Some time ago, Tesla announced that it would accept payment in Bitcoin.1
Various other businesses – including some fairly large law firms – have made similar announcements. If even the notoriously stodgy old-law behemoths accept crypto as payment, surely this marks the inevitable transition from fringe speculative investment and tech-aficionado dinner party conversation to mainstream commerce?
Perhaps. While a lot of businesses have announced that they will accept cryptocurrency payments, far fewer actually do so. The issues arising are not quite as simple as adding another payment option to the website.
Can a solicitor accept payment in Bitcoin or one of the newer cryptocurrencies? Should we do so? How do I put it in a trust account?
(Short answers: ‘yes’, ‘probably not, unless you really want to think it through’ and ‘you can’t’.)
The first issue – is it possible and legal for a law practice to be paid in Bitcoin? Is fairly straightforward – yes, you can. There is no regulatory reason a solicitor could not agree to be paid in chickens and magic beans if they want to, but there are some practical difficulties.
Cryptocurrencies cannot be held in a trust account, as payment to a solicitor’s trust account requires the deposit to be recognised as legal tender, at least somewhere in the world.
Notwithstanding inaccurate media reports, cryptocurrency is not ‘real’ currency. There has been a limited recognition for some taxation purposes,2 but that does not turn it into legal tender. As cryptocurrency is not ‘money’ it cannot be paid to a regulated trust account.
By way of contrast, you could – in theory – be paid in Zimbabwean dollars (current rate of exchange: about 92 Quadrillion ZWD to $1AUD, give or take a few hundred million) held in a foreign currency bank account registered as a trust account with an approved ADI.3 Despite the fact that crypto is, in practical terms, a transferable currency and the Zimbabwean dollar is not, a cryptocurrency wallet cannot be used in the same way.
If it is not money, why not just trouser the payment up front and not have to worry about a trust account? Not so fast – just because it is not client money does not meant it isn’t client property. Some trust rules still apply.
There is no reason you could not accept payment in Bitcoin, convert it,4 and hold the proceeds in trust in the usual way. Alternatively, you can agree to hold the Bitcoin wallet as security for payment when your bill is rendered. In that instance you are holding an asset as security in the same way that you might hold a client’s chattel or title deed.
You cannot be paid Bitcoin in advance, convert it to tender and then transfer that tender to your general account. As soon as the cryptocurrency becomes ‘real’ currency it becomes ‘trust money’.5
Nor can you spend the Bitcoin in its native form prior to it being ‘earned’ by the firm. Client property held as security or for the client is ‘trust property’, which is subject to record keeping, reporting and usage rules.6
If you do accept payment of cryptocurrency in advance of the service being rendered there is a fair bit to think about. We suggest the following areas for consideration:
- Exchange rage fluctuation. This is not easy to navigate. Pure (‘mined’) cryptocurrencies with no inherent asset backing can rise and fall rapidly. If this issue is not expressly agreed you are likely to have the worst of both worlds – losses would be the firm’s and gains would be the client’s. Again, the easiest way to solve the problem is agree on conversion to dollars on receipt (and then do so promptly).
- Billing and appropriation. If you are not to convert the coin in advance, you need an express clause in your costs agreement authorising you to take the security asset (that is, the coin) and deal with it once the work has been done and bill presented. Without that agreement and proof you have complied with the terms, you may have security in the form of a lien permitting you to hold the coin, but no immediate authority to convert it and take the proceeds as cash. Absent specific consent, there is no easy process for a solicitor to realise assets held as security and pay themselves the way there is with cash in trust.
- Risk. Cryptocurrency can be ‘stolen’ or ‘lost’ if you lose access to the electronic key. Malware specifically intended to find and steal such keys is now fairly common.7 An additional risk is that you must use a conversion service to buy Australian dollars. This conversion service is just a website – not a financial institution, and is currently not regulated by the Australian Prudential Regulation Authority (APRA).
- Proceeds of crime. One of the reasons to use electronic currency in the first place is to evade regulatory oversight. This may or may not be your client’s motivation but you cannot ignore the possibility. We must take reasonable steps to ensure that we do not participate in criminal activity or take receipt of the proceeds of crime.8 Whether Bitcoin is currency or not, solicitors must make reasonable enquiry as to the source of the funds and the reason for the transaction. If there is no sensible reason for the transaction to be structured as it is, you may find it difficult to defend allegations that you were wilfully blind to criminal conduct. There is nothing inherently wrong with cryptocurrency transfers, but they are a red flag and you must be especially careful.
- Proficiency. Are you familiar with crypto-wallets and the conversion process? If you receive notification that you have received .5BT, do you really know what you are looking at? If you are not familiar with the payment mechanism, your chance of being scammed is increased.
- Trust account. Despite the fact that cryptocurrency is not legal currency and cannot be held in your trust account there are obvious similarities. Your obligation as trustee – to keep your fund separate and not use it for your own benefit still applies. Keeping track of cryptocurrency transfers and dealings would require you to build a quasi-accounting system showing receipts, conversions and the corresponding transfers of ‘real’ money into your trust / general account.
1 And then announced that it would not again.
2 Essentially that when cryptocurrency is exchanged it is not bought and sold each time as an asset.
3 Authorised Deposit Taking Institution.
4 With the client’s express and informed consent. Note also the other issues to be addressed below.
5 Legal Profession Act (Qld) s237.
6 Legal Profession Act: Definitions Schedule, s713(4).
8 See QLS Guidance Statement No.14 – Financial Reporting; cryptocurrency is caught within the AML/CTF regime: Anti Money Laundering and Counter Terrorism Financing Amendment Act 2017.