Enhanced Protection for DeFi Lenders, Buyers, and Investors Under Recent and New UCC Amendments

1.  A “Controllable Electronic Record” (CER), which is defined as “a record stored in an electronic medium that can be subjected to control under Section 12-105” of the UCC.³ To qualify as a CER, the digital asset must be an electronic record (or information stored in an electronic medium and retrievable in perceivable form) and be susceptible to “control” as defined under UCC 12-102. Note that control over a CER may be shared to a certain extent by more than one party. Common examples of digital assets that may be CERs include BTC, ETH, other cryptocurrencies and certain NFTs. Digital assets that are CERs are classified as general intangibles under Article 9 of the UCC.⁴
2. A “Controllable Account” (CA), or an account (which under the UCC is defined as certain rights to payment of a monetary obligation)⁵ evidenced by a CER that provides that the account debtor undertakes to pay the person that has “control” under UCC 12-105 of the CER.⁶ Accounts includes CAs.⁷
3. A “Controllable Payment Intangible” (CPI), or a payment intangible evidenced by a CER that provides that the account debtor undertakes to pay the person that has “control” under UCC 12-105 of the CER.⁸ A U.S.-dollar backed stablecoin, for example, may be a CPI. Certain tokenized obligations such as subscription tokens may also be CPIs. Payment intangibles include CPIs.⁹

CERs, CAs, and CPIs are referred to herein as “Article 12 Property.”

What kinds of assets are not covered under UCC Article 12

Deposit accounts, investment property, (fiat) money, electronic accounts, electronic payment intangibles, electronic copies of records evidencing chattel paper, electronic documents of title, and transferable records under E-SIGN and UETA.¹⁰

Other than with respect to CAs and CPIs evidenced by a CER, UCC Article 12 does not govern the effect of a transfer of a CER on an asset which is tethered or linked to such CER.

How to perfect a lien on Article 12 Property

1.  While a security interest in CERs, CAs, and CPIs may be perfected by filing a UCC-1 financing statement¹¹ or by control¹² (which is a term of art defined under Section 12-105 of the UCC), perfection by control trumps and takes priority over perfection by filing.¹³

Note that from and after the “Adjustment Date” (which varies from state to state), a secured party must have “control” of collateral that is Article 12 Property under the new, amended UCC requirements, in order to ensure that it maintains an enforceable and first-priority, perfected lien on such Article 12 collateral.

To have “control” of a CER, a person must have all of the following:¹⁴

1. The power to avail itself of substantially all of the benefit from the electronic record;
2. The exclusive power to prevent others from availing themselves of substantially all the benefit from the electronic record;
3. The exclusive power to transfer control of the electronic record to another or to cause another person to obtain control of another CER as a result of the transfer of the electronic record; and
4. The ability (via the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded) to readily identify itself (such as by name, identifying number, cryptographic key, office, or account number) as having these powers.

Under certain limited circumstances,¹⁵ a person may still have “exclusive” power even if the power is “shared” with another person,¹⁶ such as via certain multi-sig and/or custodial arrangements.

The analysis of whether a particular blockchain-based consensus mechanism that allows shared power would still satisfy the amended UCC requirements for control could be complex, and would involve assessing how the smart contract protocols, multi-sig triggers and transfers, and other applicable on-chain or platform features actually work in practice and whether the buyer or secured party would have “control” under the amended UCC.

b. A secured party has control of a CA or CPI if the secured party has control of the CER that evidences such CA or CPI.¹⁷

While control may also be achieved via a securities intermediary having control on behalf of a buyer or secured party and perfecting a security interest under UCC Article 8, since a CER is not a “security” for purposes of UCC Article 8, the buyer or secured party would not be a “protected purchaser”¹⁸ of a security under UCC Article 8 and thus would not “take free” of other property claims. Instead, the new UCC Article 12 “take-free” rules would apply to a buyer or lender that is a qualified purchaser of a CER under Article 12 of the UCC.

Priority of security interests in Article 12 Property

The relative priority of a secured party’s security interest in Article 12 Property depends in part on exactly whether, how and when the secured party established priority under the UCC in the applicable CER jurisdiction. Until the Adjustment Date occurs in a CER jurisdiction, a secured party’s priority that was established before the effective date of the UCC amendments in such CER jurisdiction will continue. After the Adjustment Date occurs, however, the new priority rules apply, even to security interests that were prior and perfected under the UCC before the effective date of the UCC amendments.

As of the date of this advisory, the differing effective dates and Adjustment Dates from state to state create a regulatory patchwork across the U.S. Buyers and secured parties with Article 12 Property transactions that cross multiple jurisdictions may be able to “take-free” of other property claims, and may have first priority, perfected liens in, some states and/or some transactions, but not in others, and/or may need to take steps to keep or obtain good title and first-priority, perfected security interests in some transactions, and not others. 

We recommend that buyers and secured parties not assume that their existing and future ownership and/or security interests in Article 12 Property are, or will be, unaffected by the new UCC requirements across different states.

Transfers and Negotiability; Shelter principle

A buyer who acquires a CER, CA, or CPI, or a secured party who takes by a lien on a CER, CA, or CPI to secure an obligation, from a transferor acquires all rights in such CER, CA, or CPI that such transferor had or had power to transfer.¹⁹

As a result, if the buyer or secured party—even if not a qualifying purchaser itself—acquired a CER, CA, or CPI from a qualified purchaser, such buyer or secured party would acquire the CER, CA, or CPI free of any property claim to such CER, CA, or CPI that preceded the acquisition of the CER, CA, or CPI by the qualifying purchaser.

Transfers and Negotiability; Qualifying purchasers of Article 12 Property “take-free” under Article 12

Under Article 12’s “take-free” rule, a qualifying purchaser of a CER, CA, or CPI acquires its rights in such CER “free” of a claim of a property right in such CER, CA, or CPI.²⁰

A buyer of a CER takes free of a security interest if, without knowledge of the security interest and before it is perfected, the buyer gives value and obtains control of the CER.²¹

A buyer (other than a secured party) of a CA or a CPI takes free of a security interest if, without knowledge of the security interest and before it is perfected, the buyer gives value and obtains control of the CA or CPI.²²

A “qualifying purchaser”²³ is a person (either a buyer, including a buyer that purchases through a custodian or an exchange, or a secured party) who:

1. acquires a CER on an interest in a CER in a sale, or obtains a lien on a CER or an interest in a CER to secure an obligation;
2. obtains control of the CER;
3. gives “value”²⁴ as defined in UCC Section 3-303(a), which is narrower than the definition of “value” used for determining whether a security interest has attached. For example, while an unperformed promise is sufficient value for attachment, it is NOT sufficient value for purposes of being a qualifying purchaser;
4. acts in good faith; and
5. does not have notice of a claim of a property right in the CER.

The mere filing of a UCC-1 financing statement, in and of itself, is not notice of a claim of a property right in a CER, CA, or CPI.²⁵

Note that a buyer of (or a secured party with a lien on) a CA or CPI can have control of such CA or CPI without having a property interest in the CER that evidences such CA or CPI.

CER jurisdiction

In general, the law of the CER’s jurisdiction govern matters covered by UCC Article 12,²⁶ the effect of perfection (other than (a) perfection by filing a financing statement and (b) automatic perfection of a security interest in a CPI created by a sale of such CPI) and the priority of a security interest in Article 12 Property.²⁷

The 2022 N.Y. UCC amendments set out a waterfall to determine what is the CER’s jurisdiction, starting with the CER itself or related record expressly providing that a particular jurisdiction is the CER’s jurisdiction for purposes of UCC Article 12.²⁸ However, since to date many CERs and the systems in which CERs are recorded do not expressly specify what the CER jurisdiction is, often the last steps of the waterfall would apply and the CER jurisdiction would often be Washington, D.C., as of the date of this advisory.

Adjustment date and transition rules

To help provide a transition period to the new rules, the 2022 UCC amendments provide for an “Adjustment Date” that varies by state, which is the later of (a) July 1, 2025, and (b) one year after the applicable state’s effective date.

From and after the Adjustment Date, in general the new UCC priority of claims rules apply.

In New York, for example, the Adjustment Date will be the date (the “N.Y. Adjustment Date”)²⁹ that is one year after the date that is 180 days after the N.Y. governor signs the N.Y. bill. Once the 2022 UCC amendments become effective in New York, and until the N.Y. Adjustment Date occurs in New York, valid security interests in Article 12 Property that were perfected under the pre-amendment UCC rules, but are not perfected under the amended UCC rules, generally have until the earlier of the N.Y. Adjustment Date or the time perfection would have ceased under the previous UCC rules to satisfy the new UCC priority, perfection, and enforceability requirements.³⁰

In Washington, D.C., and Delaware, the Adjustment Date was July 1, 2025, and the new UCC rules for buying and securing Article 12 Property apply.

Buyers and secured parties should determine which state(s) and CER jurisdictions apply to their transactions involving Article 12 Property, check when the effective date(s) and adjustment date(s) have occurred or will occur in such state(s) and CER jurisdictions and assess and decide whether they should take any actions to preserve or strengthen their rights in light of the new UCC rules.