août 25 2022

What's Behind a Consolidation of Counsel in the Red-Hot Cryptocurrency Sector


In recent decades, the fastest-growing law firms have hitched a ride to thriving industries. First, it was the banks. Then, it was private equity. Today, it’s technology.

There’s plenty of demand and plenty of firms looking to service the technology sector. Out on the West Coast, firms with a strong base of technology clients are riding a wave of demand in the fintech space. But as financial and technology sectors continue on a collision course, firms with a background in financial services and regulation are also generating more work.
It’s still early days in the cryptocurrency sector. Joe Castelluccio, a corporate partner at Mayer Brown, likened the sector’s current status to that of the nascent commercialized internet in the early ’90s.

But the sector, like the internet, has proved to be resilient. Though some cryptocurrencies such as Bitcoin witnessed major drops in value earlier this year, the same cryptocurrencies are starting to recover in value. And more importantly, confidence in the use and utility of the underlying technology remains high.

“Interest has not abated,” said Matthew Kluchenek, a litigation, fintech and derivatives partner at Mayer Brown. “Market participants are still allocating serious money to innovating new types of crypto structures and products. There is a lot of opportunity in the space, and a belief among market participants that the time to strike is now.”

Kluchenek said interest isn’t just coming from entrepreneurs and venture funds. Increasingly so, large financial institutions and more traditional funds are stepping into the arena and putting money behind innovating certain types of financial products.

The Regulatory Regime

With the recent boom in the space, there’s been a heightened—and more selective—need for top-notch regulatory expertise.

“You cannot escape the regulatory implications,” Kluchenek said. “The regulation or absence of regulation is informing what participants do or don’t do, and that is [part of the reason] you see market participants focusing on a more narrow group [of firms] viewed as qualified counsel.”

For example, large financial institutions and traditional funds are putting money behind certain types of financial products that require companies to have securities, derivatives and money transfer counsel, according to Kluchenek.

That innovation comes as different regulatory agencies look to make an impact. Kluchenek pointed to the Commodity Futures Trading Commission, which he said has been advocating for more oversight on digital assets contracts, even though that is a nonderivatives space.

Castelluccio said Mayer Brown continues to win work because most of its practices that serve digital asset companies were developed before digital assets.

“We didn’t just wake up to it one day,” he said. “We evolved those practices to meet client demand, and fintech companies and financial companies want to work with us because they know us and trust us to figure out what digital assets mean for them.”

Robert Cohen, who joined Davis Polk & Wardwell in 2019 after a 15-year run at the U.S. Securities and Exchange Commission, where he held multiple senior positions, including chief of its cyber unit, painted a similar picture.

“Clients are looking to the firms who have lived through the history of financial innovation to make the best judgments,” Cohen said, noting that while every single client of the firm is hyper-focused on compliance, there is still little regulatory guidance laid to help firms achieve that.

Cohen said that makes the life experiences of people who have been through financial regulation before all the more essential. “All of these issues have been thought of, just not in this context. "We’re not starting from a blank state,” he said.

To give a little color to Davis Polk’s background in the space, Cohen added that “close to the time when someone spent thousands of Bitcoin on a pizza, Davis Polk was working on digital assets.”

Other firms, including Debevoise & Plimpton and Sullivan & Cromwell, have also leveraged a background in financial regulation and enforcement to capture work in the digital assets space.

For Debevoise, that meant creating an SEC enforcement (and white-collar) practice that drives business to other parts of the firm, according to an interview with the SEC enforcement team in June.

“It’s become even more important for clients to have counsel who have credibility in front of the SEC, so when you invariably have a run-in, you have a team that knows how to approach the staff with the right set of creative resolutions,” Debevoise partner Kara Brockmeyer said in June.

More recently, Sullivan & Cromwell opened up about its enforcement and criminal defense practices, which have also seen more demand from cryptocurrency market participants.

“Sullivan & Cromwell’s deep experience with financial institutions is so helpful in the crypto space because regulators and enforcement authorities are applying traditional concepts and ways of thinking to new technologies,” said partner Nicole Friedlander.

Sharon Cohen Levin, another Sullivan & Cromwell partner, said a background in financial regulation is not only helpful, it’s proved to be crucial.

“As companies have gotten bigger, their problems have grown and they have turned to counsel with a wealth of experience dealing with these issues for financial institutions,” Levin said.

Reprinted with permission from the August 25 edition of The American Lawyer © 2022 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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