The 2017 Bitcoin boom means most lawyers have at least heard of this popular cryptocurrency. However, few understand how Bitcoin and other cryptocurrencies really work, how they are used and their potential to fundamentally change the way we do business.
In this article, we look at why Bitcoin should be more than just a curiosity for lawyers, and the potential risks and opportunities it poses for law firms.
If you haven’t already received a client request to pay for legal services with Bitcoin or similar, you may need to prepare for this possibility. This year, Piper Alderman became the first major Australian law firm to accept Bitcoin payments.
“I work with a lot of clients who are looking to run an initial coin offering or who are involved in cryptocurrency or blockchain,” says Michael Bacina, a partner who heads up the firm’s cryptocurrency and blockchain group. “Many of those clients take a philosophical approach to the future of money. Specifically, they want to use cryptocurrency wherever possible. Piper Alderman took the view that this is something that will be more commonplace in the future and we’d like to be at the forefront of this change.”
Other potential clients who may be keen on using Bitcoin include software developers, investors and finance businesses whose work is built around, or touches on, cryptocurrencies. However, it’s about more than just keeping clients happy. Lawyers who practise in areas such as securities and finance may soon see their entire practice areas overhauled by the cryptocurrency and blockchain revolution.
To understand the how and why behind these developments, and how they have the potential to disrupt entire legal practice areas, you need to understand Bitcoin and the blockchain technology on which it runs in more detail.
Understanding Bitcoin: The lightbulb moment
In a nutshell, Bitcoin is a digital currency and a system that enables payments to be sent between people without relying on a central authority. Some big tech companies like Dell and Reddit already accept Bitcoin payments and it can be used to buy pizza, coffee, jewellery, shoes, gym memberships and more.
While Bitcoin can be used to buy everyday items, cryptocurrencies involve sometimes tricky-to-understand concepts, like wallets, mining, tokens and proof of stake. If the penny doesn’t drop immediately when you delve into the topic, persevere and be reassured by these words from Bacina:
“I find people dive into it, sort of understand it, and then about three months later wake up in the middle of the night and say, ‘This is going to change everything. Wow.’ It just takes time to process the concepts because they are so different to what’s been done before.”
Getting started with Bitcoin: A law firm’s guide
Bacina says it’s probably easier than you expect to start accepting Bitcoin payments within your law firm. For firms wishing to explore the option, he emphasises the importance of a preliminary educative process.
“The legal profession is quite conservative, and this is a new technology,” he says. “There’s a lot of people who haven’t used it, don’t understand it and don’t have any real incentive to understand it. Having an education process about it – what it is, how it works and dealing with some of the common myths and misconceptions – is an important first step.”
It’s also important to carefully consider the pros and cons and find a balance that suits your firm. Bacina says the path Piper Alderman has taken “gives clients what they want – an easy way of paying using cryptocurrency,” while the gateway adopted “protects the firm on the risk side in a manner which is not too dissimilar to receiving credit card payments”.
The firm doesn’t currently accept Bitcoin payments into its trust account. “The legal profession regulations relating to trust accounting are difficult to apply to cryptocurrencies at this stage,” Bacina says. “The sensible move for Piper Alderman is to accept Bitcoin only for payment of our invoices. In time, as regulations address these new forms of transacting, we may see some changes to how trust accounting is handled to accommodate cryptocurrencies.”
Another practical problem is that most accounting systems can’t deal with more than two decimal places, because most regular currencies don’t go below cents. Cryptocurrencies, on the other hand, can go down to 18 decimal places. “Accounting systems just can’t handle it,” Bacina says. “When larger accounting software packages release updates that deal with decimal issues, we’ll see a lot more adoption for businesses that wish to use cryptocurrencies.”
Is Bitcoin too risky?
When it comes to law firms accepting Bitcoin, Bacina says “there’s a range of solutions, and the risk is probably less than is perceived”. The main risk is price volatility – people are concerned about its highly volatile nature, with Bitcoin often moving 10 per cent or more in value in a day. Given that a transaction can take a few hours to be confirmed through the blockchain, there’s a real risk of a change in value during the time the transaction is being verified, so that is the primary risk for anyone accepting cryptocurrency.
“A lot of people believe you need to hold the Bitcoin and you’ll be exposed to price risk,” Bacina says. “But it’s no different to receiving US dollars or euros. If you want to switch it to local currency, that’s quite easily done with technology available today. We turn Bitcoin into Australian dollars quite easily and quickly.”
The other widely cited risk is that Bitcoin is in a bubble. Indeed, just months ago Reserve Bank Governor Philip Lowe warned of the “speculative mania” surrounding cryptocurrencies. While some take the view that Bitcoin’s success is unsustainable, driven up by people speculating wildly, Bacina takes a different view.
“There’s only 15 million Bitcoin wallets worldwide,” he says. “I think we’re in the very early stages of an adoption curve. Projects that help bring the benefits of cryptocurrency to the lay person or regular businesses, in a way that they don’t necessarily need to understand technology to take advantage of it, will help drive adoption. Recent price falls are good in my view, given how fast the prices have risen in the last two months.”
Regulation: Playing catch-up
Michael Milnes, who heads the Commercial Law team at Thomson Reuters Practical Law Australia, says that regulators around the globe have been playing catch-up in the evolving area of cryptocurrencies and that the response varies enormously in different jurisdictions. As Milnes observes: “In Japan, Bitcoin is recognised as full legal tender, whereas in Bangladesh, use is illegal and you risk going to jail. In Thailand, first it was illegal and now it isn’t. Whatever the position is locally, regulators are now looking at the implications more closely and starting to coordinate their efforts.”
Milnes says that here in Australia, the Government has generally adopted a progressive attitude, while still keeping a cautious eye on developments. For example, from 1 July 2017, legislative change exempted cryptocurrencies from GST in Australia, allowing Bitcoin to be treated like money for GST purposes. Legislation was also passed last year to apply anti-money-laundering provisions to Bitcoin exchanges operating in Australia, with the changes expected to commence from April 2018.
Bacina welcomes regulation and says it may help dispel one of the biggest misconceptions surrounding cryptocurrencies: “Bitcoin still has some of its bad reputation from when it was used on Silk Road and the dark web as a means of exchange for illicit activities. People regularly cite this and say it’s untraceable. That’s completely wrong. Bitcoin is 100 per cent traceable. There is a difficulty is identifying who owns what wallet, though, and this year we’ll see a lot of regulators globally start investigating dodgy operators and people who’ve been doing the wrong thing. I see blockchain, the technology on which Bitcoin runs, as a huge force for fraud prevention.”
Should your law firm bother with Bitcoin right now? Ask your clients about their views on cryptocurrencies. Learn more about it. Talk to lawyers working in this space. Perhaps then the question will not be whether to bother with Bitcoin, but how you can explore the huge potential and other opportunities cryptocurrencies bring.