Billing in bitcoins

by , Mar 28, 2013 | 7:28 pm

One of the many things I love about having a specialized, small law practice is my autonomy and flexibility. If I want to implement a business idea for Gaming Counsel, I can research it, think about it, and then do it. Provided that I comport with the law and the strictures of my regulators (e.g., the Law Society of Upper Canada & the State Bar of Nevada), I can go ahead and try new things. That’s a freedom I didn’t have as much of — not to say none of — at a big firm, and I don’t miss being more tied up.

With that in mind, I’ve decided to start accepting certain gaming business in bitcoins, which is intriguing for the firm. I don’t expect it will be a lot of business, but bitcoin is an engrossing concept and currency, and I’d like to at least try to keep up with its development and how my clients might like to do business.

I found out about bitcoin in the fall of 2011 by reading an article by Joshua Davis in The New Yorker. Even at that stage, I was late to the party; bitcoins had already been around since early 2009. I was intrigued by the concept, and resolved to find out more. I had an opportunity to do some research for an anti-money laundering book chapter I was writing over the winter, so I created a wallet at Mt Gox (the highest volume bitcoin exchange), bought some bitcoins, and devoted a small section of the paper to the subject. Unfortuantely, the bitcoin section is the weakest part of the chapter. It’s interesting (and a little embarrassing) to see some of my misconceptions about bitcoins in the context of what I’ve read, heard, and learned since then. The thrust of my point about bitcoin then — that it does not yet have a place in a well-regulated Internet gaming jurisdiction — still has some currency, if the pun can be excused, but I should have been less definitive. Persons transacting in bitcoins can be regulated; it’s just that the currency (bitcoin) and the payment system (Bitcoin) fundamentally can’t be. It’s spilt milk now, but a deeper understanding would have strengthened the chapter.

I was caught up with other things for the balance of 2012 and parked my interest for awhile. Meetings, further research, and client business over the last couple of months have got me back onto the subject and much more engaged with it, so much so that I’m going to start accepting bitcoins for some of Gaming Counsel’s business.

This is actually quite straightforward in Ontario. You can bill out in many currencies here; the bitcoin currency is just one example. (I understand from the practice management staff at the Law Society that a solicitor in the north of the province once billed out work in meat. Price for legal services = one cow.) Provided that you conform to the Law Society’s record-keeping requirements, they shouldn’t have a problem with bitcoin.

The Law Society aside, there are problems. The biggest one is the value of bitcoins. Bitcoins meet the three-pronged test of economists for a currency: it’s a unit of account, it’s a medium of exchange, and it’s a store of value. But it’s a volatile store of value. The price fluctuates wildly. Today, it’s trading at approximately $94 per bitcoin. Five days ago it only cost ~$65 to buy one bitcoin. For most of its history, bitcoin seems to have traded at under $10. The problem is bigger than just accounting, but I think it’s usefully expressed as an accounting issue. Theoretically, there’s nothing preventing someone from compiling financial statements denominated in bitcoin. But what would those statements mean? The relative value of bitcoins swings so wildly that revenues on an income statement would mean something very different at the beginning of the period than at the end of it. The same holds true for receivables or, indeed, for most items on the P&L and the balance sheet. (One might not have quite the same level of concern about denominating something like a ‘nominal’ stated capital account for shares in bitcoin although, there again, what is nominal in a mercurial currency? And there is clearly still a potentially huge effect on the equity portion of the balance sheet.) I was discussing this with a colleague the other day, and we agreed that it would be a little bit like denominating one’s financial statements in dollars during a period of hyperinflation for the dollar. The volatility of the currency strips your financials of some of their core meaning.

This isn’t the fault of bitcoin. The concept and the technology are great. In fact, to the extent that bitcoin is not subject to the whim of a central bank or other authority, in a critical way it’s quite stable. The erratic fluctuations are a function of bitcoins being “new and weird,” to quote Davis, and of their having a shallow and limited market (so far).

The bottom line is that the firm will need to either accept the downside risk and manage it through prompt payment and conversion to fiat money or hedge all bitcoin transactions. Because of the volatility, the hedge will be expensive, so that option isn’t practical, but I still see the risk as manageable and worth taking.

Another wrinkle in Ontario is with respect to lawyers’ maintenance of mixed trust accounts. These need to be held at a ‘scheduled’ bank under the Bank Act or at another prescribed facility. (See subseciton 7(1) in Part IV of By-Law 9.) I’m not yet aware of any such facility that accepts and holds deposits in bitcoin. That makes sense. Why would banks hold bitcoin deposits for customers? They are — and should be — somewhat threatened by bitcoin. My read is that Ontario lawyers cannot currently hold trust funds for clients in mixed trust denominated in bitcoin.

Finally, we’ll need to make sure that no money laundering rules or other laws are broken, which is why the firm will accept only certain business in bitcoin. For example, I’ve been reviewing the recent guidance on virtual currencies issued by FinCEN, which brings certain parties transacting in bitcoins within the money services business definition (and, specifically, defines them as “money transmitters” in the MSB definition) in 31 CFR § 1010.100. These regulations were promulgated further to the US Bank Secrecy Act. While I don’t do business “wholly or in substantial part” in the United States, I do have some US clients. Accordingly, Gaming Counsel and, indeed, anyone transacting in bitcoin from US customers, will want to consider the guidance (and other applicable law) carefully and ensure that all required rules are being followed.

Bitcoin is the only virtual currency Gaming Counsel will accept, at least at this stage, because of its decentralized nature and minimal (though not non-existent) counterparty risk. I don’t expect it will pay all the bills, but it’s an exciting thing to try.

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