Digital assets have soared in popularity, with waves of innovation outpacing legislation and regulation. To try to narrow the gap, the Uniform Law Commission has urged U.S. states to change commercial law governing the transfer of these digital assets. Here’s a look at the proposed changes:
What happened?
The Uniform Law Commission (Commission) recommended changes in 2022 to the Uniform Commercial Code (UCC) to govern the transfer of digital assets, including cryptocurrency, digital tokens and non-fungible tokens (NFTs). The proposal envisions adding a Chapter 12 to the UCC and other changes.
How did we get here?
Virtual currency and other digital assets based on blockchain have spread quickly. In 2019, the Commission and the American Law Institute began considering whether to recommend changing the UCC to accommodate emerging technologies, including artificial intelligence, distributed ledger technology and virtual currency.
The Commission’s recommended changes address questions such as whether cryptocurrency is “money,” how digital assets can be transferred to lenders and buyers and how people or companies that buy digital assets can protect themselves from adverse claims.
Who will the changes most affect?
Despite market upheaval affecting crypto, the NFT market is not a passing fad or limited to the crypto market. NFTs allow anything digital to be “tokenized” – represented in a digital record stored on the blockchain, including files containing images, videos and music. NFTs will encompass a range of assets such as virtual games, virtual real estate and virtual claims. The proposed changes are intended to facilitate transactions involving virtual currency, NFTs and other digital assets, including:
- Virtual currency and other digital tokens exchanged for goods and services.
- Tokens evidencing membership interests in a limited liability company.
- Sale of digital art and other collectibles, and digital images of athletes, artists, entertainers and others.
- Sale of virtual currency.
- Secured lending transactions, including digital assets pledged as collateral for financing.
- Securities issued by startups, crypto companies, fintech companies and others in which payment is derived from virtual currency or other digital assets.
What happens next?
All 50 states, Washington, D.C., and U.S. territories will consider the recommendations. Several states have already adopted the changes; others plan to do that soon. The effective date of the proposed changes will vary by state.
The Commission has proposed a grace period to let lenders who hold a security interest in digital assets renegotiate terms. That period is called the “adjustment date.” Each state will choose an adjustment date of January or July 1, 2025, or, if later, the one-year anniversary of an act’s effective date.
What is a controllable electronic record?
Article 12 introduces a few new terms. Here are four terms you’re likely to hear:
- Controllable electronic record (CER): A record of information stored electronically that is susceptible to control and that a person has the power to use.
- Controllable account: An account that is evidenced by a CER, and the agreement of the account debtor (obligor) obligated on the account to pay the person who controls the CER.
- Controllable payment intangible: A payment intangible evidenced by a CER, and the agreement of the account debtor (obligor) obligated on the payment intangible to pay the person who controls the CER.
- Electronic money: Medium of exchange authorized or adopted by a government or intergovernmental organization in electronic form.
What kind of digital assets would be subject to the proposed changes?
Examples include bitcoin, stablecoin and other cryptocurrencies as well as digital art and music, digital coupons, hybrid tokens and security tokens.
Is cryptocurrency “money?”
Cryptocurrencies are not considered “money” mainly because private parties – not governments – create them. Cryptocurrency is not considered “money” even if a country authorizes or adopts it as a medium of exchange, as El Salvador did in 2021.
What should companies (particularly secured lenders) do about the proposed changes?
- Know Your Collateral/Portfolio: Does your borrower currently own digital assets? What happens if your borrower acquires digital assets? Does your security agreement cover after-acquired digital assets? What is the lender’s lien priority? Does the lender control the digital assets? What are the lender’s rights if the borrower sells the pledged digital assets?
- Obtain Lien Releases/Verify Your Lien Position: Are a borrower’s digital assets subject to pre-existing (adverse) liens? Do you have claims against the borrower or others for breaches of representations, warranties or covenants regarding pre-existing liens?
- Take Control/File a Financing Statement: Update documents with borrowers to provide you control of digital assets.
- Upgrade Your Systems: Do your systems or documents ensure you have control of digital assets? How will you verify/maintain control?
- Monitor Amendment Adoption: The shifting lien priority will depend on each state's applicable "adjustment date.” For each transaction, know the applicable governing law and adjustment date.
