As digital assets – such as cryptocurrencies, tokens, stablecoins, and non-fungible tokens (NFTs) – grow in popularity, their increased use raises legal questions about how they relate to tangible assets and how they should be treated.

Under the Uniform Commercial Code (UCC), there are questions about whether digital assets should be classified as money, general intangibles, or other property.

The lack of clarity about the proper classification for digital assets leads to confusion about what rules should govern their purchase and sale, how digital assets can be used as collateral for secured transactions, how security interests can be perfected in digital assets, and what priority should be given to such perfected security interests.

The 2022 Amendments

Recognizing the need to address questions about the categorization of digital assets and provide answers about their treatment, the Uniform Law Commission and the American Law Institute on July 13, 2022, approved amendments to update the UCC.

These amendments:

• create a new Article 12 to officially define digital assets and specifically address acquisitions and dispositions of interests in these digital assets, including security interests; and

• update the existing UCC articles so that they better reflect the realities of digital assets.

The New Article 12 Governs Controllable Electronic Records

The 2022 amendments include a new Article 12 to specifically govern controllable electronic records (CERs).

The concept of “controllable electronic records” is intentionally vaguely defined, as the purpose is to capture digital assets currently in existence using present distributed ledger or “blockchain” technology, like Bitcoin, Ether, and NFTs, as well as digital assets created in the future that function similarly using future technologies.

The concept of “control” under Article 12 in respect of digital assets is roughly analogous to the concept of “possession” for a tangible asset. The person with control must have the power to reap the benefit of the electronic record, prevent others from using it, be able to transfer control of the asset to another person, and be positively identified as having such control.

The 2022 amendments provide necessary clarification on the treatment of CERs by clarifying that CERs are capable of being transferred in ways that cut off competing property claims. These take-free rules allow for innocent purchasers, who in good faith purchase CERs that are subject to competing property claims, to receive such CERs free from any security interests.

The 2022 amendments also resolve questions about potential conflicts of laws issues that might arise from the lack of physical location of CERs, by allowing parties to choose the applicable governing law and by establishing the law of the District of Columbia as the default governing law.

Additionally, the 2022 amendments provide clarification on how to perfect security interests in CERs by:

• providing how various types of digital assets are classified under existing terms in Article 9 of the UCC; and

• explaining that security interests can be perfected by filing a UCC financing statement or by control – the latter allowing a secured party to achieve “super priority.”

Additional Updates

In addition to establishing new Article 12, the 2022 amendments also update other sections of the UCC in order to better reflect the realities of digital assets.

In light of some discussions about creating virtual currencies to supplement traditional tangible forms of money, and the adoption of Bitcoin as legal tender by certain countries, the 2022 amendments add a new definition of electronic money for those situations where a government’s central bank has created a virtual currency.

The 2022 amendments also clarify that the concept of “money” for purposes of the UCC does not include preexisting virtual currencies like Bitcoin.

Up for Adoption

The states may now choose to adopt the 2022 amendments, and can either adopt them as is or with modifications.

As states begin to adopt these amendments to the UCC, market participants should pay close attention to the impact they will have on the treatment of digital assets in the transactional, commercial, and financing practices.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.