New amendments to the Uniform Commercial Code (UCC) have been proposed which relate to transactions involving cryptocurrencies, digital assets, and blockchain technology. The amendments add a new Article 12 to the UCC, which is intended to modernize and clarify existing commercial law governing the transfer of property rights in digital assets, cryptocurrencies, NFTs, and other similar assets.
What You Need to Know:
1. New amendments to the Uniform Commercial Code (UCC) have added an Article 12 relating to the transfer of property rights in digital assets.
2. While the Article 12 amendments focus on the rights acquired by transferees of interests in digital assets, they do not address regulatory or public interest issues outside the scope of the UCC.
3. As of now, thirteen states plus the District of Columbia have adopted the Article 12 amendments, including Delaware, Alabama, California, Colorado, Hawaii, Iowa, Indiana, Nevada, Nebraska, New Hampshire, New Mexico, North Dakota, and Washington.
The amendments add a new definition for these types of digital assets, which they refer to as a “controllable electronic record” or a “CER.” A CER is defined as a “record stored in an electronic medium that can be subjected to control”. A CER excludes any digital assets that are not subject to “control” as well as those that are already subject to other commercial laws such as the E-SIGN Act, the Uniform Electronic Transactions Act or any other articles of the UCC. In addition, the new Article 12 includes the recognition of three new subcategories of intangible property:
- CERs (discussed above);
- Controllable Accounts (which are accounts where the account debtor undertakes to make payment to the person who is in control of the CER); and
- Controllable Payment Intangibles (which are payment intangibles where the account debtor undertakes to make payment to the person who is in control of the CER).
By creating the concept of control over CERs, the amendments allow for negotiability of CERs, similar to negotiable instruments.
The Amendment contains other notable provisions which, among other items, include:
- A definition of “control” of a digital asset which involves (1) the ability of the holder to avail itself of the benefits of the assets and (2) the ability to prove its control via cryptographic record.
- The Amendment also contains a “Take-Free” rule similar to that which is seen in Article 3 and Article 8 of the UCC, which means that under Article 12, if a good faith purchaser (including a secured party) of a CER obtains control without notice of a competing property right in the CER, they will acquire rights in the CER free of any competing claims of a property interest in the CER. This could have significant ramifications in the case of a stolen NFT, since it would mean that a good faith downstream purchaser of the stolen NFT would acquire the NFT free of any claims by the victim of the theft.
Most states are expected to adopt Article 12 over the course of the next few years. As of now, thirteen states plus the District of Columbia have already done so, including Delaware, Alabama, California, Colorado, Hawaii, Iowa, Indiana, Nevada, Nebraska, New Hampshire, New Mexico, North Dakota, and Washington. Legislation is currently pending in New York. The New York City Bar Association has endorsed the adoption of the Article 12 amendments by the New York legislature, emphasizing that Article 12 will “modernize, rationalize and clarify New York’s UCC so that it effectively governs important transactions in digital assets, while applying to certain digital assets the unique characteristics of New York law that facilitate the negotiability of written instruments and, thereby, enhance transactional certainty.”[1]
The New York City Bar Association makes an important distinction when it identifies the purpose of the Article 12 amendments: “The amendments focus on the rights acquired by transferees of interests in digital assets. They are not intended to, and do not, address regulatory or public interest issues outside the scope of the UCC. Thus, they do not concern the technology by which such assets are created, and, in fact, are intended to be neutral on that subject.”[2] In other words, the Article 12 amendments are aimed at clarifying the ownership and possessory rights of digital assets as they are currently used, held, and transacted in commerce, and the amendments do not take any position as to the legal or regulatory propriety of these assets, which is for government agencies such as the Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) to decide.
Ultimately, the Article 12 amendments are a positive step forward in establishing and defining the rights of holders of digital assets. It is expected that most states will adopt the Article 12 amendments by 2025.
