Bitcoins and the Regulation of Lawyers

Sample Bitcoin paper wallet

On Thursday both founders of this blog ( myself and Shireen Smith of Azrights) were to be found at the Covent Garden  premises of the Chartered Institute of IT attending a lecture given by another SOLO lawyer and chartered engineer, Dai Davis of Percy Crow Davis based in Leeds.

We heard a fascinating and though provoking lecture on the concept of money and particularly virtual currencies of which Bitcoin is but one notorious example. The audience's main interest was in IT security. Since Bitcoin is a currency that is entirely dependent on cryptography and the possession of a private key to establish ownership and valid transactions, the security of the methods of storing those private keys is of fundamental importance to those charged with managing the security of the IT systems that are used to contain Bitcoin wallets or run exchanges. The picture opposite is a paper method of storing both public key (in the yellow section) and the private key (under the green fold on the right) of an alleged Bitcoin.

But why are we as Intellectual Property Lawyers interested in the concept of a decentralized or virtual currency? Two reasons: Do we accept payment by such a means to show how tech savvy we are ? and how do we advise our entrepreneurial clients about the risks and rewards of doing so or even investing in Bitcoin mining enterprises.

You will be able to listen to the entire lecture (and maybe even see the backs of our heads ) when it is uploaded here. Dai shared with us some fascinating "facts". According to the FBI 95% of Bitcoin transactions are related to illegal trade in drugs or arms. 45% of the Bitcoin exchanges (banks) have gone bust. The mining of new Bitcoins is increasingly difficult and requires substantial amounts of computing power to find new private keys and register them as your new Bitcoins.  The mining scheme has been devised so that every 4 years it becomes even harder and one of those break points is coming this summer. The maximum number of possible private keys or Bitcoins is fixed so the value should always increase (this is a big difference between a cryptocurrency and real money where the central authorities can print it. Some might say it gives Bitcoin greater integrity but it also ensures that those who got into Bitcoins on the ground floor have an enormous ENORMOUS incentive to keep the system going and see their fortunes grow at the expense of the suckers, like us, who would need to buy pre-mined Bitcoins for value.)

I will not accept Bitcoins in settlement of invoices for the same reason I do not accept other forms of barter payments. Barter is legal but just like any other transaction VAT must be accounted for (VAT is the lifeblood of the European Union and, as Dai suggested, why Europe should take the lead in setting a legal framework for the use of cryptocurrency). HMRC suggest this procedure for accounting for VAT on a barter trade. The problem is not that much different from accepting payment in a foreign currency (though often those transactions especially in US$ are mostly with clients outside the scope of VAT). However an accountant can find trusted sources to verify the rates you have used for those transactions. Setting the value of your Bitcoin for both VAT and the payment of tax is difficult. It seems this is not an issue for most users as they (unlike you) prefer to avoid paying any tax. This is not an option for a regulated lawyer. There is also a high risk that a client offering you payment in Bitcoin is involved in money laundering. Its too high a risk for a patent or trademark agent to take.

What about paying in Bitcoins? As Dai explained currencies of whatever description depend for their vailability on a large enough group of people that trust them to make them an acceptable form of exchange. The Bitcoin community wants you to trust them. This site https://bitcoin.org/en/getting-started looks confidence inspiring doesn't it? Its run by a Foundation but then most of us reluctantly trust the Bank of England but now it seems that Bitcoin to succeed needs to create its own equivalent.

Am I being too harsh - do comment if you are a proud and honest user.

Money Laundering

The tale end of Rule 11 says: Every regulated person must ensure they comply with all legislation

pertaining to “money laundering” and “proceeds of crime”.

No problem. Back in 2008 Solo posted about it. The 2007 Regulations don't apply to patent and trademark agents.   I was therefore surprised by the IPREG advice page.  In August they took advice from Mr James Ramsden, a junior counsel, who opines that the Treasury is wrong (as is SOLO). Brave man! I was alerted to this development by the report at the back (page 655 to be precise of the recently arrived CIPA Journal on the webinar in September. Personally I would have made it front page news as we know from the secret diary that no-one reads these features. Webinars are of course for CPD points getters not for any useful information. There is also a summary published clandestinely on the CIPA web site in October here.

The consequence of Mr Ramsden being right and me being wrong is (amongst other things) that all solos now need to become nominated officers to submit Suspicious Activity Reports (SARs). The National Crime Agency has a nice on line interface for enabling us to pursue our new career as a nark. Under the law as I understand it, if someone asks me to participate in a dodgy transaction, I can just say no. I have no further obligations. Yes you do need to be aware of the possibilities of money-laundering and now that we all have client accounts, we may be tempted by suggestions that we use them to facilitate interesting trades that our clients have in mind. Don't do it. Just say No. Client accounts are for managing credit risk in a way that is fair to the client.

The reason why the Treasury were wrong apparently is that we are independent legal professionals who by way of business provide legal services to other  persons, when participating in financial transactions concerning the managing of other assets (where the other assets are patents and trademarks). Me thinks he is stretching it. We do manage patents and trademarks but participating in financial transactions concerning their management? I don't think you can have  had in mind the payment of renewal fees as a financial transaction. Managing assets means looking after an investment portfolio, a load of houses - something of that ilk, not keeping a database of renewal dates. Probably you should read the opinion yourself.  Paragraph 17 to 22 are the knub of it.

Under the 2007 regulations, I only have to do client identification procedures when I am establishing a business relationship to participate in these strange financial transactions. Therefore, it seems to me that I had better not even get close to doing that.

Since IPREG took counsel's advice in August, one would have hoped that they have managed to engage with the FCA (Financial Conduct Authority not Crime Agency) and work out who is the supervisory authority for us.

ITMA recently conducted a survey to find out how many members had held money in an escrow account as part of an assignment exercise. Was that what they thought managing assets meant? An independent legal professional that is involved in financial transactions concerning the buying and selling of business entities is caught by the Money Laundering Regulations. However a trademark is not a business entity. A business is a business entity and the business might include a trademark but it would be remarkable if the trademark agent acted in the sale of the business entity just to get the trademark. If something like that comes along, pass it on to a business solicitor.

I am also confused by the Statement from CIPA and ITMA that you can see here. The first paragraph while true does not seem to support any assertion. Are they asserting that we don't need client accounts or that we should not be covered by the 2007 Regulations. The next paragraph bemoans the fact that we are not covered and some people (not many)  have had difficulty getting client accounts (as to which see my earlier post). Hopefully someone who knows will provide an illuminating comment. Maybe it could be you!

Recent Money Laundering Regulations

The Money Laundering Regulations 2007 that came into effect on 15 December have in some ways relaxed the compliance burden solicitors used to be under, and in other ways increased them. Under the old rules, firms adopted a tick box approach, and routinely checked identity when initially instructed and that was more or less the end of the matter.
Under the new risk based approach, it is not always necessary to check identity when first instructed (even though as a matter of good practice, firms may want to continue to do so). However, much stricter identity checking and vetting of clients is required when you are doing “regulated” work, and to have an ongoing program of monitoring clients. An example of non regulated business is litigation. As I understand it under the new Regulations if a client initially instructs a firm on a litigation matter the firm need not do identity and other checks. However, if that client then instructs the firm to set up a new company or to carry out conveyancing work, these being both regulated work, a firm would then need to undertake vetting and checks and continuous monitoring. So, it is important to put in place systems and procedures to ensure appropriate checks are done later even if a client has been known to the firm for years. Does anyone know for sure whether patent or trade mark work is regulated?