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Part I of this post on Web 3.0 + Engagement Agreements discussed considerations for representing DAOs in lawyer engagement agreements. Here in Part II, we’ll move on to what terms to include in your retainer agreement to ethically accept cryptocurrency or NFTs as payment for legal services.
Accepting Cryptocurrency Payments For Legal Fees
For starters, keep in mind that crypto payments generally implicate ethics concerns when crypto is accepted as an advance payment. When lawyers accept cryptocurrency for an earned fee both the cost of legal services and currency value are known at the time so the cost of services and value of the currency is fixed in time. But accepting crypto as an advance payment can triggers ethics red flags due to (1) the fluctuating value of crypto (which can theoretically give rise to unreasonable fees) and (2) the incompatibility of crypto with traditional trust accounts which are designed to hold conventional currency.
The following states have ethics opinions that address cryptocurrency payments for legal fees: Ohio (Op. 2022-07, August 5, 2022), District of Columbia (Ethics Op. 378, June 2020), Virginia (LEO 1998, March 2022), North Carolina (2019, Formal Ethics Op. 5), New York, (Formal Opinion 2019-5), Nebraska (Advisory Opinion 17-03, 2017). Some key points:
- With the exception of North Carolina, these opinions all permit lawyers to accept crypto as an advance payment. However, Nebraska requires immediate conversion of crypto to traditional currency so it can be placed in the trust account. And while North Carolina does not allow advance payment of a retainer fee by crypto, lawyers can accept crypto payments for flat fees which are treated as earned on receipt.
- All of the state opinions above view crypto as property rather than conventional currency. And like most other situations where property is tendered as payment for legal services, the arrangement is subject to Rule 1.8(a) that governs business arrangements. This means that client consent to the essential terms of the transaction is required, such as the method for valuing the crypto and which party bears the risks and benefits if the currency fluctuates during the course of the legal matter.
- Both DC and Virginia suggest that for purposes of assessing reasonableness of the fee, the transaction (and crypto value) should be evaluated at the time the transaction is entered into.
- Lawyers must segregate crypto from other law firm property and familiarize themselves with applicable technology to ensure safekeeping (e.g., the Ohio Bar suggests cold storage wallets, encryption and back up of private keys, multi-signature accounts)
Engagement Agreement Takeaways for Crypto:
If you plan to accept crypto payments and hold the funds as crypto (instead of cashing them out), you’ll need to update your retainer agreement. This article offers some detailed suggestions to include as does the D.C. Bar decision which suggests that the agreement explain:
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.
Payment by NFTs:
This recent article noted that prisoners are using NFT sales to raise funds to pay for attorneys. But can an attorney accept an NFT in exchange or as advance payment for legal services? After all, NFTs are not currency but a type of property – specifically collectibles due to their unique (i.e., non-fungible) characteristics. Most likely, so most likely, payment by NFT would, as with crypto, be treated as a business transaction with clients – though one more akin to taking an ownership interest such as accepting stock in lieu of payment if the client itself created the NFT. DC Bar Opinion 300 (on ownership interest in clients) spells out relevant considerations. And as with any business transaction with clients, an retainer agreement that accepts NFTs as payment should obtain the client’s informed consent to the arrangement.
One final word of caution here: there’s no reason for ethics regulators to reinvent the wheel or for lawyers to wait for ethical guidance. At the end of the day, both NFTs and crytpocurrency are treated as types of property, and the ABA Model Rules and most jurisdictions have long allowed lawyers to accept payment through property subject to various caveats including relevant disclosure to clients and consent through the retainer agreement.
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