Proceed with caution: Solicitors can’t play heads or tails with a Bitcoin!

There have certainly been both winners and losers since cryptocurrency was introduced back in 2009 with Bitcoin recognised as one of the original and most common options.

With its popularity growing it is no surprise that we are seeing an increase in the number of questions from our solicitor clients to check whether they should act on a transaction involving the use of cryptoassets.

So what are the risks, what should firms be considering, and what do the PII insurers think?

For the majority of traditional law firms the concept of cryptocurrency will be something more appropriate for the hi-tech companies based in Silicon Valley, but the reality is that we are starting to see the use of this type of asset more commonly now on the high street.

With the regulation of crypto generally falling outside the remit of the FCA there have been numerous scams reported with little or no consumer protection, which leaves your client in a vulnerable position if they need to call upon the services of the FSCS.

The biggest concern for solicitors should be the unregulated nature of crypto which makes the funds very difficult to trace. Crypto funds can be moved very quickly between accounts with little to no governance, meaning the opportunity for fraudulent activity is rife. This in turn creates potential problems from a money laundering and financial crime perspective. Many banks refuse to have any dealings with crypto due to not being able to trace from where the funds have originated.

Cryptocurrency is not recognised as an acceptable currency for UK house purchases, meaning owners of crypto such as Bitcoin would need to sell their assets and convert it into recognised currency. This raises some real challenges in terms of source of funds checks. The other major concern is the volatility of the crypto market where funds can crash overnight. This could cause issues on a conveyancing transaction if funds were not secured between exchange and completion and suddenly drop drastically.

There still remains little guidance on how or whether to act on matters where cryptoassets are involved and AML checks remain one of the biggest challenges. PII insurers will want to know what enhanced AML checks have been carried out and will also require some comfort that you have established the reason why your client is opting to use crypto instead of more regulated currency.

Generally we are seeing a reluctance from insurers for their insureds to be involved with client transactions involving crypto with it falling outside of the general appetite of most underwriters. The common stance is that firms are expected to exercise caution where source of funds cannot be confirmed, at which point firms need to consider if it would be wiser not to act.

One underwriter has commented to us that in their view conveyancers already have enough risk to deal with during a property transaction without adding cryptocurrency into the mix.

In terms of insurance cover, the solicitors’ primary MTC PII policy does not restrict the activities that a firm can undertake and the policy is designed to cover all activities of an SRA-regulated firm in line with their rules and as disclosed in their renewal submission each year.

Firms should always use their commercial and professional judgment to assess whether to take on any matter and we would recommend that extra care is taken when considering getting involved in anything new or unproven, such as cryptocurrencies. Any business undertaken that results in a successful claim or costs against your PII policy could adversely impact future renewal terms.

There are undoubtedly some legitimate examples of when crypto could be used in a transaction and there is generally an acceptance that this could be the direction of travel when it comes to future methods of payment, but it remains early days and an area of increased risk in what is already a very high risk environment.

Authored by:

Joel Harding Associate Director Howden Insurance Brokers Limited Get in touch