transactions.


BENEFITS OF BITCOIN


The putative benefit of Bitcoin is that the public ledger will be recorded and can be audited by anyone who wants to review it; the ledger, generally, can fit on almost any consumer-grade computer. With such a public ledger, nobody can control or change the amount of money in the system and nobody can steal money or modify any historical transaction. Furthermore, the transactions will be put through the system and verified multiple times by complete strangers, who do not even know they are verifying your transaction, and then, once verified, it will be put into the ledger for everyone to know.


CHALLENGES OF BITCOIN


A notable, though highly technical, challenge of the Bitcoin system is the limitation on how many transactions can be handled by the network at a given time. For example, at its highest, the number of Bitcoin transactions has never really gone beyond the hundreds of thousands, on a daily basis. Meanwhile, the credit card systems handle over a hundred million transactions per day.


WHY IS IT DIFFERENT?


The ABA guidance seems to have a significantly different view of Bitcoin from the IRS. The IRS looks at Bitcoin as simply another piece of property. That property can be held as a capital asset or it can be held as a simple piece of property with a basis equal to the market price in USD calculated on the date of acquisition according to customary and consistently applied valuation methods.


In my estimation, working for a client for 10 hours and getting paid $3,000.00, or 0.05 of a Bitcoin, or 6,000 pounds of bananas should be, roughly speaking, the same.


The ABA guidance seems to view a Bitcoin as a substantially different type of payment more similar to a security or currency.


WHAT IS ALL THE FUSS ABOUT?


From the perspective of the ABA guidance, and other legal ethicists, the primary two concerns are the complexity of using the Bitcoin system and the volatility of the market. The latter is a notable issue, however, the former seems only to be a generational issue.


Honestly, I believe the ABA guidance should have focused more on warning lawyers not to be duped by fake clients. A client who comes to a lawyer offering to pay Bitcoin upfront is more likely going to take advantage of the lawyer than the inverse. With the complexity issue aside for the moment, I believe the volatility is a very important topic that needs to be discussed.


If there is an information gap between client and lawyer, that, too, can cause ethical issues; a hogshead worth of tobacco, for example, has a significantly different value with or without a blockade.


Bitcoin and other cryptocurrency markets are volatile, as new things tend to be. The ethical implications, however, come into play when there is a gap between the time that an agreement is made and the time that the bill comes due.


HYPOTHETICAL SCENARIO


Let us say a client agrees to pay .005 of a Bitcoin per hour of work and that agreement is entered into on April 1, 2021. The attorney sends an invoice for 7 hours worked on May 1, 2021; in that same timeframe, let us say that Bitcoin appreciates in value from $60,000.00 per Bitcoin to $90,000.00 per Bitcoin, not an unimaginable change. At that point, the difference between the agreed upon price that was negotiated on April 1 ($2,100.00) and then the ultimate price to be paid ($3,150.00) is significantly different; notably, this scenario may tread into “unreasonable” waters.


POSSIBLE SOLUTIONS


I believe there may be dozens of possible pathways to resolve these issues. One clause in the fee agreement may, for example, set a certain price in USD to be paid in the form of Bitcoin. For example, the fee agreement may have an agreement for the client to pay $300 in the equivalent amount of Bitcoin, to be determined on the date of invoice by a given exchange, for example, coinbase.com.


Ultimately, education and transparency are key.


I am certain there will be many other possible resolutions, however, legal practitioners need to start thinking about this kind of thing as adoption spreads for Bitcoin. I do not think it is far off that we will be able to go to the corner store and buy a half-gallon of milk and some bubble gum with Bitcoin - at that point, we may see the average client asking to pay their bills in Bitcoins.






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