Cryptocurrencies, like Bitcoin, are not going to replace traditional currencies any time soon, but a growing number of law firms have begun to accept these currencies as payment from clients. Before your firm accepts crypto payments, you need to understand how these currencies work and some of the issues they raise.
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrency generally refers to a decentralized form of digital currency. Bitcoin and Ethereum probably are the best known, but dozens of others are out there, including Zcash, Ripple and Litecoin.
Cryptocurrencies are virtual assets, with no physical form, and deemed to be property by the IRS. Transfers are instant and tracked in a blockchain ledger instead of with a bank within a centralized banking authority (see, "What is Blockchain?" below).
The value of cryptocurrencies comes in part from their utility, or people's willingness to accept them as payment. The value also reflects its scarcity. In the case of Bitcoins, for example, no more than 21 million "coins" can ever be created.
WHAT IS BLOCKCHAIN?
Blockchain technology generally refers to a digitized, distributed ledger or database that records and shares information kept secure through cryptography. The information is stored in chronological, unalterable blocks, each of which includes a time stamp and a link to a previous block. The blockchain is distributed across open networks, providing a public, verifiable history of transactions.
Blockchain is likely to impact many transactional practices, from mergers and acquisitions to the sale of real estate, securities and other assets. Real estate transactions represent one important area where blockchain could have a significant impact by providing a technology where anyone can record and view land records. And smart contracts could use blockchain technology to automate sequential performance once conditions are verified, thus mitigating the risk of breach, fraud and human error.
WHAT IS IN IT FOR LAW FIRMS?
Some firms have begun accepting cryptocurrencies as payment for a very simple reason — their clients demand it. Technology and other intellectual property companies are among the clients that could have cryptocurrency assets they want to use to pay for legal services. Financial technology, payment processing and securities clients might have similar demands in the near future.
Offering clients more payment options generally improves collection rates. Some firms have found that they attract new clients when they accept cryptocurrencies. It may be that accepting crypto makes these firms appear more aligned with innovative clients.
WHAT ARE THE POTENTIAL RISKS?
Perhaps the biggest concern associated with cryptocurrencies is their price volatility. The price for Bitcoin can move more than 10% in a single day. This may create problems in light of ethics rules that require attorneys to charge reasonable fees. A Bitcoin fee that is reasonable when negotiated could become unreasonably high by the time of payment (and, of course, it also might become unreasonably low from the firm's perspective). Your firm can mitigate this risk by referring only to U.S. dollars in fee agreements and invoices.
A Nebraska ethics advisory opinion — the first issued by a state ethics body addressing receipt of digital currencies — provides additional guidance. When a cryptocurrency payment is received, it suggests, the firm should immediately convert it into dollars according to market rates and then credit the client's account using dollar amounts. The firm must advise the client of this process so the client does not expect an increase in the value of the currency to create an additional credit to its account. In addition, the client may have tax consequences from using a virtual property to pay for services.
Firms must also evaluate how to safeguard client funds if they are held in cryptocurrencies. Trust accounts are an effective safe guard for cash, but, as property, cryptocurrencies cannot be deposited in bank accounts. According to the Nebraska opinion, if the payment will be drawn on for future fees, the firm should immediately convert it to U.S. dollars and deposit the amount into the appropriate trust account. Firms that do not convert client funds will need to develop effective internal controls such as encryption or store cryptocurrencies offline. You might, for example, keep them on a USB drive locked in a safe (referred to as "cold storage").
LOOK BEFORE YOU LEAP
Despite their increasing prevalence, cryptocurrencies are not for everyone. Your firm should take the time to educate itself and evaluate the associated pros and cons before taking the plunge into accepting virtual payments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
