Bitcoin has come a long way since 2010 when Laszlo Hanyecz made the first Bitcoin purchase by paying 10,000 Bitcoins for two Papa John’s pizzas – a pizza order that today would have been worth over $80 million.

In addition to the pizza giant, some law firms are now accepting cryptocurrencies in exchange for legal services. Small firms in the technology industry, the Treasurer of the State of Ohio, and law firms such as Frost Brown Todd in Cincinnati and Steptoe & Johnson in Washington D.C. already are on the cryptocurrency bandwagon. Last week Am Law 200 firm Quinn Emanuel joined their ranks.

What is cryptocurrency?

Bitcoin is the oldest of over 1,000 cryptocurrencies – digital currencies not backed by any banks or governments. Cryptocurrencies are represented by entries in a digital ledger called a blockchain. The ledger is publicly accessible but encrypted. Each transfer of the cryptocurrency is recorded by adding to the ledger.

Individuals or entities that “own” part of the currency are identified by an anonymous key number. Each owner has a digital wallet, which can be stored in a smartphone app, that records transactions.

What are the ethics issues?

Before deciding to accept cryptocurrency payments from clients, law firms should understand and plan for the legal ethics issues that the digital currencies trigger. Among them:

  • Volatility

Cryptocurrencies are known for being extremely volatile, with sudden spikes and drops in value. Law firms accepting cryptocurrency must be careful not to run afoul of their jurisdiction’s version of Model Rule 1.5, which prohibits the collection of “an unreasonable fee or an unreasonable amount for expenses.”

Nebraska is apparently the only jurisdiction to have weighed in with an ethics opinion on cryptocurrency. It advises lawyers to convert a cryptocurrency payment to U.S. dollars immediately upon receipt and to notify their clients on how they will handle the digital currency, but questions remain as to the meaning of “immediate” (is a Monday morning conversion sufficiently immediate for a Friday night payment?), the applicable exchange rate (rate at time of payment or time of conversion?), and the exchange medium (which one should be used? Who pays transaction fees?).

  • Anonymity

The anonymous nature of cryptocurrency transactions has given digital currencies a reputation for attracting criminal behavior and may make it difficult to know who is paying your client’s legal fees. Of course, Model Rule 1.2(d) prohibits lawyers from assisting a client in conduct that the lawyer knows to be criminal. And Model Rule 1.8(f) mandates that lawyers may not accept compensation from anyone other than their clients unless certain conditions are met.

Before accepting cryptocurrency payments, law firms should establish practices, such as “know your client” procedures, to ensure that they are not facilitating criminal activity and that they know who is paying the bills.

  • Safeguarding client property

Model Rule 1.15 requires lawyers to safeguard client property. But cryptocurrencies cannot be deposited into your firm’s IOLTA account. The IRS defines cryptocurrency as property, and law firms must be technologically prepared to manage it. As financial institutions have not adapted to hold cryptocurrency in trust or to pay “interest” on such holdings to legal assistance organizations (which receive IOLTA interest under state-administered programs), this could be an area of uncertainty for firms.

Cryptocurrency can be stored in a digital wallet offered by online platforms, but there is a risk of hacking and lack of insurance against loss. Firms might also use “cold storage” by maintaining the cryptocurrency on a flash drive or other offline storage device.

Takeaway: Be tech savvy and have a good engagement letter

A detailed engagement letter tailored to compliance with the Rules of Professional Conduct is essential to manage the ethics risks of accepting cryptocurrency. A recent article counsels that the engagement letter should set forth the mechanics for conversion to U.S. dollars, identify the payer, and allocate responsibility for storage costs and the risk of loss – and that seems like prudent advice.

Remember: Model Rule 1.1 (“Competence”) as adopted in many jurisdictions carries with it the duty to be aware of the benefits and risks associated with relevant technology. You can certainly take advantage of the business development advantages of accepting cryptocurrency, but you should first carefully consider the ethical questions.