In 2019, the Uniform Law Commission (“ULC”) and the American Law Institute (“ALI”) appointed a drafting committee for amendments to the UCC to deal with digital assets, transactions in which the sale or lease of goods are bundled with the provision of services and/or the licensing of information, and certain discreet amendments required outside the field of emerging technologies. The committee hopes to present a final draft of the amendments to the ALI Council in January 2022, the ALI annual meeting in May 2022, and the ULC’s annual meeting in July 2022. Assuming approval of the sponsoring bodies, the amendments will be presented for consideration and enactment by the states in the Fall of 2022. The draft amendments are divided into five parts: Controllable Electronic Records (new Article 12 on the transfer of property rights in intangible assets); Money (to accommodate intangible money as payments or security); Chattel Paper (updating existing Article 9 with a new definition that resolves uncertainty when goods are leased as part of a bundled transaction); Payments (by check or wire transfer); and Miscellaneous amendments (e.g., a definition of “electronic” added to Article 1).
Most significant among the amendments is the creation of new Article 12. Initially, the drafting committee examined amending the existing Articles to accomplish its goals, but determined that the creation of a new Article, as an overlay, much like Article 1, was preferable. The draft amendments of Article 12 create a new definition of “controllable electronic records” (“CER”). Included within the definition of a CER are virtual currencies, non-fungible tokens, and digital assets with payment rights imbedded. A digital asset, as part of a controllable electronic record, would be negotiable, and transferable in a manner free of competing claims. Additionally, CERs can serve as collateral under Article 9 through perfection by control.
Article 12 defines a controllable electronic record as “an electronic record that can be subjected to control…” Under Section 12-105, a person has control of a CER if the CER, a record attached to or logically associated with the CER, or the system in which the CER is recorded, if any, gives the person the power to avail itself of substantially all of the benefit of the CER, the exclusive power to prevent others from availing themselves of substantially all of the benefit of the CER, and the ability to transfer control of the CER to another person. Further, the system in which the CER is recorded must enable the person to readily identify itself as having those powers and that person may be identified in any way, including by name, identifying number, cryptographic key, office, or account number. A CER is a new form of digital/intangible property. The definition of a CER specifically does not include electronic chattel paper, electronic documents (warehouse receipts), investment property, each a category of property subject to the existing provisions of the UCC, or transferable records under E-Sign or the UETA, deposit accounts, or intangible money.
The basic rules of existing Article 9 on attachment and perfection remain unamended and will cover digital assets such as CERs. An example relates to accounts as collateral. If an account that 50 years ago would have been represented by a ledger card, is now a CER, the account debtor will be discharged from the debt if it pays the person known to be in control of the account, until such times as it receives a notification authenticated by the debtor, or by the debtor’s secured party, that the account debtor should pay the secured party in control of the account. A CER, to fall within the scope of Article 12, must be susceptible to control as provided in 12-105. The distinction between a “transferrable record” under E-Sign or UETA, is that a record can become a CER in the absence of an agreement that it is transferrable, a requirement of UETA.
One of the primary drivers for the Amendments to Accommodate Emerging Technologies is the advent of intangible money including virtual currencies. Unfortunately, the cryptocurrency industry has offered standalone statutes in several states to facilitate their industry without regard to the damage some of that legislation does to existing provisions of the UCC. The current definition of “money” would only include virtual currency if the virtual currency is authorized or adopted by a government as legal tender. The problem thereby created is that existing Article 9 allows a perfection of a security interest in money only by possession of the money. Obviously, intangible money by its very definition excludes physical possession. Control, as provided in the Amendments, will allow perfection of a security interest in virtual currency. The draft amendments allow the normal perfection rules to apply if the intangible money is in a deposit account. However, if the intangible money is not in a deposit account, control must be established through a means like a CER to perfect a security interest.
The essential purpose of the UCC is to facilitate commerce. As commerce has increasingly become electronic, and distributed ledger technology has been added to the business lexicon, the law must quickly follow. Currently, with no law to provide the certainty essential to business and commerce, people are agreeing to use Bitcoin, and other forms of virtual currency, as both a medium exchange and a store of value. Yet, there is currently no law to govern disputed claims to electronic records and the rights and benefits attached thereto.
Providing legal rules for transfer of CERs, either outright or for the purpose of security, is the essential purpose of Article 12, it governs the rights of parties to these transactions. The scope of Article 12 is limited to CERs but does not necessarily govern the property rights evidenced by CERs. The amendments to the existing Articles of the UCC, and the existing provisions of other Articles, particularly Article 9 on secured transaction, work hand-in-hand with the new Article 12 to facilitate digital commerce.