Whoa, We’re Half-Way There: UCC Crypto-Overhaul Now Adopted by 25 States
In 2022, the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) published the first substantive amendments to the Uniform Commercial Code (UCC) since 2010 (the “2022 Amendments”). As of October 14, 2024, the 2022 Amendments have been adopted by 25 States and have been proposed in 9 others. In the coming weeks, this blog will examine these changes in detail, including what they mean for Buyers and Sellers of Crypto, Lenders seeking to secure interests in Crypto as collateral, and how the deviations in implementation among the states will affect the crypto landscape nationwide. We begin today with an introduction and overview.
The two most significant changes arising out of the 2022 Amendments are the formation of Article 12, governing the rights of purchasers of Controllable Electronic Records (“CERs”) like Bitcoin and a significant overhaul of Article 9, governing attachment, priority and perfection of Secured Interests. Since perfection in most collateral is governed by either the location of the Debtor or the location of the collateral itself, every lender in the country making loans to a Borrower with operations in any state that has adopted the 2022 Amendments is affected.
The states that have adopted the 2022 Amendments already are Alabama, California, Colorado, Delaware, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Virginia and Washington. The District of Columbia has also adopted the new law.
This update to the law of 25 states and counting was designed to allow the law to be responsive to present and future emerging technologies, including both private and state-sponsored cryptocurrencies, as well as other digital assets. In Articles 1 and 9, it amends the definitions of Money, Electronic Money, and Chattel Paper, as well as creating methods for securing an interest in a borrower or lessee’s CERs. In Article 12, it creates the first meaningful legal scheme to govern ownership and transfers of property interests in digital assets.
Article 12 does this, in part, by creating a new legal term, the Controllable Electronic Record, which is intended to capture both existing blockchain based technologies such as Bitcoin and other crypto currencies, as well as future technologies intended to serve either as electronic assets or currencies. A Controllable Electronic Record under the 2022 Amendments is defined as “a record stored in an electronic medium that can be subjected to control under Section 12-105.” The term specifically excludes accounts, payment intangibles, deposit accounts, and other intangibles that were already defined and understood by previous iterations of the UCC. Section 12-105, in short, defines control as 1) the ability to benefit from the CER, 2) the ability to exclude others from benefiting from the CER, and 3) the exclusive ability to transfer control of the CER. These attributes mirror the existing technology of the Blockchain to identify the current owner of a Bitcoin or other similar record, and to record transfers of ownership such that each asset can have only one owner. These attributes also serve the drafters explicit intention to cause CERs to closely parallel and be the functional equivalent of Negotiable Instruments as defined and governed by UCC Article 3. Critically, although a security interest in a CER may be perfected by either filing or control, perfection by control will have priority over perfection by filing and a filing does not serve as notice of the existence of a property interest in a CER. This means that any lender seeking to have a first priority claim on a CER must perfect by control.
A couple of important notes to conclude this summary are that Article 12, by its terms, states that Article 9 will control in any instance where provisions of the two articles conflict with each other. In addition, Article 12 states that CERs may by their own terms select a jurisdiction whose law will apply to them. If they fail to do so, then the law governing the system in which the record is housed under its rules will control, and if no such law can be designated from the internal rules of the CER or the system housing it, then the law of the District of Columbia will control by default.
Future issues of this blog series will include an in-depth analysis of the revised Article 9 and how it affects lenders, a 50-state survey of the status of the 2022 Amendments across the country, and a comprehensive assessment of the new Article 12 and what it means for businesses, lenders, and investors who hold, trade, or have interests in tokens, cryptocurrency, and other digital assets.
