Cryptocurrency has been making news lately, but is it here to stay? And if so, should attorneys accept it?
Starbucks recently announced it was working with Microsoft so it could accept certain kinds of cryptocurrency as payment for lattes and the like.
A Libertarian candidate for Wisconsin governor announced last month that he would be accepting campaign donations in bitcoin, a type of cryptocurrency.
In less happy news, a British law-enforcement agency reported that the country’s consumers lost more than $2.6 million in June and July from cryptocurrency fraud.
Here are some of the big picture issues involving cryptocurrency:
Cryptocurrency is an emerging technology, so the law hasn’t quite caught up with it yet. In the U.S., states have no single set of rules governing its use, if they have any rules pertaining to cryptocurrency at all. The various arms of the federal government also lack a uniform approach.
For example, data privacy and cybersecurity lawyer Sarah Sargent, formerly of Reinhart Boerner Van Deuren and now at Godfrey & Kahn, noted that the Internal Revenue Service treats cryptocurrency as property while the Securities and Exchange Commission considers some forms of cryptocurrency to be securities.
“You have to be really careful because the legal landscape is just not developed yet,” said Sargent. “The pace at which cryptocurrency has been blowing up in the last two years — the law hasn’t quite kept up with it yet.”
Generally, cryptocurrency remains largely unregulated, which means dealing with it can be risky because the protections people and companies are used to when paying with checking accounts and credit cards go away.
And then there’s the question of what happens if someone steals your bitcoins, which is just one of the many types of cryptocurrency out there.
“If somebody steals your cryptocurrency wallet or you have your cryptocurrency sitting with a company that is supposed to be a secure wallet provider for your cryptocurrency and that gets stolen, as of right now, you don’t have any recourse,” said Sargent. “I mean technically could you go file a police report? Yeah. But would anything happen? No.”
Washington, D.C.-based derivatives lawyer Cheryl Aaron of Michael Best & Friedrich, which opened a cryptocurrency and block-chain practice last year, noted that one of the risks of accepting cryptocurrency is that it can be hacked, so businesses and their legal counsel have to ensure that whatever wallet or exchange they are using has the appropriate security measures.
“It is not clear, right now, if you’re hacked, how you could be made whole again,” Aaron said.
Aaron deemed Overstock.com, which was one of the first companies to accept cryptocurrency as payment, the frontrunner in its use.
“They see it as an investment,” she said. “They’re not just using bitcoin and other cryptocurrency as a currency equivalent. They’re actually hanging onto some of the cryptocurrencies the receive as payment and keeping it as an investment for now, which is to say, it’s part of their investment strategy.”
But cryptocurrency may not be right for every business. For one, cryptocurrencies are volatile, so companies interested in accepting cryptocurrencies for payment need to decide if they will exchange them for dollars immediately or hold onto some or part of them as an investment.
Tied to volatility, one legal issue that might come up involves a company’s return policies and what happens if the value of a cryptocurrency that is paid has changed between when an item was purchased and when it was returned.
Aaron said the first thing companies and their corporate counsel should think hard about before accepting cryptocurrency as payment is whether doing so is necessary for their business.
For example, is the company paying too much of the so-called merchant fees that credit cards charge? If so, will accepting cryptocurrency more than make up for that cost, covering the legal fees that also might be incurred?
“There needs to be some business inefficiency that it would make sense to bring in cryptocurrency or other block-chain technology,” Aaron said. “I wouldn’t just assume it’s a blanket rule that it’s better for every business.”
“You have to evaluate its pros and cons, just like any business risk,” she said. “Before anyone dives into cryptocurrency, understanding the technology and the nuances behind it is important.”
Aaron and Sargent disagree about how ubiquitous cryptocurrency might become.
Sargent noted that companies might use it more often, but that doesn’t necessarily mean cryptocurrency use will become common among everyday consumers. Cryptocurrencies, she explained, still won’t be protected in the way that debit cards, credit cards and bank accounts are.
She noted that if cryptocurrency did become regulated like those other methods of payment, that would defeat the reason cryptocurrency was invented in the first place.
“Cryptocurrency is supposed to be this underground, kind of anti-establishment movement,” Sargent said. “When you start doing things that regulate it, that goes against that theory of why people developed cryptocurrency in the first place; it defeats the purpose. Just because of that, I don’t see it becoming really mainstream to everyday average consumers.”
Aaron, however, says regulation draws attention to cryptocurrency and gives it legitimacy.
“Putting regulation aside, I think there are so many efficiencies to be had by relying on cryptocurrency, and I don’t think the point is to not be regulated,” she said. “As a whole, I think the industry has a potential to benefit from more regulation and adoption. …The more prevalent it becomes and more regulated it is, I think you’ll start to see it becoming more ubiquitous and bigger players will step into the market where they were not willing to initially.”