Insurers Wary of “Silent Crypto” Exposure: PART III, Silent Crypto Exposure for Lawyers – FinTech

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January 19, 2023

Wilson Elser Moskowitz Edelman & Dicker LLP

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The recent implosion of crypto firm FTX and its subsidiaries provides a case study of potential crypto exposure under traditional insurance policies in this four-part series: Silent Crypto for D&O and Corporate Liability Insurance (Part I), Silent Crypto Exposure for Accountants (Part II), Silent Crypto Exposure for Lawyers (Part III) and Crime and Custody Covering for Crypto Assets (Part IV).

Silent Exposure to Crypto for Lawyers

Like other professional service providers, lawyers are not immune from potential liability in providing legal advice and services to crypto businesses as the regulatory landscape continues to change. evolve in an unstable and uncertain way. Indeed, more and more businesses and participants in the burgeoning blockchain, cryptocurrency and digital asset ecosystem are hiring lawyers to protect themselves against their own potential exposure to liability, as it becomes increasingly clear that there will be greater regulatory oversight and scrutiny of crypto companies doing business in the United States and internationally.

Many law firms carry Lawyers’ Professional Liability (LPL) policies, which generally provide coverage for claims made for the first time against lawyers in connection with the provision of professional legal services to clients for costs. These claims are frequently brought by clients of law firms in the form of a malpractice suit alleging negligence, errors or omissions in the provision (or failure to provide) of legal services or advice. appropriate. Carriers issue policies based on the area of ​​law in which the plaintiff attorney typically practices, which can be broad, but all policies contain exclusions that should be reviewed. Lawyers can purchase LPL policies which provide extensive coverage for legal services provided by lawyers acting in a fiduciary capacity or providing investment advice. This is particularly notable where the boundaries of law, business, finance and investment may blur.

The insurance market also offers a specialized product known as staff attorney coverage, which is usually added by endorsement to corporate D&O policies or management liability insurance policies. This coverage is intended to insure the acts, errors or omissions of in-house counsel, but only in connection with the provision of legal services in their capacity as an employee of the insured organization.

Recent events in the crypto markets, including the fall of the fourth-largest crypto exchange, FTX, highlight the various unresolved legal issues that can trip up lawyers advising individuals or entities engaged in creating , buying, selling, trading, lending, keeping custody of, or other transactions involving cryptocurrencies or digital assets.

Some legal issues that have caught crypto companies and their lawyers off guard include:

Appropriate legal structure of the entity Where the entity should be domiciled Ever-changing global regulatory landscape for crypto businesses and digital assets Whether the business needs to be registered or licensed to do business in different jurisdictions If the business is subject to the supervision of the Securities and Exchange Commission (SEC) for trading in “securities” If the company is subject to the supervision of the Commodity Futures Trading Commission (CFTC) for trading in “commodities” If the business is a “money services business” Whether the business is subject to bank secrecy AML and anti-money laundering laws Whether the business’ customer terms of use are appropriate and adhered to Tax treatment of cryptocurrencies and assets The lawyer’s personal interest in the company as an investor, shareholder or stakeholder If the lawyers have advised Appropriately (or correctly) advised individual directors or agents about potential personal exposure.

Lawyers who intend to provide such advice should be careful to set client expectations in this uncertain and largely untested legal environment for crypto businesses, keep abreast of new developments, and recalibrate legal advice and recommendations to as the regulatory landscape evolves.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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