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.

Accounting the Cost

KPMG site

One of the major worries when setting up as a solo practitioner is how to deal with the financial side. Even if you are only borrowing from yourself (or perhaps especially then) you need to keep a careful record of all transactions. My strategy was to buy some accounts software and later recruit an accountant to do the end of year accounts and tax work. I asked for recommendations, visited several firms, sent enquiries to others. It was rather hit and miss. Small business is not that attractive. (It might be different if you are in a smaller local community than the heart of London and you can network with local providers). Since then accounts packages have moved into the cloud and pay by month Software as a Service has become a popular option that feeds our just in time culture. I was therefore intrigued when I received a cold call from Big Brand Accountants KPMG promoting their service which combines everything you need in the financial way from book keeping through VAT returns and payroll to the end of year accounts and tax - all bundled into one neat monthly fee and accessible from anywhere (provided the cloud is still in the sky). Prices start at £150 per month (this year but what about next?) and depend on how much of a burden you are predicted to be!

The accounting package at the heart of it is Xero - a brand I had not heard of before. You could try the Xero software for free to see if you like its approach - but it seems to be able to deal with € and $ as well as £.

The benefit of having an accountant on board when you start should be that things get set up properly. It ought to impress prospective clients too that you are well managed and regulated even if small.  That does seem to worry some transferring clients that have been used to the apparent re-assurance of big firm providers.

Xero Direct

I am not being paid to write this and I am not a user but it certainly looks an interesting and innovative approach to the problem. The idea of having an accountant that you can call with a VAT query without risking another bill seems to address exactly the problems that some small CIPA members were having as reported during Congress.

This type of product could also be beneficial to not so solo firms too. If anyone has has experience of cloud based book keeping or dipped a toe in the water please comment. What do you see as the risks and benefits of this approach?

New European VAT Rules

One of the challenges for the SOLO IP practitioner based in the United Kingdom is dealing with your VAT returns. As from 1 January 2010 we have to change the rate of VAT on our bills from 15 back to 17.5%. However that is not all that affects us. IP is a global business so hopefully you have a few non-UK based clients. Since the provision of patent and trademark services is a "service" not a "good", it used to be pretty simple. No VAT for overseas clients and you could forget that strange thing an EC Sales List (ESL). No longer. Within 14 days of your next VAT reporting period HMRC want an ESL from you.

Here is the official Notice. For practical purposes this means you need to record the value of services supplied to EU clients but you still do not charge them VAT. You do need to included their VAT number on your invoices and on the ESL. Most of us have that data already. However I have noticed a few of my European suppliers have been asking for my VAT number recently. Its easy to reply as I have my VAT number in my email footer and their VAT numbers in my database.

I have sent my VAT returns online for sometime and it is a lot simpler than paper. I can do the ESL online too and since I have very few European clients, doing it manuallly after the end of the 1st quarter of 2010 is not a big burden. If you have more, then perhaps its time to look at your accounting software and speak to your accountant. If you are not doing it online yet, now is the time to start. Its very simple.

I am hoping for comments on whether you think these changes have more significance than I have appreciated.

VAT Change for SOLOs

I've been struggling with the VAT change. I've dredged up from my memory the horrors of bills with two VAT rates so I was pleased to find this paragraph in the detailed VAT guide rather than the confusing summary that arrived in the post.

If you are making a single supply of a service which is nevertheless carried out over a period of time which spans the change in rate (e.g. the service provided by a solicitor in preparing a will) the whole supply can be charged at the new 15% rate. Any VAT already accounted for at 17.5% (e.g. on payments on account made before 1 December 2008) may be adjusted using the special change of rate rules described in paragraph 3.1.

I think my IP jobs are analogous to preparing a will so I have stopped fretting as to whether I need to bill all my work in progress before the end of the week. Anyone have thoughts ? The idea of being asked to sub up the 2.5% to the VAT man because I have made a mistake and charged the lower rate when I should have charged the higher one.

So its back to the credit control , oh joy