The recent implosion of crypto firm FTX and its affiliates provides a case study for potential crypto exposure under traditional insurance policies in this series of four articles: 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 Coverage for Crypto Assets (Part IV).

Silent Crypto Exposure for Lawyers

Like other professional services providers, lawyers are not immune from potential liability exposure in connection with providing legal advice and services to crypto firms as the regulatory landscape continues to evolve in a choppy and uncertain fashion. Indeed, more firms and participants in the burgeoning ecosystem for blockchain, cryptocurrency and digital assets are engaging lawyers as a hedge against their own potential liability exposure as it becomes increasingly clear that there will be greater regulatory oversight and scrutiny of crypto firms doing business in the United States and abroad.

Many law firms purchase Lawyers Professional Liability (LPL) insurance policies, which typically afford coverage for claims first made against attorneys in rendering professional legal services to clients for a fee. These claims frequently are brought by the law firms’ clients in the form of a legal malpractice lawsuit alleging negligence, errors or omissions in rendering (or failing to render) appropriate legal services or advice. Carriers issue policies based on the area of law in which the applicant attorney typically practices, which may be broad, but all policies contain exclusions that must be reviewed. Attorneys may purchase LPL policies that afford expanded coverage for legal services provided by lawyers acting in a fiduciary capacity or providing investment advice. This is particularly noteworthy where the lines of law, business, finance and investments may blur.

The insurance market also offers a specialized product known as Employed Lawyers coverage, which is typically 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 corporate counsel – but solely in connection with rendering 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 attorneys who provide advice to individuals or entities engaged in creating, buying, selling, trading, lending, retaining custody or other transactions involving cryptocurrency or digital assets.

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

• Appropriate legal structure of the entity

• Where the entity should be domiciled

• Constantly evolving global regulatory landscape for crypto firms and digital assets

• Whether the firm should be registered or licensed to transact business in different jurisdictions

• Whether the firm is subject to oversight by the Securities and Exchange Commission (SEC) for dealing in “securities”

• Whether the firm is subject to oversight by the Commodity Futures Trading Commission (CFTC) for dealing in “commodities”

• Whether the firm is a “money services business”

• Whether the firm is subject to the Bank Secrecy Act and anti–money laundering laws

• Whether the firm’s customer Terms of Service are appropriate and being followed

• Tax treatment for cryptocurrencies and digital assets

• The attorney’s personal interest in the firm as an investor, shareholder or stakeholder

•  Whether attorneys have appropriately (or correctly) advised individual directors or officers 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 firms, keep abreast of new developments, and recalibrate legal advice and recommendations as the regulatory landscape evolves.