Lawyers should familiarize themselves with the use of cryptocurrency as an entire ecosystem for cryptocurrencies has developed. Cryptocurrencies have emerged as a popular payment system with many businesses now accepting cryptocurrencies as a form of payment. This allows their customers to make purchases seamlessly without the need for intermediaries (the banks). The integration of cryptocurrencies into commercial transactions is expected to grow, reshaping the future of financial transactions. Cryptocurrencies are also increasingly being used in real estate transactions, asset purchases and smart contracts. With the increasing footprint of crypto ATM machines that allow users to deposit cash in exchange for a cryptocurrency, the chances of crypto becoming mainstream is closer at hand. There are currently over 40 cryptocurrency ATMs in Maryland alone. See
https://www.bitcoin.com/bitcoin-atm/.
This burgeoning acceptance of cryptocurrency across various economic sectors may be a signal of a paradigm shift of legitimizing cryptocurrency for everyday transactions. The legal profession too is adapting to this change, recognizing the potential of cryptocurrency as a viable and ethical form of payment for legal services. The Maryland State Bar Association’s Committee on Ethics recently issued an opinion regarding the ethical propriety of attorneys accepting cryptocurrency as payment for fees. See Ethics Docket 2022-01. The committee’s opinion stated Maryland attorneys may accept cryptocurrency as payment for legal fees provided the fee is reasonable, and otherwise complies with the Maryland Rules of Professional Conduct. Please do read the opinion about other conditions the Committee determined should be put in place before accepting cryptocurrency for legal services. A handful of other states’ entities governing attorney conduct, have issued similar opinions regarding attorneys accepting cryptocurrency for legal services.
The U.S. and state governments are struggling to keep up with the popularity of cryptocurrency ownership and use in financial transactions. According to the National Conference on State Legislatures, 35 states, plus Puerto Rico and Washington, D.C., have introduced legislation governing cryptocurrencies and other digital assets in the 2024 state legislative sessions. See
NCSL Website.
The UCC was recently amended in order to keep up with the increased use of cryptocurrency in commercial transactions. Article 12 was added to the UCC to describe digital assets (cryptocurrencies) as “controllable electronic records.” A controllable electronic record (CER) is defined as a “record stored in an electronic medium that is susceptible to “control,” e.g. cryptocurrencies, non-fungible tokens, blockchain technology, but specifically excluding bank accounts, or electronic chattel paper investment property. Essentially, Article 12 provides for a CER to be transferred in such a way as to cut off competing property interests. The UCC used the term “control” to define CERs because control establishes clear ownership and possession of the digital assets. Article 9 of the UCC was amended to recognize the value of digital assets. These UCC amendments not only align with the evolving digital economy but have also legitimized digital assets and cryptocurrency as a means to complete commercial transactions.
In order to understand cryptocurrencies, and how they are used for financial transactions, it is important for lawyers to understand the role of blockchain technology, the definition of cryptocurrency, the distinction between a cryptocurrency and a non-fungible token (NFT), and a digital wallet.
What are Blockchains?
Blockchains are basically a collection of transactions that are linked together electronically, or cryptographically. Blockchain is the technology that most cryptocurrencies are running on. It is a decentralized ledger that records all transactions across a large computer network. Each transaction is cryptographically added to a continuously growing chain of blocks, forming a validated record that is immutable. Cryptocurrencies like Bitcoin and Ethereum operate on their respective blockchains, enabling users to transfer value directly without the need of a bank or other financial institution.
There are many different “blockchains” available, but only one main “blockchain”, or sequence of transactions, in each network, e.g. Bitcoin, Ethereum. Each blockchain has only one true blockchain transaction sequence so that bad actors cannot insert false transactions into the chain. This is what makes the blockchain immutable. The transaction sequence for each blockchain network began the first time the first token on the network was formed and continues up to and including all present transactions. Blockchains are also known as a “virtual public ledger.”
Cryptocurrencies
The U.S. Dollar is a government-issued currency, not backed by gold or silver, but the full faith and credit of the United States, otherwise known as a fiat currency. Cryptocurrencies (or tokens) are simply a form of digital currency that is traded online and used for electronic financial transactions. Cryptocurrencies are not issued by a government body, and remain anonymous. They are secured by cryptography and operate on a decentralized network, typically built on blockchain technology. They are a medium of exchange and can be used for financial transactions without relying on a bank. Bitcoin and Ethereum are examples of well-known cryptocurrencies and the two most popular. Bitcoin is primarily used for peer to peer transactions allowing users to transfer payment seamlessly and across borders with no banking fees. Ethereum is gaining popularity for its smart contract features.
The value that cryptocurrencies represent can be cash, land, stock, credits for a game, etc. Cryptocurrencies are also known interchangeably as “tokens,” “crypto,” “digital currency,” “virtual currency,” “digital assets,” “digital tokens,” or “cryptoassets.” While cryptocurrencies are fungible and can be traded or exchanged for dollars or other assets, they should not be confused with non-fungible tokens (NFTs). NFTs are unique digital assets that represent ownership of a specific item, like artwork. They have distinct characteristics that make them one-of-a-kind. NFTs are created on blockchains, but are not currencies. They provide a way to establish electronic ownership and authenticity of a digital asset in a decentralized manner on the blockchain.
What is a Crypto Wallet?
Crypto Wallets or “digital wallets” are used to store, send, and receive cryptocurrencies securely. In other words, your Crypto Wallet is like a bank account where you control the transfers in and out through a private secure key. Crypto Wallets can be used by simply downloading the software or apps onto your computer or mobile device.
Each digital wallet contains encrypted information, called public and private keys, that are used to send and receive the cryptocurrency. All cryptocurrency transactions are recorded in a virtual public ledger called the blockchain or a decentralized ledger. The role of the Crypto Wallet is to manage the crypto transactions and provide a secure environment for recording and storing cryptocurrencies. Without a Crypto Wallet, one cannot access or use cryptocurrencies in a safe and secure manner.
Volatility and Risks of Cryptocurrency
Lawyers may want to be aware that cryptocurrencies are known for their high volatility with prices fluctuating significantly over a short period of time. Indeed, the value of popular cryptocurrencies, Bitcoin, Ethereum, Tether, Binance, and Solana, have increased substantially over the last couple of months. The high volatility of cryptocurrencies presents risks for clients accepting them as payment in a commercial transaction. If a business accepts cryptocurrency as payment, the value of that payment could drop significantly before the funds are converted to cash, resulting in potential losses. Cryptocurrency payments are irreversible. If funds are sent to the wrong address or stolen by hackers, there is probably no way to recover them. Businesses must implement robust security measures to protect their cryptocurrency holdings and transactions. To mitigate risks, businesses that accept cryptocurrency payments may consider converting the funds to cash immediately. Additionally, they should stay updated on regulatory developments, implement robust security measures, and seek professional advice on accounting and tax implications.
Summary
Cryptocurrencies are digital currencies that use cryptographic security and decentralized blockchain technology to facilitate secure and transparent financial transactions without the need of a bank. Cryptocurrencies are becoming an increasingly popular way to complete commercial transactions. Cryptocurrencies offer advantages, such as lower transaction fees, but they also present risks that attorneys and their clients should carefully consider. They are volatile, leading to price fluctuations, and pose risks for those accepting them as payment. As the adoption of cryptocurrencies continues to grow, it is crucial for attorneys to stay informed about the evolving regulatory landscape, and understand the technical aspects of blockchain and cryptocurrency systems. Clients will be seeking comprehensive legal advice when considering incorporating cryptocurrencies into their financial operations. Attorneys can play a pivotal role in helping clients navigate the complex world of cryptocurrencies and make informed decisions that align with their financial objectives and risk tolerance.