Blogs

Proposed UCC Amendments for Cryptocurrencies, NFTs, and Electronic Money: What Every Lawyer Needs to Know

The Uniform Commercial Code (UCC) is a set of laws that govern commercial transactions in the United States. In 2022, significant amendments were proposed to the UCC to address the growing use of cryptocurrencies, non-fungible tokens (NFTs), and other digital assets. As these amendments are being adopted by various states, it is crucial to understand the implications of these changes and how they may affect their clients.

Key Concepts and Definitions

The proposed amendments introduce the concept of "controllable electronic records" (CERs), which are electronic records that can be subjected to control. Control is a legal concept that is intended to be the functional equivalent of possession for intangible assets. To have control over a CER, a person must have the power to enjoy substantially all the benefits of the CER, the exclusive power to transfer the CER, and the ability to identify themselves as the person in control.

The amendments also distinguish between CERs and other types of digital assets. For example, a Spotify stream or a Facebook page would not qualify as a CER because the user does not have the requisite level of control. On the other hand, cryptocurrencies like Bitcoin and some types of NFTs may qualify as CERs if they meet the control requirements.

Amendments to Article 12 and Article 9

Article 12 is a new article added to the UCC that specifically addresses CERs. It provides rules for the transfer of CERs and the rights of purchasers. Under Article 12, a purchaser of a CER can qualify as a "qualifying purchaser" if they obtain control of the CER, give value, and act in good faith without notice of adverse claims. A qualifying purchaser takes the CER free of any adverse claims, similar to the concept of a holder in due course for negotiable instruments.

Article 9, which governs secured transactions, has also been amended to address CERs. Under the amended Article 9, a security interest in a CER can be perfected by obtaining control of the CER. This is in addition to the traditional method of perfection by filing a financing statement. Importantly, a security interest perfected by control has priority over a security interest perfected only by filing, regardless of the order in which the interests were perfected.

Implications for Lenders and Borrowers

The proposed UCC amendments have significant implications for lenders and borrowers. Lawyers who advise clients on commercial transactions involving digital assets must be familiar with the new rules and concepts introduced by the amendments. They should also be prepared to draft and review contracts, security agreements, and other legal documents that address CERs and related issues.

For example, if a lender wants to take a security interest in a borrower's cryptocurrency holdings, the lawyer should ensure that the security agreement and other loan documents are drafted in a way that allows the lender to obtain and maintain control over the CERs. The lawyer should also be familiar with the perfection and priority rules under the amended Article 9 to ensure that the lender's security interest is properly perfected and has the desired priority.

Lawyers should also be aware of the transition rules that apply when states adopt the amendments. Transactions that were entered into before the effective date of the amendments may be subject to different rules than transactions entered into after the effective date. The transition rules are designed to maintain the expectations of parties to existing transactions, but they can be complex and may require careful analysis.

Another area where the amendments may have implications is in the realm of electronic money. The amendments address the possibility of governments issuing central bank digital currencies (CBDCs) and provide rules for the perfection of security interests in electronic money. While the United States has not yet issued a CBDC, lawyers should be aware of these provisions and how they may apply if and when a CBDC is introduced.

Conclusion

The proposed UCC amendments for cryptocurrencies, NFTs, and electronic money represent a significant development in commercial law. As digital assets become more prevalent in commercial transactions, it is essential for lenders and borrowers to stay up-to-date on the legal framework governing these assets.

While the amendments are complex and may require some adjustment, they also provide greater clarity and certainty for transactions involving digital assets. By establishing a framework for the control and transfer of CERs, the amendments facilitate the use of these assets in secured transactions and other commercial contexts.

As states continue to adopt the amendments, lenders and borrowers should engage experienced corporate finance counsel to closely monitor the implementation process and be prepared to navigate any challenges that arise during the transition period. They should also proactively educate themselves  on the implications of the amendments and how they may affect their transactions and relationships.  Ultimately, the proposed UCC amendments represent an important step forward in the evolution of commercial law to keep pace with the rapidly changing world of digital assets.