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Big changes are coming to the UCC, the Uniform Commercial Code,
with regard to cryptocurrency and other digital assets. What will
that mean to business transactions involving those digital assets
Author Rotatori: Hi, thanks for joining us.
I’m Arthur Rotatori, a Member of
McGlinchey’s Financial Institution’s Compliance group,
resident in the Cleveland office. I’m joined today
by Marshall Grodner, a Member in our Baton
Rouge office, who specializes in commercial finance. Marshall was
an observer to the drafting committee for the 2022 Amendments to
Marshall, we’re doing a “Deep Dive” content series
on decentralized finance, DeFi, right now. And this UCC update
comes at the perfect time to update our clients about the impact of
DeFi on commercial transactions.
Marshall, I want to start us off in this discussion by noting
that I took a look at the new Article 12, which is part of these
amendments, and I expected to see all sorts of references to
cryptocurrencies or NFTs, and I didn’t see anything. I wondered
if I was looking in the wrong place, or at the wrong thing?
What we have are some definitions and a new acronym. We have
“Controllable Electronic Records,” or CERs, in Article
12. And also we have a definition now of “electronic
money” that is in the revisions to Article 9.
Marshall Grodner: Well, no, Arthur, you
weren’t. But what we have are some definitions and a new
acronym, if you want. We have “Controllable Electronic
Records,” or CERs, that are covered by Article 12, the new
Article 12. And also we have a definition now of “electronic
money” that is in the revisions to Article 9 of the UCC. So
now [the UCC] clearly encompasses all digital assets, including
cryptocurrency, NFTs, electronic payment intangibles, electronic
accounts, and general electronic contracts as well.
Arthur Rotatori: All those things are
Controllable Electronic Records, CERs?
Marshall Grodner: Yes, they can be CERs
depending on if they meet the definition. And just to be clear,
controllable electronic money is under Article 9 now, and is really
not a Controllable Electronic Record. But NFTs and other digital
assets are clearly Controllable Electronic Records. And a couple of
other exceptions are electronic chattel paper and electronic
documents of title. But basically everything else electronic is a
Controllable Electronic Record, assuming they meet the
Arthur Rotatori: Well, what is the
definition? What makes a Controllable Electronic Record, a
Controllable Electronic Record?
Think of it as your car. I have my car, my certificate of title.
I have the exclusive right to drive it, use it, and sell it, or
grant my lender a security interest in it. And that’s what
exclusivity is, but it’s applied to digital assets.
Marshall Grodner: Well, what you have to
do, and actually what they’ve done, is make a common definition
that applies basically to documents of title, electronic money, and
electronic records with regard to “controllable.” And
basically, there is a system which gives you the exclusive power to
control it. And by control, I mean, give yourself all the benefits
of ownership of it, as well as the rights to transfer it. And the
system has to be able to do that and distinguish between, you have
control of this digital asset, and another person has control of
the other asset. So it’s really an exclusive basis. You can
think of it as your car. I have my car, my certificate of title. I
have the exclusive right to drive it, use it, and sell it, or grant
my lender a security interest in it. And that’s sort of what
exclusivity is, but it’s applied to digital assets.
Arthur Rotatori: Now you mentioned
control. And when I heard that, I was reminded of what we are used
to in Article 9, for example, with electronic chattel paper and the
concept of control. Is it the same thing, or if not, how does it
differ? And do any of these changes also change Article 9?
Marshall Grodner: Yes. The answer is yes.
Control is sort of a concept that originally originated in Article
8, dealing with securities, where there are certain intangible
assets that you can’t take possession of. So this was sort of a
way to import possession to tangible assets that started in Article
8, was imported to Article 9 in the 2001 amendments, I believe. And
now it’s expanded to cover all these digital assets. And again,
control is sort of like ownership. Or it can also be used if a
secured party, a lender, has control over it, over a digital asset,
it’s like having a security interest in tangible personal
Arthur Rotatori: And these amendments, I
guess, didn’t just create Article 12, but they made some
changes to Article 9. So Article 9 and Article 12 will work well
Marshall Grodner: Yes, what they have
done, and actually it applies to Article 7 too, is that in Article
9, there is now electronic money. Money, when it was originally
instituted, thought about paper, money, coins, et cetera. Now we
have digital currencies, some of which have been adopted by the
state. So electronic money has been brought into Article 9. And
basically, the same rules for control under Article 12 apply to
electronic money under Article 9. Electronic chattel paper under
Article 9 was included originally, but they now have coordinated
the same sort of control rules for electronic money, electronic
chattel paper, and other controllable electronic assets in Article
12. So it’s a harmonization of documents of title, electronic
money, electronic chattel paper, and other digital assets, such as
NFTs, for example.
Arthur Rotatori: And I would imagine, just
like Article 9, Article 12 does not require any particular
technique, equipment, or software or anything in order to
demonstrate control. It’s, I guess, technology-neutral,
It’s medium-neutral, although it will apply to the
blockchain as it’s being used now for NFTs, cryptocurrencies,
et cetera, and other smart contracts as well.
Marshall Grodner: Yes, it is, and I think
agnostic is a good term. And it tries to take into account future
developments. When Article 9 was originally enacted, the latest
revision before this one, it was intended to be medium-neutral. I
don’t even think there was such a thing as the blockchain back
then, but it’s actually adapted to it. And it intends to be
applicable for any new version of what the blockchain can or will
be, or “blockchain 2.0.” So it’s medium-neutral,
although it will apply to the blockchain as it’s being used now
for NFTs, cryptocurrencies, et cetera, and other smart contracts as
Arthur Rotatori: That sounds great. It
sounds like this is really a good thing. Am I missing something?
Does anybody think it’s not a good thing? Are they opposed to
it in any way, or feel something was left out?
Marshall Grodner: Actually, in the drafting
process, there was an attempt, a successful attempt to try to get
all the interested parties involved so that there would be no major
opposition. The cryptocurrency people were involved in the drafting
process. And by cryptocurrency people, I mean the major dealers,
and what is normally known as the “wallet people,” the
custodians of the cryptocurrencies, and the people who trade and
deal in cryptocurrencies, either on their own behalf or on the
behalf of others.
Arthur Rotatori: With all those different
interest groups involved, did it take a long time to draft these
Marshall Grodner: This process was
actually fairly rapid. I think they began in 2019, so it’s been
a fairly rapid process. I think a lot of people have been thinking
about these issues. And as a matter of fact, we have been doing
legal gymnastics for the last several years to make these sorts of
assets work under the current law. So the law was kind of
well-developed and we mostly knew where we needed to go.
Arthur Rotatori: So give us an example
before and after these changes, how a transaction today might be
done, perhaps not done smoothly or elegantly, and how it would be
done going forward with the new law.
Marshall Grodner: Well, the sort of mental
gymnastics we had to do, in particular with cryptocurrencies, in
order to take a security interest or lend money on cryptocurrency,
you had to declare it was a financial asset under Article 8 of the
UCC, like a security, like an interest in a share of stock. And
once you declared it that, and you got one of the wallet people to
agree that they were a securities intermediary, and that in fact,
the cryptocurrency was a security, the transaction became a whole
lot easier to do. But it was a lot of mental gymnastics to
accomplish the same thing as control as they have it under Article
12 or under Article 9. But it was just a lot of drafting and
doesn’t seem intuitive. And this has made those transactions
much simpler and more intuitive.
It was a lot of mental gymnastics to accomplish the same thing
as control as they have it under Article 12 or under Article 9. And
this has made those transactions much simpler and more
Arthur Rotatori: Interesting. And I also
suspect that not everyone wanted to declare the asset to be a
Marshall Grodner: Yeah, I don’t think
the wallet people wanted to have the term “broker-dealer”
tied to their business model.
Arthur Rotatori: And I see now, thinking
about Article 12, it sidesteps that whole issue, we don’t have
to go there. We just have to talk about control.
Marshall Grodner: Exactly.
Arthur Rotatori: Interesting. Now, do you
think that vendors will enter the space to provide control like
they did with Article 9? Or are they already there?
Marshall Grodner: I think generally they
are already there. Like I said, we were doing it in financial
assets, and the current vendors in the space for electronic notes
under e-sign and electronic chattel paper under Article 9 are
already sort of there already. So I think that with these new sorts
of assets being brought into the fold, these vendors already have
the systems set up to establish exclusive control over all digital
assets, not just typically what are electronic notes and electronic
chattel paper, right now.
Arthur Rotatori: So not too far into the
future, there will be a transaction where someone will pledge these
electronic assets, a CER, and someone, a client, a client’s
lender, whatever, will ask for a legal opinion saying they have a
perfected security interest in the CER. And that’s when they
call you. And then I guess that’s something you’ll be able
This is not a done deal. This is a uniform law. It has to be
adopted by each state separately.
Marshall Grodner: Yes, exactly. And for
other digital assets, it’s a little bit iffy right now, but
once Article 12 and the revisions to Article 9 and the other
Articles come into effect in all states, hopefully in the next year
or so, then those legal opinions will be a lot easier. And I know
some friends of mine are currently working on a project regarding
legal opinions in this space right now.
Arthur Rotatori: And you raise a good
point. This is not a done deal. This is a uniform law. It has to be
adopted by each state separately. And that will take a year, year
and a half, probably.
Marshall Grodner: Yes. And that’s what
the ALI, the American Law Institute, and the Uniform Law Commission
have approved a text for. I think the last approval came in July.
So the text is ready to go to the various state legislatures right
now. And several groups in which I am involved are geared up and
ready to go in almost every state, to go through the enactment
process. We would hope that some people are going to even start
this fall with the enactment process. I know in several states,
including my home state [Louisiana], the legislature won’t be
in session until the spring, but we hope to have it introduced
Arthur Rotatori: Well, I just think this
sounds like a very good thing to tell our audience about changes in
the law that are positive rather than negative, and are also
anticipating recognizing current technology and anticipating future
changes to that technology. So I think this is a great thing to
discuss today. So Marshall, thank you for introducing us to this,
and I believe we’ll have more detail in future discussions.
Marshall Grodner: Yeah. I look forward to
having this a done deal and enacted in all fifty states and our
territories. And I think that is a positive step and will encourage
transactions in digital assets.
Arthur Rotatori: Great. Thanks,
Marshall Grodner: Thanks for having
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