Amendments to UCC Permit Secured Financial Transactions with Digital Assets

In 2022, the American Law Institute and Uniform Law Commissions proposed amendments to the Uniform Commercial Code (“UCC”). These amendments included a new Article 12 and revisions to Article 9 to permit the use of digital assets in secure financial transactions. The proposed Article 12 has created a new term, “controllable electronic record” (“CER”), which includes a definition of digital assets broad enough to include cryptocurrencies, non-fungible tokens (“NFTs”), other blockchain-based assets and, potentially, future technologies as the definition continues to evolve. The hope is that financial institutions will be able to utilize these CERs as collateral for conducting secured transactions.

One of the central hallmarks of a “secured” transaction is the ability of the secured party to control the asset in which it has a security interest. If the secured party does not have the ability to control and transfer the digital asset, it would be ineffective to rely on it as collateral. Therefore, Article 12 also clarifies what qualifies as acceptable proof of identification of the asset, as well as the method of establishing control over it (such as cryptographic keys, identifying numbers, account numbers, etc.). To address concerns about transferability, the amendment also creates a “shelter rule,” whereby the purchaser of a CER acquires all the rights of the transferor, and a “take-free” rule, whereby the purchaser acquires the CER free of competing claims without a UCC search. Finally, the amendment to Article 9 modifies the definition for “intangibles” to include CERs to provide a methodology for perfecting and prioritizing the creditor’s interest. Altogether, this new framework establishes new means for integrating digital assets into commercial transactions.

While Massachusetts has not yet adopted the proposed amendments, there is currently a bill working its way through the committees that would adopt portions of them. On April 3, 2024, it was referred to the House Committee on Steering, Policy and Scheduling for further review. It remains to be seen what impact the amendment would have at the state level in Massachusetts, but with thirteen states and the District of Columbia already adopting these amendments, there is already a national interest in moving them forward.

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