President Biden’s New Executive Order on Cryptocurrency is Good for Law Firms

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On March 9, President Joe Biden signed a new Executive Order (the “Executive Order”) calling for a renewed focus on the quickly evolving world of cryptocurrency. The Executive Order sets priorities for the U.S. Government, including creating a digital currency authorized by the U.S. Government.  

While many bitcoin purists might argue that government involvement has no place in the world of cryptocurrency, this Executive Order may signal a major turning point in the degree of federal government involvement in the regulation of cryptocurrency. As detailed below, the Executive Order addresses issues that could be a boon for certain kinds of law firms.  

1. Protecting consumers 

The primary purpose of the Executive Order is to protect consumers from “significant financial risks.” In an industry with such little control over digital assets, the Executive Order will seek to provide a safeguard as investors continue to take part in the growing crypto market. The Executive Order describes the current situation as follows: “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment.” With over a trillion dollars in assets, cryptocurrencies are no exception to this need for safe investing. Yet, they pose some of the greatest risks.  

Being decentralized and disconnected from any financial institution, cryptocurrencies are, by nature, uninsured and any accidental loss is permanent. These loses can come from a variety of places including hackers, scams, or by simply inputting the wrong wallet address. According to the Executive Order, “Cybersecurity and market failures at major digital asset exchanges and trading platforms have resulted in billions of dollars in losses.” With the number of users growing every day, the need to protect large investments that can disappear in an instant has become concerning for the federal government.  

The focus on consumer protection will likely lead to the adoption of detailed regulations. This will create opportunities for law firms with lobbying, consumer finance, regulatory compliance, and litigation capabilities.  

2. Protecting the U.S. and global financial systems

A second and arguably more important aspect of the Executive Order is the need to protect the U.S. from potential financial instability created by cryptocurrencies. With the market value of cryptocurrencies skyrocketing over the last decade, the Executive Order argues that cryptocurrencies “may create additional economic and financial risks requiring an evolution to a regulatory approach that adequately addresses those risks.”  

The Executive Order opens the door for new regulatory compliance advisory work. Digital asset providers will need to “be subject to and in compliance with regulatory and supervisory standards that govern traditional market infrastructures and financial firms.” Law firms will be necessary for crypto-tech businesses to make sure they are handling their digital assets appropriately in accordance with these new laws that will take place.  

Mitigation security will also play an important role. The Executive Order acknowledges a risk of unknown dangers created by cryptocurrencies and it will be necessary to have measures in place for law firms to reduce the severity of these issues when the need arises. This will likely create more opportunities for lawyers with data privacy and related expertise. 

3. Criminalizing certain activities relating to cryptocurrencies 

The Executive Order’s third objective gives detail into how criminal activity will be approached. Criminals have used cryptocurrencies over the past decade to commit a myriad of crimes “including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing.” While crime can be carried out with any currency, one of the earliest use cases for bitcoin was when cybercriminals began using the cryptocurrency to buy and sell illegal drugs on websites such as the Silk Road, which was shut down in 2013. With a public ledger that can be viewed by anyone (and fully downloaded), this type of illicit activity is already being monitored and has led to the creation of coins such as Monero which hides transaction history on its blockchain.  

Without doubt, this will be one of the most important aspects of the Executive Order which aims to “ensure appropriate controls and accountability for current and future digital assets systems to promote high standards for transparency, privacy, and security — including through regulatory, governance, and technological measures — that counter illicit activities and preserve or enhance the efficacy of our national security tools.” It is not hard to see how this aspect of the Executive Order will be a boon to firms with white collar criminal defense practices.  

4. Promoting U.S. leadership in tech 

To remain the global economic leader, the Executive Order will encourage “the responsible development of payment innovations and digital assets” within the United States. With tech industry giants such as Google and Meta already under scrutiny, companies in the crypto industry will need to follow strict guidelines “particularly in setting standards that promote: democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems.” This aspect of the Executive Order will be of special interest to cyber law and intellectual property attorneys.  

Cryptocurrencies are highly susceptible and are often the target of hackers and spam. OpenSea, one of the largest NFT marketplaces online, was hacked just a month before the signing of the Executive Order. With more and more businesses operating under the risk of major hacks, tech companies will need to create new features to protect them. This should create increased demand for law firms with data security and privacy expertise.  

5. Promoting access to safe financial services 

The fifth objective of the Executive Order is to increase access to banking. The order indicates that, “many Americans are underbanked.” According to the FDIC, about 5.4 percent of American households didn’t have a checking or savings bank account of any kind and are “underserved by the traditional banking system.” Due to this fact, cryptocurrencies have become popular because of their minimal requirements to create a wallet.  

Unfortunately, with the known risks of using cryptocurrencies, underbanked citizens are at risk of losing what little assets they may already possess. Firms specializing in data security will see many opportunities to offer their services as cryptocurrencies become more commonplace among lower class Americans that struggle to open a bank account. Intellectual property services will also be necessary for blockchain companies that develop new methods to keep crypto assets secure and require patents.   

6. Supporting tech advances and responsible development 

The final objective of the Executive Order is for the U.S. to begin supporting businesses with the technological advances necessary to make cryptocurrency investing safer for Americans. The Executive Order states that the federal government will focus on key aspects of new technology being developed for cryptocurrency that is “implemented in a responsible manner that includes privacy and security in their architecture, integrates features and controls that defend against illicit exploitation, and reduces negative climate impacts and environmental pollution.” It appears that the U.S. government will begin working with the various crypto-tech companies that are sprouting up across the country to establish a set of rules for tech companies to follow.  

While these rules won’t change the technical aspects of certain coins such as bitcoin, it will affect the exchanges where these cryptocurrencies are bought and sold. By creating this new set of standards for crypto companies to follow, law firms will be required to provide services for regulatory compliance.  

7. Exploring U.S. Central Bank Digital Currencies 

As a part of technological development in the sixth objective of the Executive Order, an entire section outlines the experimentation to create and decide whether United States Central Bank Digital Currencies (“CBDC”) would be “deemed to be in the national interest.” This development would be massive. Allowing the U.S. to develop its own cryptocurrency can have major impacts on businesses that seek international clients. The order states, “CBDC may have the potential to support efficient and low-cost transactions, particularly for cross‑border funds transfers and payments, and to foster greater access to the financial system, with fewer of the risks posed by private sector-administered digital assets.” With the creation of a national cryptocurrency, law firms around the globe will find it easier to afford business development inside the U.S. as this new CBDC allows them to use the U.S. dollar outside American borders with less transaction fees.  

If the U.S. were ever to adopt a central digital currency, it would significantly impact a range of law firm practice areas, including corporate, securities, tax, real estate, customs, and international trade. The implication here is that American business would be able to extend their services to international clients who don’t have the ability to store fiat USD. By using an American cryptocurrency wallet, they then would be able to do deals with an American-backed currency which wouldn’t have been available beforehand, thus increasing the amount goods and services American companies can provide to the world.  

The creation of a CBDC would also require an extensive number of legal services for the new technology that would be created. Intellectual property and patents, technology services for both private and public use, cyber security, and data security would all see an uptick in demand. 

Conclusion 

Within the legal services industry, the most obvious beneficiaries are likely to be Am Law 200 firms.  These are the firms that already employ lawyers across the practice areas identified above. Expect accounting firms, private equity backed consulting companies and others to get into the market of providing advice about how to comply with the Executive Order. This is also an opportunity for boutique firms to identify and launch cryptocurrency-related niche practices.   

The Executive Order provides a six-month window for the Secretary of the Treasury to take the next steps. “Within 180 days of the date of this order, the Secretary of the Treasury […] shall submit to the President a report on the future of money and payment systems.”  

Thus, this is the time for law firms to start identifying how they can serve and attract clients in the cryptocurrency space.

CA Legislature Puts the Brakes on Ownership of Law Firms by Non-Lawyers

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On February 25, 2022, an open session of the California State Bar’s Closing The Justice Gap Working Group (“CTJG” or “Working Group”) took place that could pause the short-term prospects of allowing non-lawyers to own and invest in law firms. Specifically, the Working Group made three potentially game-changing decisions.  

First, and most importantly, the Working Group will modify its membership and limit members to those who have experience working in California. While other states including Utah, Arizona, and Florida have all discussed the matter of nonlawyer ownership, the California State Bar agreed that relevant experience in California would be necessary to be part of the Working Group.  

Second, the minutes of the February 25 meeting show that the State Bar agreed to streamline the Working Group to reduce the administrative burden these meetings place on the State Bar’s staff. More than one participant has expressed frustration with the Working Group’s organizational structure. The Working Group itself is comprised of multiple subcommittees, which will be eliminated moving forward.   

Third, the Working Group’s Charter will be changed so that the roles of the California legislature and Supreme Court are more clearly defined. In addition, the Charter will more explicitly identify who will be allowed to participate in the regulatory sandbox. This will include stricter screening of the financial interests of those entities who would be allowed to be part of the Working Group.  

If these changes seem out of step with what the Working Group had been doing previously, it’s because they are. These changes are not an accident. They are a direct response to criticisms of the Working Group articulated by members of the California legislature.  

On December 7, 2021, a letter from the Senate was sent to the California State Bar arguing that allowing corporations to take part in ownership of law firms would cripple the integrity of justice and legal systems for consumers. The letter was co-signed by Assembly Member Mark Stone (D–Monterey Bay) and Senator Tom Umberg (D-Santa Ana). Stone and Umberg are both attorneys. Mark Stone received his J.D. from Santa Clara University of Law in 1988 and was an attorney from 1993 – 2003 before becoming county supervisor of Santa Cruz County in 2003. Tom Umberg graduated from UC Hastings in 1980 and was Assistant U.S. Attorney in Orange County before being elected to the California State Assembly in 1990.

Stone and Umberg took direct aim at the underlying rationale of the Working Group and its ability to provide more representation to the middle class and other underserved communities. “The regulatory sandbox could become an open invitation for profit-driven corporations, hedge funds, or others to offer legal services or directly practice law without appropriate legal training, regulatory oversight, protections inherent in the attorney-client relationship, or adequate discipline to the detriment of Californians in need of legal assistance.” 

Stone and Umberg also voiced concern that the “the State Bar has used a substantial amount of its resources for the CTJG, as well as the Paraprofessional Program Working Group, apparently utilizing hundreds of hours of staff time and an unknown amount of other State Bar resources.” They argue that the Working Group is preventing the State Bar from carrying on its “core mission of protecting the public by correcting the delays and defects in the attorney discipline system.” To support this contention, the letter points out that “the State Bar’s backlog of discipline cases grew by 87 percent since December 2015 and that recent changes to the system have significantly reduced its efficiency.” With the State Bar already dealing with a heavy backlog stretching over seven years, there is not enough bandwidth space to consider changes that could “fundamentally infringe on the basic and paramount obligations of attorneys to their clients.” 

The letter from Stone and Umberg had an immediate and powerful impact on the Working Group. The initial response was to put meetings of the Working Group on hold for two months. Given that the Working Group is agreeing to change its composition and its charter, it will take months if not years to put these changes into effect. Moreover, considering the rocky relationship between the State Bar and the legislature, with the legislature having almost all the leverage, it wouldn’t be surprising if the changes made to the Working Group signal that efforts to allow non-lawyers to own law firms will be put on hold in California for the foreseeable future. With Florida recently deciding not to follow the lead of Arizona and Utah, delays in implementing changes in California are likely to have repercussions throughout the country.   

The Regulatory Sandbox isn’t dead, but it is looking a lot less inevitable than it did a few months ago.  

Florida Bucks the Trend Toward Nonlawyer Ownership

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With all the changes impacting law firms right now, it would be easy to overlook an important regulatory development that recently took place. In November, the Florida Bar Association’s Board of Governors unanimously voted down proposals to test nonlawyer ownership and fee sharing in legal practices. The decision represents a sharp deviation from the trend of “regulatory sandboxes” that have taken root in states including California, Utah, and Arizona.

Debating arguments from the Florida Supreme Court’s Special Committee to Improve the Delivery of Legal Services, which suggested these measures as opportunities to improve access, board member Josh Chilson expressed concerns, saying, “I’m troubled that this is being offered with no real evidence that the proposal will improve access to justice… This is a bell that once rung, will never be able to be unrung.” Member Sia Baker-Barnes asserted that allowing companies driven by profit to enter the legal services industry would impede the “independent judgment of a lawyer… critical to the fair administration of justice in [the] state.”

Those who support opening up law firm ownership to nonlawyers rely on a variety of arguments, ranging from a belief in the power of markets to assertions that such changes will improve access to legal representation among the middle class. The Florida Bar should be commended for asking for more evidence and reaching a unanimous decision.

Whether you think these changes are long overdue or expect they will bring on the demise of the legal profession, it’s clear that, if implemented, these changes will be very hard to reverse.  So let’s dig deep and examine whether allowing nonlawyers to invest in law firms is the best and only way to improve access to justice. Let’s also explore more incremental changes that will enhance the economic standing of law firms that represent individuals. As consultants to law firms, we see firsthand that the more financially secure a law firm is, the better positioned it is to serve a wider range of clients.

ABA Ethics Opinion Allows Passive Investment in Out-of-State ABS

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On September 8, the American Bar Association (ABA) addressed lawyers’ ethical obligations as investors in firms with nonlawyer owners. Formal Opinion 499, issued by the Standing Committee on Ethics and Professional Responsibility, permits attorneys throughout the country to act as passive investors in Alternative Business Structures (ABS) that may not be allowed within a given lawyer’s state of licensure.

The issue, which we have covered in earlier stages of development, has worked its way to the fore, as states have created and extended regulatory changes to admit nonlawyers as owners in legal practices. The new ethics opinion clarifies how lawyers admitted to practice law in states without such permissions can still get involved in these business models.

The District of Columbia has allowed for nonlawyer partners since 1991 with limitations, but in recent years, others have joined the push. In 2021 alone, Utah extended its “regulatory sandbox” to a total of seven years, and Arizona eliminated Rule 5.4, which was modeled by the ABA to prohibit lawyers from splitting their legal fees with nonlawyers. The State Bar of California launched its own pilot program in May 2020 based on recommendations from its Task Force on Access Through Innovation of Legal Services (ATILS).

What last month’s opinion expressly condones is passive investing from lawyers admitted to practice law in other states. Providing guidance around potential conflict-of-interest issues, the committee broadly explains that attorneys would not be in violation of their ethical duties in making financial investments in ABS where such entities are allowed, so long as that lawyer has no active management role with the organization. As described in their conclusion below, the committee defines a passive investment as one in which the lawyer making the investment would not have a hand in the day-to-day operations of the ABS or be privy to confidential client information.

A lawyer admitted to practice law in a Model Rule jurisdiction may make a passive investment in a law firm that includes nonlawyer owners operating in a jurisdiction that permits such investments provided that the investing lawyer does not practice law through the ABS, is not held out as a lawyer associated with the ABS, and has no access to information protected by Model Rule 1.6 without the ABS clients’ informed consent or compliance with an applicable exception to Rule 1.6 adopted by the ABS jurisdiction… If, however, at the time of the investment the Model Rules Lawyer’s investment would create a personal interest conflict under Model Rule 1.7(a)(2), the Model Rule Lawyer must refrain from the investment or appropriately address the conflict pursuant to Model Rule 1.7(b).

This opinion will likely catapult the topic of nonlawyer ownership to prominence in additional states as lawyers are now being tempted to contribute to the growth of entities outside of their home locales. State bar associations and other advocates for the legal community will be forced to confront the fact that the current set of rules could favor firms in places like Utah and Arizona, shifting investment dollars out of other states. The most significant aspect of this opinion is that it may contribute to California adopting similar rules to those in Utah and Colorado. And given California’s size, that would be a game-changer for many U.S. lawyers.

5 Ways This Election Could Affect Law Firms

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The dust has yet to settle on the election, but it’s not too early to identify specific impacts the results could have on law firms and the legal services industry. Below are five ways this election could affect law firms.

 

  1. A win for Biden-Harris is also a big win for large law firms and their clients. With BigLaw and its individual attorneys fundraising heavily on Biden’s behalf and Harris’ husband Doug Emhoff a partner, until recently, in DLA Piper’s L.A. office, the ticket has strong ties to the industry. The transition team for the DOJ is populated with numerous lawyers from Am Law 200 firms.

 

  1. Regulatory changes will mean more work in certain practice areas. In specific areas, such as environmental protections and foreign trade, the Biden administration is likely to make newsworthy changes and Trump-policy reversals. These shifts will benefit lawyers who advise clients in these areas. Ultimately, the broader economic trends will have much farther-reaching ramifications than these particular laws or regulations.

 

  1. For most lawyers, the impact of this election will be tied mainly to the economy. How the new administration uses executive orders or issues regulations in relation to COVID-19 will affect solo practice and small firm clients. Meanwhile, firms that serve larger corporations may continue to dodge the pandemic’s devastation.

 

  1. If the federal government is divided along party lines, more action will take place at the state level.Especially in California, law firms will benefit in the short term with respect to compliance issues. But regulatory changes may have adverse effects as well, negatively impacting the economy and causing businesses and individuals to leave the state. Down the line, this is likely to hurt the legal services industry in the region.

 

  1. Smaller practices will continue to struggle. With divided outcomes, increasing market share and consolidating into bigger firms will still be effective strategies. Practicing solo, in contrast, will get even harder.

 

What election-related changes to the world of law do you foresee?

Utah and Arizona Moving Forward With Nonlawyer Ownership of Law Firms

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As California considers major regulatory changes that would allow non-lawyers to own stakes in law firms, we are closely following updates in Utah, where similar shifts are a step ahead.

Citing “crisis levels” of demand for affordable legal services stemming from the effects of COVID-19, the Utah Supreme Court on August 14 announced its decision to permit nonlawyer ownership and investment in law firms as a move toward greater access to justice. Accompanied by changes to the Rules of Professional Conduct, the regulatory sandbox created a two-year trial period, at the end of which the Utah Supreme Court can make these changes more permanent.

With the exception of one solo practitioner offering a 10% stake to his paralegal, the initial batch of organizations allowed into Utah’s pilot project is largely comprised of legal technology firms.

LawHQ is sharing revenues with software developers in relation to an application which would allow users to report spam communications and join lawsuits against those behind the messages or calls. 1Law is offering legal advice via chatbots, and LawPal would automatically generate legal documents for matters of divorce, custody, eviction, and property-seizure. The last of those announced so far is Rocket Lawyer, which the ABA Journal emphasized in its coverage earlier this month. The platform, which has already been serving as a middleman between consumers and attorneys, along with assisting in the creation of legal documents, is taking this opportunity to hire lawyers directly.

Arizona followed Utah just weeks later, eliminating rules that previously blocked nonlawyers from having financial stakes in firms, and the state went a bit further. The Arizona Supreme Court at the same time created a category of nonlawyer licensees permitted to represent clients in court. These “legal paraprofessionals” are expected to adhere to the same ethical requirements applicable to lawyers, and one must “meet education and experience requirements, pass a professional abilities examination, and pass a character and fitness process” to qualify.

The changes in Arizona have gone into effect without a temporary trial period, but alternative business structures will have to go through a “rigorous application process.” Arizona’s Task Force on the Delivery of Legal Services cited technology and free market competition as benefits of this change that could lead to greater access to justice. Rocket Lawyer is also expected to play a role in Arizona.

It remains unclear how nonlawyer ownership in law firms will evolve. For example, will the Utah Supreme Court or other proponents of this shift prevent venture capital and private equity firms from backing legal technology firms that are, in turn, permitted to own or invest in law firms? The answer to this question may have a huge impact on the financial fortunes and independence of lawyers, especially as California considers moving in the same direction as Utah and Arizona.

CA State Bar Innovation Task Force Takes a Pause

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As we have previously reported (see posts here and here), a task force assembled by the State Bar of California has encountered significant pushback from the legal community. The Task Force on Access Through Innovation of Legal Services (ATILS) was created to address issues of access to justice in the state. Charged with “identifying possible regulatory changes to enhance the delivery” of legal services, the group offered sixteen recommendations last summer, which, most notably, included proposals for non-lawyers to share in ownership and fees.

The outcry suggested that such changes would put consumers at risk, with some referencing the state’s recent issues with “notarios.” These unlicensed immigration consultants were banned by the state assembly after allegedly “tak[ing] advantage of vulnerable populations,” and many argue the existing regulations around who is eligible to provide legal services protect clients from unethical practices. Other state bar associations have also expressed their opposition to allowing non-lawyers to invest in firms and share law firm profits.

On Thursday, March 12, the bar tabled recommendations from the task force, describing the move as “an attempt to make sure we have the best information in front of the board at the right time.” The regulatory body credited “political headwinds” for its decision to delay approving any recommendations. Among the next steps held off by trustees was the launching of a group to study a regulatory sandbox much like the one established in Utah. Such a pilot program would test recommendations on a small scale to predict the impact of each proposed shift.

Members of the task force expressed disappointment as the foundational issue remains unaddressed. Nearly 4,000 Californians were surveyed in the California Justice Gap Study which ATILS used as the basis for its recommendations. The data expressed that people in the state “regardless of income” were often “navigating critical civil legal issues without legal representation or meaningful legal assistance.” With Californians receiving “inadequate legal help” if any for eighty-five percent of legal issues, the survey concluded, “Failure to access legal services is a result of both a service gap (supply) and a knowledge gap (demand).”

These findings led the task force to its viewpoint that “something more than modest tweaks to the existing regulatory environment is needed,” and the group set out to evaluate such regulations as those concerning fee splitting from the get-go. ATILS endorsed “the twin goals of public protection and enhanced access to legal services,” but many of the 3,000 public comments received in reply questioned the ability of the task force’s recommendations to meet those aims. The opposition proved enough to postpone the bar’s efforts, at least for the next few months.

The Biggest Change to the Legal Profession Lawyers Might Be Missing

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The makeup of a task force assembled last year by the State Bar of California is a cause for concern for many of the bar’s members. Created to address potential regulatory changes that could improve the accessibility of legal services, the group includes a number of tech industry insiders who stand to benefit financially from the proposed shifts.

Six of the committee’s twenty-two members are current or former executives for legal technology companies – see details below.

Andrew Arruda – CEO & co-founder, ROSS Intelligence (legal research platform using artificial intelligence)

Dan Rubins – CEO & co-founder, Legal Robot (automated legal analysis of documents)

Joshua Walker – co-founder, Lex Machina (legal analytics); author, On Legal AI

Simon Boehme – COO & co-founder, Disputly (security deposit recovery in California)

Johann Drolshagen – CTO/CIO, Level Playing Field Solutions (case management and administrative tools)

Allen Rodriguez – former director of attorney services, LegalZoom (connection to legal services through independent attorneys)

While some attorneys argue this is not substantially different from lawyers overseeing their own regulatory body, others worry the guidance offered by the task force is biased by conflicts of interest and not purely presented in service of its stated mission.

The sixteen recommendations issued by the committee this past summer included “allowing non-attorneys to own or have financial interests in legal entities,” as explained by ABA Journal. In response, attorney Carolin Shining of Culver City asked the panel on October 7th for “a pledge… to not profit, take salaries or any kind of benefit from entities that arise from the result of [its] work.”

The State Bar maintains that the task force is not subject to conflict-of-interest provisions because it is only providing advice. The diversity of backgrounds represented in the group, according to a statement from the organization, will result in recommendations that are better-informed and broader in perspective.

Regardless of whether or not members of the bar approve of the direction, this move toward involving non-lawyers in the industry could signify the beginnings of an enormous shift in the power structure of the legal profession. Changing the financial incentives of those who provide legal services has the potential, in the case of non-lawyer ownership, to result in the status and compensation of lawyers declining dramatically as client relationships transfer from attorneys to corporations and these companies seek to eliminate costs.

It appears that the committee’s recommendations are based on the assumption that for-profit tech companies can help increase access to justice by reducing costs associated with running a law firm.  But pursuing justice is at best an imperfect market good or service.  It is, therefore, far from clear that allowing non-lawyers to own and invest in law firms and the resulting reduction in lawyer power and economic clout will actually increase access to justice.  By contrast, it’s easier to trace how the regulatory changes being considered by the task force will economically benefit legal tech companies. Lawyers who ignore the work of the task force do so at their own peril.