Even people with a passing knowledge of cryptoassets know what a volatile world it is. Since the start of the month, bitcoin has decreased in value by over 20% after a global crash in the market.
Yet, despite the latest wobble, bitcoin is still worth over four times as much today as it was on March 23, 2020 – when the U.K. entered its first national lockdown of the pandemic.
A fast-growing industry with plenty of questions about regulation might sound like an ideal scenario for law firms looking for lucrative workstreams. But the reality is that cultural mismatches, concerns over the regulatory status of some clients and an inability to hold onto many up-and-coming crypto lawyers has left a lot of firms playing catch up.
Law.com International spoke with a wide range of U.K. lawyers operating in this space, with many describing how demand often outstrips what the legal industry can supply.
One sign that some large law firms might be taking cryptocurrencies more seriously came earlier this year when U.K.-based hybrid law firm Gunnercooke announced it would accept payment for its legal services in crypto assets.
James Burnie, a financial services regulation & fintech partner at Gunnercooke, said the firm’s crypto asset payment option isn’t simply a gimmick, but is about proving the firm is at one with the community it works with.
“If I wore a suit to meetings with my clients, they would think I needed psychiatric help,” Burnie said. “This is not a client base that likes the big shiny buildings. Crypto guys simply aren’t like that.”
There is a cultural mismatch between law firms and crypto clients, according to one partner, which is partly rooted in the fact that law firms still hesitate to take on certain clients. Some players in the crypto industry are seen as what they refer to as “anarchistic cowboys”.
Rich Folsom, a technology partner at Deloitte, said that law firms wouldn’t go anywhere near players that fall into this category, as they are particularly difficult to advise.
“Some crypto-native firms think they should be able to operate the same everywhere, without needing to pay attention to the law in a specific jurisdiction. These are groups of people with a high-risk appetite, and there are certain misconceptions about how legal risk applies,” he said. “They really don’t feel like they need good legal advice.”
Folsom added that in some instances, there are potential clients who have raised funds in crypto assets, don’t have any kind of track record of bad behaviour, but aren’t sure how to create a product.
“A lot of help can be given to that side of the market, but I’m not sure that’s necessarily going to come from the [traditional London] law firms.”
The unique way in which some potential fintech clients are structured complicates matters even more.
Decentralised autonomous organisations (DAOs), for example, are not uncommon in fintech. These DAOs normally consist of a group of software developers, with each member purchasing tokens to buy a stake in the organisation, explained Bird & Bird partner Gavin Punia, who specialises in financial services regulation.
“The issue is working out who the client is for legal purposes. They would be viewed as a general partnership, which is a lot of risk for them given they’re all jointly liable,” he said.
DAOs present firms with a challenge, according to Rich Folsom, in that they don’t currently have legal personhood in the U.K., meaning they can’t become clients.
“Given it’s a requirement for a legal-client relationship for the client to have legal personhood,” Folsom said, “an individual would need to go and get hypothetical advice from a law firm about what the arrangements would be. It’s very unclear.”
The willingness of certain clients in the digital asset market to adopt anonymity is evident in a landmark case from 2019, in which a U.K. judge handed down a ruling which included the line: “I consider that a crypto asset such as Bitcoin are property”. The first two defendants are referred to in the ruling as ‘persons unknown who demanded bitcoin on 10th and 11th October 2019’, and ‘persons unknown who own/control specified bitcoin’ respectively.
Losing Crypto Talent
But it is not just uncertainty about certain clients that is holding law firms back. John Salmon, an information technology partner at Hogan Lovells, said some firms are also struggling with retention of lawyers who are able to handle the work.
“The general counsel of a client of mine was saying recently that many U.S. law firms who specialise in crypto have been struggling to keep their lawyers. Lots of them want to go in-house as there is a very hot market for crypto and some very interesting opportunities,” he said.
“More broadly, there is a lack of talent in both Asia and the U.S. in terms of lawyers with experience of both technology and financial services. Law firms are struggling to hold onto people who understand both these aspects.”
The problem appears to go beyond just law. Salmon also said there are reports of engineers and business experts leaving Silicon Valley giants like Facebook and Google to go into crypto.
That is not to say, however, that law firms aren’t finding plenty of work in this burgeoning field. Bird & Bird, Fieldfisher, CMS, and Hogan Lovells were identified by a number of partners as firms with expertise in crypto, blockchain and NFTs.
In April this year, Hogan Lovells advised the Rubey platform in its collaboration with The Royal Museum of Fine Arts Antwerp to become the first European museum to offer to the market Art Security Tokens, which were registered on the Ethereum/Polygon blockchain.
Meanwhile, CMS said that it has over 190 cryptoasset clients, including Binance, Crypto.com, Kraken, Dapper Labs, Mutant Apes and Wirex, and has also worked on over 50 NFT issuances in the last 18 months.
More Demand Than Supply?
The problem, according to one London-based partner, is not finding work, but finding enough lawyers with the kind of versatility required to take it on.
“We’re certainly hiring in this area, but when we speak to recruiters, they will say that there are tradeoffs involved. You can’t get people who are strong in all areas because there simply aren’t that many people,” the partner said.
Some larger firms have opted to hire lawyers from firms with a crypto-focus. Paul Ferguson, for example, joined Addleshaw Goddard as a partner earlier this month from Ontier, a U.K.-based firm that describes itself as “innovators and law changers in the Bitcoin, blockchain and cryptocurrency space.”
Ferguson spent 14 years with Ontier and was head of litigation.
“There are plenty of people who call themselves crypto lawyers but a lot of them just don’t have the experience,” he said. “The Magic Circle isn’t across it in the way you’d expect. Twelve months ago, perhaps, there was still some stigma attached so most firms will be scrambling to keep up.”
Other partners said that firms have been aware of the world of crypto for a few years.
For example, one partner from a tech-focused firm said that in previous years, when it was more common for ransomware hackers to ask for payment in bitcoin, they personally knew of several law firms that kept a stash of the digital asset—just in case.
John Salmon said that Hogan Lovells made a strategic decision about five and a half years ago to take work from startups—before other firms did the same.
“If we had waited until our larger clients were looking for advice,” he said, “we’d be behind and would not have the required experience.”
First Mover Advantage?
As more firms try to get up to speed in the practice area, firms that saw the potential of crypto assets and blockchain technology early on say they are at an advantage, as their lawyers have followed the progress of changing regulations and haven’t had to start from scratch.
Jonathan Emmanuel, a London-based partner in Bird & Bird’s commercial group, said it is crucial for lawyers to understand both the technology and the regulation.
“The clients in this space are technical people, and they appreciate that we can understand the language they’re speaking,” he said. “Another thing they appreciate is clear advice on regulation. If you’re a content creator, you probably don’t have time to keep up with the complexity of the regulatory landscape. A lot of these companies are fast-moving and disruptive.”
And the potential benefits on offer are huge. Partners who are doing work in the field are passionate about the potential that digital assets and blockchain technology have to improve the world.
Bryony Widdup, a London-based partner at DLA Piper, said that a focus on the environmental downsides of bitcoin had distorted the conversation around crypto’s ESG potential.
“In Nigeria, we can already see the big impact of digital assets and payment systems. They have their own [Central Bank Digital Currency] which is used amongst the business population, although uptake needs to be further stimulated to achieve the stated financial inclusion aims,” she said.
Widdup also said law firms have a big role to play in the future of crypto assets, adding: “A lot of the people who are going into fintech have gained their skills in private practice.”