Bitcoin - the risks every law firm needs to know

By David Smith

Just the other day I was reading about a law firm which claimed to be the first to accept Bitcoin for its services in the UK. This got me thinking about the acceptance of Bitcoin and other alternative currencies, and what it might mean for law firms.

Of course, the announcement was in part a publicity issue. In fact, another firm promptly asserted that they had been accepting Bitcoin already and so were the "true" first. Although, Bitcoin is not actually being accepted for payment. Bills are still being issued in Sterling and there is a third-party payment gateway that accepts payment in Bitcoin at the current rate of exchange to satisfy the bill.  The law firms are not so much advertising that they accept Bitcoin payments, but rather that they have partnered with a payment organisation that will accept Bitcoin. From a law firm’s point of view, accepting Bitcoin is no different from accepting Euros or Dollars. Their bill is rendered in Sterling and this will appear in their bank accounts from the payment processing company. Tax will be calculated and paid on the basis of the original Sterling bill.

That does not mean that accepting Bitcoin is an issue to be taken lightly, however. Significant money laundering obligations come with it. All solicitors (when working on matters that fall within the regulated area) must comply with the requirement to ensure that funds are not laundered or procured illegally. This inevitably involves an inquiry into the source of funds. With Bitcoin this is practically impossible. Bitcoins are traded, but they are also generated by computers "mining" them. From an external viewpoint, this means that they appear literally out of thin air. Or to use another metaphor, Bitcoins really do grow on (electronic) trees! Bitcoin also has a history of being involved in criminality and is particularly hard to trace as a currency due to its being processed entirely by third party organisations. This has also resulted in Bitcoin being used in a manner which evades taxation in one or more jurisdictions. Its acceptance (even via a payment processor) is fraught with risk. This risk is all the greater when it might be used in a way that allows it to be converted into an asset within the real world.

The other significant risk associated with Bitcoin is the very large fluctuations in value it goes through. As it is not backed by any central bank, its value is purely driven by the market. It is worth precisely what people are prepared to pay for it. As it has no fundamental value of its own (unlike gold, for example) its value can consequently fluctuate wildly. Currently, payment processors deal with this issue by offering a Btitcoin price against a transaction in another currency for just 15 minutes. It is then recalculated. However, there is a real risk that Bitcoin will not be worth what you thought tomorrow, or even in an hour. Additionally, as the recent collapse of the Bitcoin exchange MTGox shows, the trading environment for Bitcoin is not risk free and exchanges can collapse owing large sums to individuals.

So, what can be done to mitigate this?

Well, the most obvious answer is just not to accept Bitcoin! However, that is a position that law firms may soon find themselves unable to sustain. A more measured approach would be to:

  • Only accept Bitcoin to settle bills rather than to place money on account.
  • Only accept it for bills for work that fall outside the regulated sector - litigation being the obvious example.
  • Not take payment directly - always use a payment processor which is taking payment in Bitcoin, but paying you in Sterling.
  • Keep a close watch on the regulatory position - HMRC is about to announce how it intends to tax Bitcoin.
  • Avoid incurring massive costs where Bitcoin is the intended method of payment.
  • Ask for provenance and be prepared to say no and seek more conventional payment if something does not feel right.  

Bitcoin is currently used most often to pay for relatively intangible services within the IT world, and some shadowy activities associated with parts of it. There is something poetic about the idea of an intangible virtual currency being used to pay for legal services, which to many members of the public are equally intangible! But it is that very intangibility which makes Bitcoin so risky for lawyers. Even if the issues with Bitcoin are resolved, there will be a number of other virtual currencies, such as Dogecoin, waiting in the wings.

Law firms will need to continue to consider how they will deal with this proliferation of payment options.

Filed Under: Practice of Law

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