By David Jolly
You’re at the top of your game, a leader of a top firm, you’re an expert. But there’s that one area where you need to catch up: cryptocurrency.
For those starting from scratch, we recommend beginning your crypto education with our Crypto 101 primer, which breaks down the difference between crypto and NFTs, explains how blockchain figures in, and lays out what exactly the metaverse is and why it matters.
Just over a decade ago, crypto was a shiny new toy, a long-shot gamble on an intriguing technology. After a wild ride that has sent it to stratospheric heights and back down to earth, digital assets have become an everyday part of the legal landscape. Have you kept up?
We’ve talked to experts in the field about what law firm leaders need to know—and we’ve packaged it here with the idea that you can nail down the basics and build on that foundation for a solid grasp of what’s next.
What does crypto’s future look like? The Federal Reserve’s interest rate hikes have sparked a ferocious sell-off, though it’s unclear where things go from here. What we do know is that it’s extraordinarily volatile, and that a lot of money is at stake. Even if the market were to ultimately fizzle out, a few things are certain: There will be deals, there will be litigation, there will be bankruptcies—and that means firms have a big role to play.
“For a major law firm, it’s almost impossible to not have clients coming to you with crypto questions at this juncture,” said Kari Larsen, co-leader of Perkins Coie’s Blockchain, Digital Assets & Custody Industry group. “If you’re not fixed on it, you’re going to face a number of issues that your firm is ill-prepared to handle.”
Why now, in the midst of a sell-off in digital assets that has knocked $2 trillion off the market? Because despite that, thousands of legitimate players are still investing, and are going to need your help. If you don’t know how to give it, they’re going to someone else.
Managing partners have to think strategically and look around the bend. Crypto is an area ripe for business development, but the regulatory framework is still being hammered out.
A sober perspective is essential in a young industry plagued with scams, money-laundering and black-market activity. But you don’t have to be an Elon Musk-level enthusiast to recognize that—for better or worse—hundreds of billions of dollars are at stake.
What follows is everything a managing partner should be thinking about around cryptocurrency, blockchain, the metaverse, and NFTs. If you’re starting from square one check out this primer first: Crypto 101: Essential Reading for the Law Firm Managing Partner
Crypto’s impact on firms is being felt in mergers and acquisitions, securities regulation, bankruptcy, trusts, family offices, intellectual property, environment—even employment and divorce. Firms have organized themselves accordingly.
Perkins Coie formed its crypto group in 2013 from a team that had been working on payments issues, Larsen said. It now boasts one of the world’s largest, with more than 70 attorneys focusing their practices on blockchain and digital assets, and a client list that has included Nasdaq, Mt. Gox in its bankruptcy, and Andreessen Horowitz’s investment in Coinbase.
The firm has taken a “cross-functional” approach, Larsen said, meaning that group members have significant experience in the technology and industry concerns. It includes partners in technology transactions, white collar, real estate, intellectual property, investment management, privacy & data security, corporate & securities, and venture capital.
“A focus on the industry is what clients are looking for,” Larsen said. “Having that grounding means clients have certainty that they won’t have to start every phone call with a 10-minute explanation of their business.”
Alexandra Scheibe, who leads the FinTech and Blockchain Practice Group at McDermott Will & Emery, said firms are responding to client demand.
“That doesn’t mean the mainstream client base wants to invest in the most aggressive stuff,” Scheibe said. “It doesn’t mean they want to buy every single token on Kraken and trade it 24 hours a day. It means they’re trying to think strategically about crypto as an asset class or as an opportunity, and whether they should be involved.”
Scheibe said members of McDermott Will & Emery’s crypto group sit in their practice groups—litigation, transactions, tax, or intellectual property, for example. Clients include startups, larger companies, M&A targets and acquirers, as well as private equity funds and family offices.
Managing partners have a mandate for both revenue-generating activities and operations, said Brian Burlant, managing director with legal recruiting firm Major, Lindsey & Africa. The impact of Web3, blockchain, and crypto will naturally be felt mostly on the money-making side of the equation.
“You want to look ahead and start building that capability,” Burlant said, adding that it’s important to think of the longer term, looking out to five or 10 years on the horizon and planning accordingly.
“Regulation in the crypto space—in securities, banking, commodities—is taking place in real time,” Burlant said. “You’ll have a hand in shaping the regulation for the next 100 years. Nobody really knows how this is going to develop. It’s going to take collaboration and insight from all of the players. Getting the balance right is the really exciting thing.”
Scheibe also nodded to regulation as being a way for firms to find a way into the industry.
“The global regulation in this space is evolving either too fast, or not fast enough, depending on whom you ask,” Scheibe said. “And, obviously, a very good way for a law firm to advise clients is on the application of regulation to what they want to do.”
Another smart way in, Scheibe said, is with some of the more mainstream products.
“If you want to help your client think about a bitcoin purchase, or an investment in ethereum, or your corporation maybe wants to sell an NFT the way Major League Baseball has done, that’s less risky than saying, ‘Well, I want to trade perpetual swaps on a 1,000-times margin and see what happens,’ ” Scheibe said.
They also need to keep a close eye on the key question of the day, one that has transfixed the crypto world and focused the attention of lawmakers in Washington, Dilendorf said: “Is a coin a security or something else?”
The answer to that question, whether decided by the courts or by lawmakers, will go a long way to determining how crypto is regulated, he said.
Firm leaders should at least be familiar with blockchain technology and digital assets, even if they don’t need to know how to write their own protocol, crypto lawyers say.
“It’s vital that Big Law managing partners have a baseline of knowledge about crypto and related technologies—and that they help to make sure each of the firm’s lawyers possesses the same understanding,” said Judie Rinearson, a K&L Gates partner and co-leader of the firm’s digital assets, blockchain technology, and cryptocurrencies group.
“It’s real, it’s here to stay, it’s going to disrupt a number of industries, and they need to know about it,” Rinearson said.
Some examples give a taste of what may lie ahead: A UK judge recently gave the go-ahead to serve legal documents over a blockchain ledger with an NFT for the first time. And a bankruptcy case has raised the question of how and in what order should a distressed crypto firm should pay back creditors—whether they are actual people or platforms governed by computer code referred to as smart contracts.
Leaders can’t know everything, of course, which means they have to build teams that can assess representation opportunities as well as effectively advise clients on digital assets.
“If I’m an MP in a law firm, I want to keep an open mind about how I build this team, looking at a broad variety of backgrounds,” Burlant said.
“You want to hire and recruit people who are fluent in the technology,” Burlant said. “They’re teaching it in law schools now. Otherwise, anyone who’s an expert in this space is pretty much self-taught.”
Burlant noted a potential pitfall in overpromising.
“Because this is so new, and so many of the people are self-taught, firms need to be careful about telling clients that, ‘We have this really wonderful team that’s expert in this,’ ” he said. “But not really.”
It is essential, though, that some members of the team are solidly grounded in the technology, Duane Pozza, a partner at Wiley Rein LLP and former FTC enforcement official, said.
“What’s most important is that there are specialists at the firm, people who can step up and evaluate potential representations, for example,” Pozza said.
Max Dilendorf, partner at Dilendorf Law Firm, echoed Rinearson’s sentiment that crypto is in all things.
“It’s not enough for the partner to say, ‘I’ve been working in securities regulation all my life,’” Dilendorf said. “Because crypto involves everything. You can’t just analyze it from that angle, or you’re doing a disservice to your clients. You need a team of four or five: a solid securities lawyer, a solid white collar criminal lawyer, a tax lawyer who understands the issues, someone who understands the state issues, someone who knows IP.”
Scheibe at McDermott Will & Emery said her experience was that, in the end, the crypto experts on the team needed to be balanced with people having “a certain amount of non-crypto, non-Web3 experience, to be able to spot and understand what these clients really need, what the risks to the firm are and what the risks to the client are.”
“A lot of the reason that we get the clients we do is that we have a lot of senior level expertise—in financial institutions, in tax, in other structured finance, and IP, and funds—that can lend themselves to thinking through a lot of these strategic issues and transactional issues on the crypto side,” Scheibe said.
As for ways firm leaders themselves can come up to speed, practitioners pointed to the endless offering of online tutorials, CLE courses, and high-quality classes offered by law schools and other institutions. There’s even an online MIT course on blockchain and money taught by SEC chair Gary Gensler. But just following the firehose of news in such a fast-developing, barely regulated space is critical to staying current, they said.
The world of crypto presents other new challenges for firms. Many of the players seek to be anonymous, sometimes—but not always—for nefarious purposes. And clients may be located in sensitive jurisdictions, which puts extra importance on the on-boarding process.
“It’s hard for a law firm to represent a client that wants to remain anonymous,” Scheibe said, “because how do you diligence them, who’s going to pay you? Where do you send the bill? How do you make sure you’re not working for somebody you shouldn’t be working for? How do you do conflicts with all of your other clients? How do you represent a DAO?”
Such challenges aren’t insurmountable, but a firm needs to be thoughtful on how it addresses those issues, Scheibe said.
The shortage of experts in the space means firms need to guard against potential conflicts, according to Liz Chien, head of global tax for Protocol Labs and an adjunct professor at the University of California, Hastings College of the Law.
For example, a lawyer advising on an M&A deal might also advise portfolio companies, because the expertise in some areas is spread thinly and the same people end up wearing multiple hats, Chien said.
Dilendorf said firm leaders needed to understand the possible framework for regulating digital assets—most importantly the US Bank Secrecy Act and state-level money-transmitter regulations.
Dilendorf said his notable clients include one who is in the process of applying for an EB-5 investment Green Card using cryptocurrency proceeds to participate in the federal immigration investment program, and victims of Voyager’s Chapter 11 bankruptcy whose funds were frozen on the exchange and became part of the bankruptcy estate.
Dilendorf and others noted that the Securities and Exchange Commission recently said it was adding 20 more officials to its crypto enforcement group, with a focus on virtual-currency offerings, stablecoins, decentralized finance and trading platforms.
“If someone is in DeFi, they should be thinking: ‘If we get subpoenaed tomorrow, what are we going to do?’,” Dilendorf said.
Crypto isn’t confined by borders. Many of the largest players—Tether and Binance, for example—are located outside the US, and operate at least somewhat beyond the reach of US regulators.
Firms needed attorneys who understand not only how to operate in a decentralized way—decentralized markets, decentralized workers—but who understand what that means for employment-related risk when employees are dispersed globally, Protocol’s Chien said.
“You have to think about building up your international partnerships—Singapore, the UK, Switzerland, India, UAE,” she said. “There are interesting things happening in all of these places.”
Leaders also need to be keenly aware of the limits of their regulatory expertise, Pozza said.
“It’s important to have someone you can rely on for regulatory expertise,” he said. “Many crypto ventures are going to need regulatory advice in multiple jurisdictions, not just the US.”
Legal experts point to a “litigation cycle” in markets, in which a new industry grows up, explosive growth follows, deals follow the growth, deals go bust, and litigation follows. Crypto shows signs of following that model. Though it’s impossible to know what the future holds for digital assets, regulators and investors are certain to be litigating crypto issues for years.
In the meantime, businesses are becoming more comfortable with blockchains, traditional financial firms are moving into the space, and lawyers are needed with every new step.
“It’s a time investment,” Perkins Coie’s Larsen said of building a crypto business. “And for those in the market it’s obvious when someone isn’t really steeped in it.”
Her advice to managing partners: “Take a look at what you have, and grow in an area that you are comfortable investing the extra time in this industry and its nuances.”
—With assistance from Sam Skolnik.
To contact the reporter on this story: David Jolly in Washington D.C. at djolly@bloombergindustry.com
To contact the editors responsible for this story: Keith Perine at kperine@bloomberglaw.com; Rachael Daigle at rdaigle@bloombergindustry.com
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