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 Records[3]

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.

[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).