Notwithstanding recent turbulence in the cryptocurrency
markets, digital assets of all types are seemingly here to
stay. Bitcoin, stablecoins, non-fungible tokens a/k/a NFTs, and
even digital currency exchanged in the “metaverse” are
now included in security agreements, asset purchase agreements, and
mortgages. After all, digital assets are “property.”
However, the increased infusion of digital assets into commercial
life has not resulted in a uniform approach to transferring
property interests in digital assets. And, existing federal laws
regarding securities and commodities are vague (at best) as they
relate to the digital assets marketplace, and are subject to
considerable change in the near future.
These issues may soon be resolved. In July 2022, the Uniform Law
Commission (the “ULC”) finalized two key amendments (the
“2022 Amendments) to the Uniform Commercial Code
(“UCC”) to encourage a more uniform approach to digital
assets in commercial transactions: (i) the newly promulgated UCC
Article 12 governing digital assets or, as the UCC refers to them,
“Controllable Electronic Records,” and (ii) amendments to
UCC Article 9 detailing the process to obtain and perfect a
security interest in Controllable Electronic Records.1
These amendments address two fundamental questions related to
commercial transactions involving digital assets:
- To what extent does a buyer of a digital asset take the asset
free and clear of third-party claims? - How does a secured party perfect and enforce a security
interest in a digital asset?
The ULC promulgated UCC Article 12 and amended UCC Article 9 in
response to the rapid technological advance and rise in commercial
transactions involving digital assets. Indeed, the introductory
commentary to UCC Article 12 anticipates further evolution of
digital assets, noting that it “creates a legal regime that is
meant to apply more broadly than to electronic (intangible) assets
that are created using existing technologies such as distributed
ledger technology (DLT), including blockchain technology, which
records transactions in bitcoin and other digital assets. It also
aspires to apply to electronic assets that may be created using
technologies that have yet to be developed, or even imagined.”
In a sense, the ULC sought to provide clarity to commercial
transactions occurring today while also providing a legal framework
for emerging forms of digital commerce yet to be invented.
To date, two state legislatures—North Dakota and New
Mexico—have enacted the 2022 Amendments while another
twenty-three state legislatures have introduced bills to enact the
same.2
Article 12 – Controllable Electronic Records3
Section 12-102(a)(1) of UCC Article 12 defines a Controllable
Electronic Record as “a record stored in an electronic medium
that can be subjected to control.”4 The cornerstone
of UCC Article 12 is the “control” of Controllable
Electronic Record because such control may signify the extent of
property rights in the Controllable Electronic Record. And, the new
amendments to UCC Article 9 (discussed below) provide that a
security interest in a Controllable Electronic Record may be
perfected by, among other things, “control” pursuant to
UCC Article 12.
Control. Section 12-105 of UCC Article 12
provides that a person has “control” of a Controllable
Electronic Record if the person has: (i) the power to avail itself
of substantially all the benefit from the electronic record; (ii)
the exclusive power to prevent others from availing themselves of
substantially all the benefit from the electronic record; and (iii)
the exclusive power to transfer control of the electronic record to
another person or cause another person to obtain control of the
electronic record.5 Furthermore, the person must be able
to “readily identify itself in any way, including by name,
identifying number, cryptographic key, office, or account
number” to signify control of the Controllable Electronic
Record.6
Purchasers. Section 12-104(d) of UCC Article 12
provides that a “purchaser” of a Controllable Electronic
Record “acquires all rights in the controllable electronic
record that the transferor had or had power to transfer, except
that a purchaser of a limited interest in a controllable electronic
record acquires rights only to the extent of the interest
purchased.”7 However, a “qualifying purchaser
acquires its rights in the controllable electronic record free of a
claim of a property right in the controllable electronic
record.”8
Section 12-102(a)(2) of UCC Article 12 defines a
“qualifying purchaser” as a person who takes an interest
in a Controllable Electronic Record (i) for value, (ii) in good
faith, and (iii) without notice of a claim of a property right in
the Controllable Electronic Record.9 The concept of a
“qualifying purchaser” of a Controllable Electronic
Record under UCC Article 12 is analogous to a “holder in due
course” of a negotiable instrument under UCC Article 3 (i.e.,
a check, promissory note, or money order). Much like a “holder
in due course” of a check or money order taking ownership free
and clear of any prior property interests, a “qualifying
purchaser” of a Controllable Electronic Record takes it free
and clear of all competing claims of property rights.
Amended UCC Article 9 – Security Interests in
Controllable Electronic Records
Section 9-102 of UCC Article 9 now provides that “general
intangibles” include Controllable Electronic Records as
defined in UCC Article 12.10 Accordingly, upon enactment
of the 2022 Amendments, security agreements that grant a security
interest in “general intangibles” will cover all forms of
digital assets contemplated by UCC Article 12.
Amended Section 9-312 of UCC Article 9 provides that the
perfection of a security interest in a Controllable Electronic
Record may occur by (a) filing a UCC-1 statement or (b) by taking
control of the Controllable Electronic Record pursuant to pursuant
to Section 12-105 of UCC Article 12.11 However—and
importantly—a security interest perfected by taking control
of a Controllable Electronic Record has priority over any other
security interest granted in the same asset.
Practically speaking, the amendments to UCC Article 9 weave
Controllable Electronic Records into an already well-oiled UCC
system. A party seeking to obtain a security interest in
Controllable Electronic Records will likely consider the same
factors that they would in taking a security interest in other
general intangibles such as intellectual property or other
interests in payment streams. However, new considerations of
perfection by “control” under UCC Article 12 are now in
play.
Conclusion
The ULC’s amendments to the UCC provide welcome uniformity
and clarity as digital assets become ubiquitous to our commercial
system. With the framework of existing concepts well settled under
traditional concepts of commercial law, the new amendments will
further help solidify a baseline standard for incorporating
cryptocurrency and other emerging technology into our everyday
transactions.
Footnotes
1. Uniform Law Commission, A Summary of the 2022
Amendments to the Uniform Commercial Code, July 21, 2022, available
here.
2. See
2022 Amendments to the Uniform Commercial Code. Arizona,
Arkansas, California, Colorado, District of Columbia, Hawaii,
Indiana, Kentucky, Louisiana, Maine, Massachusetts, Missouri,
Montana, Nebraska, Nevada, New Hampshire, Oklahoma, Rhode Island,
South Dakota, Tennessee, Texas, Washington, and West Virginia have
all introduced bills to adopt the 2022 Amendments.
3. A copy of the Uniform Commercial Code Amendments
(2022) can be found here.
4. UCC § 12-102(a)(1).
5. Id. § 12-105.
6. Id.
7. Id. § 12-104(d).
8. Id. § 12-104(e).
9. Id. § 12-102(a)(2).
10. Id. § 9-102(a)(42).
11. Id. § 9-312(a)-(b).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
