People Law | Visitor Submit: Why Legislation Companies Ought to By no means Settle for Their Charges in Cryptocurrency
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Visitor Submit: Why Legislation Companies Ought to By no means Settle for Their Charges in Cryptocurrency

Visitor Submit: Why Legislation Companies Ought to By no means Settle for Their Charges in Cryptocurrency

John Reed Stark

As the cryptocurrency phenomenon has developed, one of the interesting parts of the story has been the relationship between the digital currency firms and the lawyers that advise them. In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, takes a look at a particular aspect of this lawyer-client relationship, the question of whether the lawyers should accept cryptocurrency in payment of fees. A version of this article originally appeared on Cybersecurity Docket. I would like to thank John for allowing me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article.

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Law firms are increasingly accepting cryptocurrency as payment for services – this might seem innovative and forward thinking, but ironically, it is much more of a throwback.

Given that the U.S. Internal Revenue Service does not yet classify cryptocurrencies as legal tender, cryptocurrency is instead “property.” This means that lawyers accepting cryptocurrency are more akin to famed lawyer (albeit fictional) Atticus Finch than famed bitcoin creator (albeit quasi-fictional) Satoshi Nakamoto.

Much like today’s law firms who accept cryptocurrency from clients, Atticus Finch, the country lawyer of Harper Lee’s “To Kill a Mockingbird,” was very creative with his fee arrangements. For instance, in exchange for providing legal counsel regarding an entailment on the farm of his “down-and-out farmer neighbor” Walter Cunningham, Atticus accepted as fees: a load of stove wood; a sack of hickory nuts; a crate of smilax and holly, and (of course) a Croker sack full of turnip greens. Atticus Finch was pleased with the transaction, as was Walter Cunningham (except later on in the novel when Mr. Cunningham threatened to shoot Atticus, but that was a different situation, and I digress.)

Would Atticus Finch go so far today as to accept cryptocurrency from a client? Perhaps. But law firms should think twice about the notion, and consider the comprehensive analysis below of the broad range of significant risks law firms will confront when concocting cryptocurrency fee agreements with their clients.

Some Background

That law firms are now accepting cryptocurrency in fee arrangements should really come as no surprise. In a highly competitive legal marketplace, where pressure is mounting for lawyers to attract clients, adding cryptocurrency into the mix of alternative fee arrangements seems enticing.

Concurrently, the legal and regulatory world is being upended by technological advances from cryptocurrencies and blockchain to peer-to-peer lending and enhanced mobile financing, capturing the attention of Wall Street investors and industry regulators alike. The potential for financial and economic disruption is immense in the short and long term, particularly where blockchain is concerned — and the need for wise legal and compliance counsel to manage that disruption and growth is growing at an astronomical rate.

Hence the genesis of a new era of legal counseling quarterbacked by so-called fintech(short for “financial technology”) lawyers and their respective fintech legal and compliance practice groups. Comprised of a hodgepodge of lawyers from existing and related disciplines, fintech law practice groups include:

  • Privacy, data security, intellectual property and other cyber-related legal practitioners;
  • Former regulators, prosecutors and other government attorneys who specialize in technology-related investigations and enforcement proceedings;
  • Former Congressional staffers and current Congressional lobbyists, who concentrated their efforts towards technology-related legislation and rule-making and can navigate the hidden passages of Capitol Hill;
  • Random technologists and information security specialists who can understand and “speak the language” of coding, engineering, cryptography and the myriad of other categories of circuitry-narrated know-how; and
  • Any other designated tech-savvy lawyer who enjoys or appreciates the complex challenges associated with futuristic and game-changing technological advances.

What better way to attract the business of fintech than to create a financially friendly environment where a client’s cryptocurrency fanaticism is not only inventively crafted and philosophically championed — but also enthusiastically embraced as consideration for legal services rendered.

In fact, crafting cryptocurrency fee arrangements for legal services seems like a no-brainer, falling squarely within a slew of classic and basic legal marketing principles, including:

  • Sharing the excitement of cryptocurrency offers a unique chance to become the trusted advisor of a client. The ultimate business development goal of attorneys is to become the trusted advisor of their clients (notably spelled with an “o” and not an “e”). Accepting cryptocurrency is pioneering, risky and dangerous — which means a lawyer is leaping down into a foxhole with a client, the best of all places to build a genuine and ironclad relationship of trust and confidence;
  • The medium can become the message. By accepting cryptocurrency as payment, a law firm is demonstrating its commitment to creativity, modernization and originality – traits that clients might appreciate and find compelling;
  • Payment flexibility can attract business in and of itself. Given that accepting debit and credit cards online can make a law firm more appealing to current and potential clients, so too can accepting other forms of payment, including cryptocurrencies;
  • Accepting cryptocurrency can serve as an alternative means of continuing legal education. Warehousing, trading and handling cryptocurrency allows for the exercise of “learning by doing,” always a preference for legal experts; and
  • Lawyers can take advantage of the chance to demonstrate tangible support for a client’s enterprise. By “putting your money where your mouth is,” fintech legal practitioners in particular can prove themselves true believers in the future of technology-driven digital currency, setting themselves apart from their scribe competitors who remain content to observe the crypto-revolution from the safety and shelter of the sidelines.

But having said all of the above, the risks for a law firm that accepts cryptocurrency run a perilous gamut of legal, regulatory, financial, ethical and reputational dangers. Simply stated, accepting cryptocurrency as a fee payment in today’s crypto-manic environment is, despite all of the bus dev allure, just not worth it.

Cryptocurrency Conversion Concerns: Costly, Complicated and Risky

The logistics of accepting cryptocurrency are unique, complicated and problematic. It is not as if a law firm’s controller can stroll across the street and convert cryptocurrency to U.S. dollars, record the data in a firm’s accounting software, and be back in time for a partnership meeting. First, the law firm must identify a reliable and trustworthy financial institution to safeguard the cryptocurrency (some sort of digital wallet) and to convert the cryptocurrency upon demand.

Where can a law firm find this kind of honorable, respected and U.S. registered financial institution? Not among Wall street’s traditional ranks for sure. The institutions servicing cryptocurrency clients are barely in their infancy. There is no central regulatory authority; no state or federal team of bank auditors and compliance experts monitoring transactions; no proven licensure for any of the participants at the cryptocurrency institutions – it’s not just the Wild West, it’s global anarchy.

Furthermore, even if a law firm could identify a respectable institution to convert its cryptocurrency to cash, there remain other problems. For instance, by registering and interacting with the cryptocurrency institution, the law firm is inviting not just possible identity theft but also exposing its operations to a potential cyber-attack.

Unlike Fed-insured banks and SEC registered broker-dealers, cryptocurrency platforms and operators might not abide by a rigorous regime of cybersecurity rules and requirements, and likely lack not only appropriate cybersecurity practices, policies and procedures, but also skilled data security personnel and hardened cyber-infrastructure. This creates vulnerabilities not just to external threats but threats from their own internal employees, customers, contractors and operators.

A law firm must also maintain the proper recordkeeping and accounting requirements of the cryptocurrency. This allows for audit, reporting and cash management – not just for the due diligence of the transaction but also for paying the partners, shareholders and other employees of the law firm. Even when a law firm becomes satisfied by the process, the law firm must establish rigid internal controls so that the cryptocurrency is not somehow stolen or wrongfully depleted by hackers or insiders. The more technical the cryptocurrency process the more easily manipulated or hijacked by the few internal experts schooled on its remittance.

Even the simple issue of decimal points can cause problems. For example, most accounting systems do not process more than two decimal places, because most regular currencies do not fall below cents. Cryptocurrencies, on the other hand, can go down to 18 decimal places. Law firm accounting systems cannot handle this conflict and until software packages develop for managing multiple decimal points, any cryptocurrency accounting will have to be done manually (and painstakingly).

Cryptocurrency Valuation Concerns: Wild Price Fluctuations

From a practical standpoint, accepting cryptocurrency also carries with it risks relating to its extraordinary price fluctuations. For example, bitcoin has had an exceptionally volatile price history. At around this time last year, bitcoin was trading at a price slightly higher than $2,000, according to CoinMarketCap. By the end of 2017, it had reached its all-time high of around $20,000 and a market cap of more than $325 billion, marking an unprecedented surge.

Yet, the first quarter of 2018 has not been nearly as euphoric for the largest cryptocurrency, either in terms of market capitalization or price. As of the end of May, bitcoin was trading at around $8,400 with a market cap of just over $143 billion – a loss of more than 50% of its December 2017 value.

Navigating this financial rollercoaster ride during the typical timeline of law firm engagement (such as the negotiating phase; estimating phase; pricing phase; contract phase; invoice phase; and payment phase) is laden with extraordinary financial risk to say the least.

Merely pinpointing the appropriate price for a cryptocurrency is challenging. For example, different payment processors convert bitcoin at different prices because there exists no single market price for bitcoin. Mark-ups and manipulations can thrive and the customer may have nowhere else to turn but a crooked, irresponsible or incompetent payment transmitter.

Relatedly, aside from rabid price fluctuations, there are also unsightly, unreasonable and hefty commissions and other transaction fees that cryptocurrency exchanges typically charge when converting cryptocurrency into cash. Determining who bears the burden of these unpredictable and sizable costs is challenging. Likewise, if a client insists, or a law firm requires, that the law firm hold a retainer in cryptocurrency to draw fee payments from, who receives the windfall if the cryptocurrency increases and who must endure the loss if the cryptocurrency value craters?

Cryptocurrency Ethical Concerns: Complex and Far-Reaching

Accepting cryptocurrency as payment prompts an odd assortment of ethical issues for lawyers, many of which raise more questions than answers.

First off and above all else, a lawyer has certain obligations which arise from the essential ethics of the legal profession (as an Officer of the Court) including and especially an obligation not to support or facilitate criminal activity.

Thus, lawyers accepting cryptocurrency as payment must have reasonable policies, practices and procedures in place to insure fee arrangements are not somehow facilitating criminal activity. Awareness, vigilance, recognizing red flag indicators and caution are a lawyer’s best tools in assessing situations that might give rise to concerns of money laundering, terrorist financing or other similar conduct.

Know Your Client Responsibilities

Lawyers who take cryptocurrencies as payment from a third party for legal services to a client should use standard “know your client” procedures to identify the payer. For instance, a law firm must ensure that whoever is paying a client’s fees does not interfere with the law firm’s independence or relationship with their client. Along these lines, this step is also critical to enable lawyers to comply with the ethics rules on third-party fee arrangements; conflicts of interest; and lawyer-client confidentiality.

But confirming the identity of a cryptocurrency payor is not easy — especially given that the raison d’être of cryptocurrency is to provide anonymity. In fact, when it comes to the origins of cryptocurrency payments, lawyers might have an easier time verifying the bonafides of a gym bag filled with cash and loose change.

The mere investigation of the identifiers within cryptocurrency payment trails poses immediate problems. Within the cryptocurrency world, there exist few traditional financial institutions involved and scant licensed professionals performing any sort of gatekeeper function. In short, there is no simple path of due diligence — like a phone call or even a Google or LEXIS search — that can instantaneously ease identification concerns.

Almost by definition, the world of cryptocurrency is cloaked and fortified by a shroud of mystery, circuitry and shadowy figures. To exacerbate matters, cryptocurrency patrons and promoters rarely break ranks, circling their sacred wagons of secrecy, anonymity and universal propriety.

Overpayment Concerns

Cryptocurrency pricing can be wildly volatile, and given that lawyers are prohibited from charging unreasonable fees for legal services, lawyers accepting cryptocurrency risk possible unconscionable overpayment for services, especially given the typical billing and payment cycle and delays for legal invoices.

With such rapidly changing cryptocurrency prices, a law firm cannot ensure that they are charging their client a consistent price. For instance, given this volatility, a billable fee of one bitcoin could cost a client wildly different prices based on the market’s behavior that day. Cryptocurrencies also raise particular concerns for determining the appropriate value and whether the client is truly informed as to the nature of a fee. Although law firms are working-around cryptocurrency volatility by quickly exchanging cryptocurrencies into fiat, delays could still distort transactions between them and their clients.

Safeguarding Cryptocurrency

Lawyer has very specific ethical obligations with respect to the safeguarding, care and protection of client funds such as retainers, advances, settlements and the like – another area that is strictly regulated; aggressively policed by every state; and of increasing concern to state bar associations.

With respect to warehousing cryptocurrencies in any kind of trust account, lawyers will face an array of challenging issues. For instance, cryptocurrencies cannot simply be deposited into a bank account like traditional currency and would need to be handled as property instead, where its handling requires not just financial competence but technological expertise as well. Not only do most law firms typically lack the technological sophistication to manage and properly execute inherently intricate cryptocurrency transactions, but also no state regulatory bar association is currently equipped to audit properly cryptocurrency transactions and storage.

Any sort of technological mishap can be fatal to a cryptocurrency payment, and, once lost or stolen, cryptocurrencies can be gone forever. Whether by mishap or cyberattack, once a cryptocurrency is pilfered, depleted, absconded with or compromised, there are no banks and there is no FDIC insurance to reimburse a cryptocurrency owner.

Given that lawyers must employ reasonable methods to protect the cryptocurrency that they are handling, managing and trading, just the task of conjuring up a reliable and acceptable set of cryptocurrency practices and procedures could be overwhelming (and by necessity, must remain in a constant state of flux). Unfortunately, safeguarding cryptocurrency is not yet a course offered by any law school, so most lawyers will have to wing it – not a preferred modus operandi when it comes to issues of finance, taxes and compensation.

Nebraska, Lawyers and Cryptocurrency

The first (and apparently the only) state to officially weigh in on the ethics of whether a law firm can receive cryptocurrency as payment is Nebraska, who held, in September 11, 2017 opinion 17-03, that lawyers may accept payment in digital currencies but must immediately convert the money into U.S. dollars.

Although law firms across the country have announced that they accept cryptocurrency for payment, Opinion 17-03 is the first state bar opinion on whether attorneys can do so in compliance with the Model Rules of Professional Conduct, the most widely adopted system of legal ethical rules.

Nebraska noted that lawyers who receive payment in digital currencies should take three steps. First, the lawyer should notify the client that the payment will be immediately converted to U.S. dollars. Second, the lawyer should make the conversion through a payment processor. Third, the lawyer should credit the client’s account at the time of payment.

The opinion also says that:

“[Lawyers who accept virtual currency] must be careful to see that this property they accept as payment is not contraband, does not reveal client secrets, and is not used in a money-laundering or tax avoidance scheme; because convertible virtual currencies can be associated with such mischief.”

With respect to client trust accounts, Nebraska lawyers may only hold digital currencies in trust for clients after advising that the currency will be converted U.S. dollars, but the currency must be held separate from the lawyer’s property and must be properly safeguarded. The Nebraska opinion also admonishes lawyers that they should take safeguarding precautions such as encryption or use of more than one private key for access.

The committee said lawyers must take reasonable security precautions when they receive client payments in cryptocurrency or share them on behalf of clients. The opinion suggested that reasonable methods could include:

  • Encrypting the private key required to send the cryptocurrency;
  • Using more than one private key for access to the cryptocurrency; and
  • Maintaining the wallet in a computer or other storage device that’s disconnected from the Internet, which would also allow for offline storage of private keys.

The Nebraska opinion seems to assume that an escrow involving lawyers and clients would occur in the same way as an ordinary escrow arrangement (even though cryptocurrency is property and not currency), in which the client gives complete control of the funds over to the lawyer. Therefore, if a cryptocurrency payment is intended to serve as a retainer that will be drawn on for future fees, Nebraska requires that the lawyer must immediately convert the cryptocurrency to U.S. dollars before the deposit into the trust account.

Although Nebraska Opinion 17-03 addresses only the conduct of attorneys licensed to practice law in the State of Nebraska, other states that have adopted, or used iterations of, the Model Rules of Professional Conduct may see the opinion as a guide for their own judicial systems or bar associations.

Cryptocurrency Tax Implications: All-Encompassing

When a law firm conducts a transaction in a foreign currency, there are special rules which govern how gains or losses from the exchange of foreign currency are handled for tax purposes. Many cryptocurrency users assumed that those rules would also apply to virtual currencies. But they were wrong. Per IRS guidance issued in March 2014, for federal tax purposes, virtual currencies should be treated as property and not foreign currency.

Specifically, this means that when acquiring cryptocurrency, a law firm is required to record the fair market value of the property which is deemed the law firm’s “basis” in the property. When the asset is later exchanged, if the fair market value has increased, then the law firm has a taxable gain. Thus, a law firm accepting cryptocurrency as payment must also establish an appropriate manner to manage the taxes associated with a cryptocurrency fee arrangement.

The law firm must meticulously track and record the basis of cryptocurrency transactions, which requires knowing the value of the cryptocurrency when received and when sent, an exceedingly onerous and almost impossible burden (which, if it were even possible, would require a costly high-tech solution to automate).

Cryptocurrency AML Concerns: Myriad and Expanding

Given that cryptocurrency transactions are pseudo-anonymous, encrypted and decentralized by nature, virtual currencies offer a convenient method of transferring funds obtained from illegal activities without an audit trail. This makes it harder for any central authority or law enforcement agency to track transactions, and to identify the individuals behind any of them — triggering a litany of anti-money laundering (AML) concerns.

From buying a fake I.D. or a bottle of opiates, to receiving a cache of credit card numbers or stolen identities, to collecting a ransomware payment demand or even for funding terrorist-related activities, Cryptocurrencies represent a pseudo-anonymous virtual currency which has unfortunately evolved into the payment mechanism of choice for unlawful transactions.

Slowing the growth of this unlawful behavior is a notion that appeals not just to market participants, but also to the myriad of victims of crypto-funded ransomware, terrorism, drug dealing and the like. The government, in particular the Financial Crimes Enforcement Network of the U.S Treasury Department (FinCEN), is acutely aware of the dark side of cryptocurrency use. Along those lines, newly appointed FinCEN director Kenneth Blanco, a former U.S. Department of Justice AML expert, who has testified before Congress about the threat of virtual currencies, has dedicated increasing resources to FinCEN’s cryptocurrency enforcement program.

A Lawyer’s AML Obligations

Given a lawyer’s role in society and inherent professional and other obligations and standards, lawyers must at all times act with integrity, uphold the rule of law and take care not to facilitate any criminal activity. Lawyers must remain especially vigilant of the threat of criminals seeking to misuse the legal profession in pursuit of money laundering, terrorist financing activities and other similar crimes. These AML obligations arise from both ethical obligations for attorneys (discussed above) and AML statutory responsibilities established all around the globe.

In the U.S., pursuant to the Bank Secrecy Act (BSA), transactions involving traditional financial firms, such as banks, brokers and dealers, and money service businesses (MSBs), are subject to strict federal and state AML laws and regulations aimed at detecting and reporting suspicious activity, including money laundering and terrorist financing, as well as securities fraud and market manipulation. Following this example, law firms can create their own internal compliance programs, especially in the area of cryptocurrency transactions.

Although U.S. lawyers are arguably not subject to specific AML requirements, despite frequently playing a key role in handling financial transactions on behalf of clients, many western countries, including the United Kingdom and France, have established AML reporting requirements relating to attorneys.

Indeed, a December 2016 report, the Financial Action Task Force (FATF) singled out a number of non-financial sectors in the U.S. for failing to fight against money laundering. The report criticized the U.S. legal industry for not having an adequate understanding of money laundering vulnerabilities and the need to implement appropriate controls to mitigate them. Among the priority actions highlighted in the report was a suggestion that the U.S. apply more AML obligations to lawyers.

Putting aside the debate over lawyers’ being subject to AML rules — a debate certain to evoke strong opinions (especially from criminal defense lawyers) — U.S. lawyers already have every reason to avoid such pitfalls if only to safeguard their own reputations. The last thing an innocent individual attorney or law firm wants is to be linked to something as unsavory as having unwittingly facilitated some manner of financial crime.

By instituting certain fundamental AML programs, if only as a matter of simple self-regulation, law firms can protect themselves from an AML mishap. After all, only when equipped with timely and relevant due diligence can attorneys, within their own sound judgment, truly render competent legal advice about a transaction or course of conduct.

AML programs typically include a system of internal controls to ensure ongoing compliance with the BSA; independent testing of BSA/AML compliance; a designated BSA compliance officer to oversee compliance efforts; training for appropriate personnel; and a customer identification program. Thus, to ensure AML compliance, law firms would start by obtaining clearly identifiable information about a prospective client, and identifying any potential risks of association.

Here is where cryptocurrency transactions can create challenging hurdles. Theoretically, anyone with an Internet connection and a digital wallet can be part of a cryptocurrency platform, initial coin offering or other cryptocurrency financing endeavor – which, of course, opens the laundry room door for those with criminal motives.

Accepting Payment from Cryptocurrency Exchanges

FinCEN has taken an interest in cryptocurrency and issued guidance for cryptocurrency exchanges to prevent and report money laundering activities. While these guidelines might not apply to a law firm that simply receives payment in cryptocurrency, attorneys must be aware of the risks and only accept payment through exchanges that actively take steps to prevent money laundering. But how? Cryptocurrency exchanges have only just begun operating and their existence itself may be short-lived. Both the U.S Securities and Exchange Commission (SEC) and the New York State Attorney General’s Office (NYAG) have raised serious concerns about their operations.

The SEC has issued a strong warning that cryptocurrency trading platforms might need to register with the SEC and meet all of the SEC’s strict registration, compliance, auditing and other extensive regulatory requirements. Meanwhile, the Investor Protection Bureau of the New York Office of the Attorney General launched its Virtual Markets Integrity Initiative, a fact-finding inquiry into the policies and practices of platforms used by consumers to trade cryptocurrencies.

As part of a broader effort to protect cryptocurrency investors and consumers, the NY Attorney General’s Office sent questionnaires to thirteen major virtual currency trading platforms requesting key information on their operations, internal controls and safeguards to protect customer assets. As the letters explain, the Initiative seeks to increase transparency and accountability as it relates to the platforms retail investors rely on to trade virtual currency, and better inform regulators, enforcement agencies, investors, and consumers.

Law Firm Entanglement

Law firms should be viewing AML compliance as a necessity rather than a burdensome suggestion. The legal industry has already begun to feel the impact of compliance related requirements through new anti-bribery and anti-money laundering terms that have appeared in outside counsel guidelines; legal master service agreements; and law firm engagement letters. If only as an internal risk mitigation measure, law firms have already begun to adopt some of the financial industry’s internal practices to protect against AML violations.

When involved with cryptocurrency trading and remittance, law firms face more than the risk of being perceived by clients as organizations that support money laundering practices. The mere association with cryptocurrency is a lightning rod for governmental skepticism, suspicion, inquiry and scrutiny.

Not surprisingly, the notion of terrorists and criminals being able to launder money anonymously has not escaped the attention of U.S. law enforcement agencies, who have vowed to crack down on the virtual currency exchanges who serve criminals, even those operating outside the United States. The U.S. Department of Justice (DOJ), acting in cooperation with FinCEN, has become increasingly active in policing criminals exploiting cryptocurrencies, leveraging AML statutes and regulations as its preferred statutory prosecutorial weapon. Thus, law firms also risk becoming entangled in a costly and distracting federal or state investigations (or even the prosecutions) of the attorneys involved.

For instance, AML rules and regulations could impact the law firm advising an initial coin offering or token trading platform indirectly to the extent it relies on the law firm to enhance its bona-fides, or if a law firm is somehow involved with clearing, settlement, custody, or any other function. This is already true with respect to SEC investigations, where SEC Chairman Jay Clayton has specifically stated that he is concerned about legal advice given to unlawfully operating cryptocurrency trading platforms and illicit initial coin offerings.

By becoming increasingly sophisticated at coopting a cryptocurrency network to establish an AML jurisdictional nexus, FinCEN and DOJ have laid the groundwork to link and prosecute both the masterminds and the foot soldiers of rogue and unregistered crypto-financing institutions. This could include the lawyers who become entangled in the undertaking (for instance, lending their reputations to promote a cryptocurrency firm’s operations and money laundering or perhaps even serving as an indirect testimonial of a cryptocurrency’s success and global acceptance).

Director of the SEC Enforcement Division from 1974 to 1981; general counsel to the Central Intelligence Agency from 1981 to 1985; and U.S. District Court Judge for the District of Columbia from 1985 to 2000, famed Judge Stanley Sporkin put it best when he said, “When you lie down with dogs, you get fleas.” When contemplating cryptocurrency fee paying agreements, law firms would bode well to heed Judge Sporkin’s enduring admonition.

Cryptocurrency OFAC Concerns: A Matter of Life and Death

Aside from a deep due diligence process of a crypto-paying client, a law firm accepting cryptocurrency must also conduct other verification processes for offshore clients such as those required by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).

Every U.S. person and business (including lawyers and law firms) is required to avoid engaging in financial transactions with certain individuals, entities and countries that are subject to U.S. economic sanctions. Accordingly, when a law firm relationship triggers OFAC compliance, it is the firm’s obligation to ensure that none of its clients are on the list of prohibited individuals or entities maintained by OFAC. Law firms also need to be sure that clients and other business partners are not based in countries subject to broader economic sanctions.

For its part, OFAC recently released guidance, issued in the form of Frequently Asked Questions (FAQs). The FAQs explain that transactions involving cryptocurrencies will be treated the same as other transactions—a position that multiple Treasury Department officials have signaled for several months.

Compliance with the economic sanctions programs administered by OFAC and compliance with the AML laws established under the BSA are often considered in the same breath. However, while effective OFAC screening and AML programs will certainly have areas of overlap, namely a robust customer identification procedure, they are two separate and distinct programs and responsibilities, requiring separate and distinct procedures for each.

With respect to OFAC and AML considerations, it is also important to recognize and appreciate that cryptocurrency is a global phenomenon. This makes identifying the source of cryptocurrency, or in the least, confirming that the cryptocurrency is not somehow tainted by unlawful conduct, especially challenging if not impossible. Like accepting a $50,000 roll of $100 bills – the cash’s very existence raises questions pertaining to its purity. Moreover, merely because a $50,000 roll of $100 bills does not have blood stains on it, does not alleviate the obvious suspicion about its origin.

Looking Ahead

In the celebrated John Wick thriller films, John Wick, played by Keanu Reeves, is an international assassin whose day-to-day work requires staying at the Continental, a hotel that functions as neutral territory for hired cutthroats and notorious murderers. The Continental Hotel has its own form of currency in the form of uniquely branded gold coins. The gold coins have images and Latin phrases on both sides. On one side, at the top of the coin is the phrase Ens Causa Sui, or “Something generated within itself. On the reverse side is the phrase Ex Unitae Vires, or “Out of unity comes strength.” Sound familiar . . . ?

All services in the Continental are paid by the coins including specialized services like weapons and munitions supply (from the Continental’s Sommelier) or body armor (from the Continental’s seamstress). All the criminals Wick encounters seem to accept the gold coins – which can pay off everything from a bar tab to an invoice from the outside contractors who Wick hires to dispose of the typically 20-30 bodies he leaves behind after a particularly action-packed altercation.

A few years ago, the Continental’s coin-based fee arrangements may have seemed limited to the imaginary universe of Hollywood blockbusters — but the reality of a John Wick currency system is happening right in our midst. Only instead of the Continental’s exclusively minted gold coins, there has sprouted a broad range of cryptocurrencies mined on virtual servers, rather than forged in iron and fire.

Once U.S. companies began accepting cryptocurrency as payment, U.S. law firms began to follow suit. Given the potentially wide-reaching application of the underlying blockchain technology, cryptocurrencies may someday become commonplace in the legal profession. So why not be a pioneer rather than the last in line?

New York has even begun setting the stage for cryptocurrency acceptance in commercial transactions. Specifically, New York’s Department of Financial Services allows merchants to sell goods and services using cryptocurrencies, by requiring a BitLicense for anyone engaged in the financial use of virtual currencies such as holding or storing virtual currency on behalf of others. It’s no wonder that advocates of accepting cryptocurrency payments have even gone so far as to argue that the risk of accepting cryptocurrency payments is no different from that of accepting foreign currencies.

But taking on all of the associated risk with cryptocurrency payment arrangements is not for the faint of heart – and when a client mandates a cryptocurrency fee arrangement, it may be time for a lawyer to push back.

Federal and state law enforcement and regulatory efforts pertaining to all things crypto have increased exponentially in the past year, and some cryptocurrency institutions that seem to be thriving at the moment, might not even be doing business in the future. Cryptocurrency’s liquidity risk; price volatility; cybersecurity vulnerabilities; commission fees; AML implications; OFAC concerns; ethical dilemmas; tax burdens; entanglement mishaps and the rest, create a situation that could be unmanageable or even untenable for a law firm’s shareholders or partners. Not to mention that for the most part, the entire cryptocurrency system resides amid an unregulated, mysterious and arguably sinister environment — certainly a poor choice of virtual venue.

Moreover, for a law firm, where reputation is everything, the risks of somehow becoming ensnared or even merely associating with the dark and seedy underbelly of cryptocurrency, are considerable. As one Virginia bar ethics officer recently wrote, addressing the issue of bitcoin payments for lawyers (in a co-authored article):

“The bulk of people we know regard bitcoins as ‘shady money’ and they may well regard lawyers accepting bitcoins as ‘shady lawyers.’”

This is probably why the club of commercial enterprises most interested in accepting cryptocurrency is not the kind typically including sophisticated professional service firms. For instance, at present, there is a notable (or perhaps better described as “notorious”) group of merchants and customers, who are willing to put up with cryptocurrency’s many logistical and regulatory inconveniences, including:

One final important note perhaps most bothersome to me: When clients discourage payments in U.S. dollars and mandate that their law firm devise a cryptocurrency fee arrangement, it may also be a subtle indication of a lack of respect and appreciation for the skills, talents, expertise and trustworthiness of counsel.

An important lesson I have learned from having been air-dropped into many bet-the-company crisis situations, is that when a client does not believe in the value proposition of counsel, then payment, billing and invoice disputes will inevitably arise down the road. The same notion holds true for cryptocurrency fee payment arrangements.

Stated more simply, for clients who truly appreciate the sage counsel of their attorney, the form of payment should never be a deal-breaker.

John Reed Stark is president of John Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last 11 of which as Chief of its Office of Internet Enforcement. He has taught most recently as Senior Lecturing Fellow at Duke University Law School Winter Sessions and will be teaching a cyber-law course at Duke Law in the Spring of 2019. Mr. Stark also worked for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of, “The Cybersecurity Due Diligence Handbook.”

The post Guest Post: Why Law Firms Should Never Accept Their Fees in Cryptocurrency appeared first on The D&O Diary.

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