Changes to the Uniform US State Commercial Law Rules for transactions in digital assets, including cryptocurrencies, tokens, e-tickets and electronic movable paper, are being finalized this summer and could be adopted by state legislatures as early as this fall. Once adopted, these rules will create a level playing field with more certainty for digital asset transactions – but may also hold surprises for those who are unprepared. Everyone interested in digital assets – exchanges, custodians, holders, issuers and lenders – should stop now to consider how these new rules will apply to their businesses and whether changes to their practices and contracts are warranted. They should also consider whether new laws create new opportunities. Find out how the new rules apply to you and your business.
The proposed new laws are the work of the Uniform Commercial Code (UCC) Emerging Technologies Drafting Committee, a joint effort of the American Law Institute and the Uniform Law Commission. The committee developed a two-year draft with over 300 participants. The project was approved at the annual meeting of the American Law Institute in May and was approved at the annual meeting of the Uniform Law Commission in July. He can now head to state legislatures for adoption. A few states have gotten ahead of the process, adopting earlier versions of the law revisions as non-uniform versions of the UCC or adopting their own non-uniform approach.
The project touches almost every corner of UCC. For example, and without being an exhaustive list, the project
- amends the definition of “visible” in section 1 to remove specific characteristics such as font size or color and replaces them with a statement that whether a term is visible or not is at the discretion of the court
- throughout, replaces obsolete references to wet-ink handwriting and signatures with medium-neutral references to records, authentication, etc.
- provides for electronic money and clarifies that a government’s adoption of a pre-existing cryptocurrency does not make that cryptocurrency money for UCC purposes
- clarifies the definition of “negotiable instrument” in section 3 to indicate that a negotiable instrument may contain a term which specifies the law which governs the promise or order and may contain a promise or undertaking to resolve in a forum specified a dispute about the promise or order order
- updates certain provisions regarding electronic checks and payment orders to follow current practices and technologies
- preserves the existing general definition and safe harbor for electronic title “control” in section 7 and adds new safe harbors that no longer rely on the concept of a single authoritative copy and are therefore no longer technologically neutral; the new provisions also clarify how one person can have control through another
- provides additional support and clarification in Part 5 of Article 8 to confirm that digital assets can be treated as financial assets and held in Article 8 securities accounts (this supports the existing practice of many actors of the sector and confirms that Article 8 is an appropriate tool for holding digital assets); the draft also confirms that digital assets subject to Article 8 are not subject to the general rules of Article 12 and are not treated as verifiable electronic records for the purposes of Article 12
- amends the definition of control of securities and securities rights in 8-106 to clarify language regarding a party having control on behalf of another and to add the phrase that a person has control of ‘a security right if another person other than the transferor of an interest in the security right acknowledges that he has control on their behalf
- provides new rules for controllable accounts and controllable payment intangibles, which are respectively accounts for which the account debtor has promised to pay the person in control of the record and payment intangibles in which the account debtor has promised to pay the person in control of the intangible payments
- changes the definition of furniture paper in several ways
- updates the definition of “control” for deposit accounts to clarify that if someone has control on your behalf, then you have control
- redefines the definition of “Electronic Furniture Paper Control” in 9-106 to inform or modify the current Safe Harbor and provide updated rules for a situation in which there is not a single authoritative copy
- adds a new control rule over electronic money, similar to the definition of control over a controllable electronic record, which emphasizes the power to avail oneself of substantially all benefits and the exclusive power to prevent others from avail substantially all of the benefit and transfer control
- updates duties of a secured creditor in 9-208 to keep up with new types of security
- creates new choice of law rules for electronic furniture paper and hybrid furniture paper as well as controllable accounts and controllable payment intangibles
- updates the Perfect-by-Deposit and Perfect-by-Control Rules to reflect new and revised forms of security
- amends 9-317 to include “free take” rules for certain purchasers of digital assets
- provides that a security right in auditable accounts, auditable electronic records and auditable payment intangibles may be perfected either by deposit or by control and that perfection by control takes precedence over perfection by deposit
- amends Part VI of Article 9 to provide more detail on what constitutes a recognized market for the purposes of warranty remedies
- creates UCC Section 12 to address auditable electronic records, which includes certain digital assets held or traded on the blockchain
- defines “verifiable electronic record”, creates a concept of control over verifiable electronic records and provides that a party who takes control of an verifiable electronic record receives negotiability
- includes a new applicable law provision in Article 12
Sidley’s attorneys were deeply involved in the process of drafting the new rules. We will be happy to discuss how they apply to you.