MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2022-01
Accepting Cryptocurrency in Payment of Fees
In your letter of October 15, 2021, you requested an opinion concerning the ethical propriety of an attorney accepting cryptocurrency as a retainer and, if allowed, how you must handle that retainer. The Committee on Ethics of the Maryland State Bar Association considered and approved the following as our written opinion on this matter.
QUESTION PRESENTED
May an attorney accept a cryptocurrency retainer in advanced payment of fees, and what are the ethical considerations raised by doing so?
BRIEF CONCLUSION
An attorney may accept cryptocurrency in payment of fees, provided that the fee is reasonable and the fee arrangement—pursuant to which such fees are paid—otherwise complies with the Maryland Attorneys’ Rules of Professional Conduct (“MARPC”). See Md. R. Att’y Rule 19-300.1, et seq. (hereinafter “Rule”). However, given the nature of cryptocurrency and its attendant inability to be deposited into an Attorney Trust Account, we caution that alternative fee arrangements involving the receipt of fees paid in cryptocurrency raise a host of potential ethical considerations, and any attorney considering such an arrangement should be careful to ensure that such arrangements are in full compliance with the MARPC.
STATEMENT OF FACTS
As a hypothetical, you have asked us to assume that an attorney is engaged in the representation of clients operating within the cryptocurrency industry and wishes to accept payment of fees in the form of cryptocurrency, rather than in traditional fiat currency (e.g., USD). The attorney’s clients typically hold assets in the form of cryptocurrency and prefer to transact business via the direct transfer of cryptocurrency, rather than having to first convert assets to fiat currency. You’ve further asked us to assume that these clients “are generally unwilling to deposit funds directly into a traditional bank account, including an attorney trust account.”
The hypothetical attorney proposes fee agreements where after obtaining informed consent, confirmed in writing, the attorney would establish a “digital wallet” under the attorney’s exclusive control for each client. These wallets would have the express and sole purpose of holding a “retainer fee” paid in cryptocurrency assets. Upon establishing the wallet and providing the client with the wallet address, the client would pay the retainer by directly transferring cryptocurrency assets to the newly established wallet. Upon completion of the transfer, the assets would be under the exclusive control of the attorney. Following receipt of the cryptocurrency retainer, the attorney would thereafter debit funds to the attorney’s own account as fees are earned, much in the same way that earned fees are debited from retainer funds held in Attorney Trust Accounts.
For the reasons set forth below, we believe your proposal is permissible pursuant to an alternative fee agreement(s) as described in Rule 19-301.15(c).
ANALYSIS/DISCUSSION
We are not the first State Bar Association’s Ethics Committee to consider the ethical implications of attorneys receiving payment in cryptocurrency. Ethics Committees in other jurisdictions have taken varied approaches. In general, we agree with the conclusion(s) reached by many committees that accepting payment of fees in the form of cryptocurrency comports with professional ethical obligations, provided that such fees are reasonable and that they otherwise comply with the MARPC. However, due to cryptocurrency’s decentralized digital-only nature, we caution that cryptocurrency presents unique challenges to ensuring ethical compliance.
Cryptocurrency’s Nature – Funds or Property?
Whether cryptocurrency should be treated as “funds” (i.e., traditional fiat currency) or alternatively as “property” (i.e., a non-currency-commodity) is at the core of many of our concerns. Unlike traditional physical commodities (e.g., gold or silver) and unlike traditional fiat currency (e.g., the U.S. Dollar), Cryptocurrency’s digital-only algorithmic existence is “stored” in digital “wallets” maintained by online platforms (i.e., “hot wallets”) or offline on a computer’s hard drive, a USB [drive], or even paper (“cold wallets”). Assuming you have the wallet internet address, the contents of the wallet—and transactions of interactions with the wallet—are fully transparent and viewable to the public on the blockchain.
Rule 19-404 typically governs the receipt of “funds” by an attorney and requires the deposit of such funds into an Attorney Trust Account:
Except as otherwise permitted by rule or other law, all funds, including cash, received and accepted by an attorney or law firm in this State from a client or third person to be delivered in whole or in part to a client or third person, unless received as payment of fees owed the attorney by the client or in reimbursement for expenses properly advanced on behalf of the client, shall be deposited in an attorney trust account in an approved financial institution. This Rule does not apply to an instrument received by an attorney or law firm that is made payable solely to a client or third person and is transmitted directly to the client or third person.
Id.
Similarly, Rule 19-301.15(a) typically requires that “funds” be kept in an Attorney Trust Account:
(a) An attorney shall hold property of clients or third persons that is in an attorney’s possession in connection with a representation separate from the attorney’s own property. Funds shall be kept in a separate account maintained pursuant to Title 19, Chapter 400 of the Maryland Rules, and records shall be created and maintained in accordance with the Rules in that Chapter . . . .
Id.
However, 19-301.15(a) goes on to recognize that property assets, unlike “funds,” by nature are incapable of deposit into client trust accounts and specifies how to ethically safekeep such property:
Other property shall be identified specifically as such and appropriately safeguarded, and records of its receipt and distribution shall be created and maintained. Complete records of the account funds and of other property shall be kept by the attorney and shall be preserved for a period of at least five years after the date the record was created.
Id.
The U.S. Internal Revenue Service (“IRS”) describes “virtual currency,” i.e., cryptocurrency, as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” and treats cryptocurrency as property, rather than currency, for federal tax purposes. Despite having no physical existence and theoretically being “spendable” like fiat currency, cryptocurrency is more similar to a commodity, such as gold, in that its exchange value is tied directly to market demand.
For these reasons, we believe that cryptocurrency should be treated as “property” rather than “funds,” for the purposes of ethical analysis. Thus, neither the provisions of Title 19, Chapter 400, nor the provisions of Rule 19-301.15 require that cryptocurrency assets be deposited into trust accounts, but rather permit attorneys to “appropriately safeguard” such property, (i.e., with the care required of a professional fiduciary). See Rule 19-301.15 at cmt. [1]. In accordance with Rule 19-301.15(a), an attorney’s fiduciary obligation to take necessary steps to appropriately safeguard cryptocurrency, as digital property, should be carefully considered and as required by Rule 19-301.15 the attorney must identify the cryptocurrency specifically as trust property and maintain the required records.
Alternative Fee Arrangements & Accepting Advanced Payment of Fees
Legal fees are typically paid in funds (i.e., fiat currency), rather than in property. As a result, an advanced payment received by an attorney must generally be deposited into a client trust account under Maryland Rule 19-301.15(c) and may only be withdrawn as fees are earned or expenses incurred. However, 19-301.15(c) also allows attorneys and clients to agree to alternative fee arrangements, provided that clients give informed consent, confirmed in writing:
(c) Unless the client gives informed consent, confirmed in writing, to a different
arrangement, an attorney shall deposit legal fees and expenses that have been paid in advance into a client trust account and may withdraw those funds for the attorney’s own benefit only as fees are earned or expenses incurred.
Id.
Similarly, Comment 4 to Rule 19-301.5 speaks directly to the ability of an attorney to ethically agree to an alternative fee arrangement, whereunder the attorney will receive a property asset—in this case cryptocurrency– in the advanced payment of fees:
An attorney may require advance payment of a fee, but is obliged to return any unearned portion. An attorney may accept property in payment for services, such as an ownership interest in an enterprise, providing this does not involve acquisition of a proprietary interest in the cause of action or subject matter of the litigation contrary to Rule 19-301.8(i). However, a fee paid in property instead of money may be subject to the requirements of Rule 19-301.8(a) because such fees often have the essential qualities of a business transaction with the client.
Id.
Thus, accepting advanced payment of fees in cryptocurrency may be ethical, provided that any unearned portion of the advanced payment is returned at the conclusion of representation, and assuming that the attorney complies with 19-301.15(c) and 19-301.8(a) prior to accepting the advanced retainer. Any fee arrangement, regardless of whether it is paid in property or in funds, must be reasonable pursuant to Rule 19-301.5.
Informed Consent
Compliance with Rule 19-301.15(c) and 19-301.8(a), as discussed in the preceding section, is dependent upon obtaining informed consent, confirmed in writing. Although “Informed Consent” is defined by 19-301.0(f), we believe Comment 6 to Rule 19-301.0 provides the best guidance as to what actions an attorney must take in order to obtain informed consent:
Many of the Maryland Attorneys’ Rules of Professional Conduct require the attorney to obtain the informed consent of a client or other person (e.g., a former client or, under certain circumstances, a prospective client) before accepting or continuing representation or pursuing a course of conduct. The communication necessary to obtain such consent will vary according to the Rule involved and the circumstances giving rise to the need to obtain informed consent. The attorney must make reasonable efforts to ensure that the client or other person possesses information reasonably adequate to make an informed decision. Ordinarily, this will require communication that includes a disclosure of the facts and circumstances giving rise to the situation, any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct and a discussion of the client’s or other person’s options and alternatives. In some circumstances it may be appropriate for an attorney to advise a client or other person of facts or implications already known to the client or other person to seek the advice of another attorney. An attorney need not inform a client or other person of facts or implications already known to the client or other person; nevertheless, an attorney who does not personally inform the client or other person assumes the risk that the client or other person is inadequately informed and the consent is invalid. In determining whether the information and explanation provided are reasonably adequate, relevant factors include whether the client or other person is experienced in legal matters generally and in making decisions of the type involved, and whether the client or other person is independently represented by another attorney in giving the consent. Normally, such persons need less information and explanation than others, and generally a client or other person who is independently represented by another attorney in giving the consent should be assumed to have given informed consent.
Id. (internal citations omitted).
At its core, ethically accepting cryptocurrency (as an advanced retainer, pursuant to an alternative fee agreement, with informed consent confirmed in writing) turns first on the question of whether the consent obtained is truly informed. Attorneys considering such arrangements must ensure that they take appropriate steps to ascertain and confirm that their clients have the information necessary to make an informed decision, including the material risks and benefits and potential alternatives. Obtaining such informed consent in the context of fees paid in cryptocurrency may require substantially more effort on the part of attorneys, as clients will need to first understand the nature of cryptocurrency. Secondary to obtaining informed consent, all efforts should be made to exhaustively address contingencies or issues that may arise due to the nature of the property asset, particularly because cryptocurrencies and other digital assets may give rise to novel issues that may not be initially contemplated. Accepting fees paid in cryptocurrency will ultimately require substantially more effort on the part of attorneys, as clients will need to understand the attorney’s obligations as they relate to acceptance of non-fiat retainers and the parameters of the agreement should be exhaustively documented.
CONCLUSION
Under the MARPC, you may accept advanced retainer fees in the form of cryptocurrency in lieu of fiat currency. Before accepting any such alternate payment arrangement, you must ensure the fee is reasonable and that the client provides informed written consent and understands the nature of blockchain transactions. Attorneys who accept retainers in cryptocurrencies should be competent in utilizing the technology and able to protect the client’s assets (e.g., safekeep the client’s property as required by Rule 19-301.15). In this case, competence requires that attorneys understand and safeguard against the many ways cryptocurrency can be stolen or lost. In the same way an attorney might be disciplined for depositing a client retainer paid in fiat currency into their personal account or the firm’s operating account, an attorney accepting a cryptocurrency retainer could be disciplined for falling prey to a phishing attack, for losing access to the wallet containing the funds, or for simply sending funds to be disbursed back to the client to the wrong address. Because the cryptocurrency industry is unregulated, uninsured, anonymous, and irreversible, it is particularly important for you to appropriately safeguard the cryptocurrency retainer against theft, loss or mishandling, or other similar risks. We hope this response is helpful. Thank you for contacting the Committee on Ethics.
Very truly yours,
MSBA COMMITTEE ON ETHICS
REFERENCES:
Rules Cited:
MARPC Rule 19-301.0
MARPC Rule 19-301.5
MARPC Rule 19-301.8
MARPC Rule 19-301.15
Ethics Dockets Cited:
Nebraska Ethics Advisory Opinion for Lawyers No. 17-03
D.C. Bar Ethics Opinion 378
New York City Bar Association Formal Opinion 2019-05
Other Authority Cited:
‘Is It Ethical for Lawyers to Accept Bitcoins and Other Cryptocurrencies?’ Virginia State Bar Journal – June 2018, pp. 24-25, contd. on p. 30 (republished by North Carolina State Bar Journal – September 2018, pp. 36-37).
DATE APPROVED BY COMMITTEE: 2/16/2022