In my recently published article, How El Salvador Has Changed U.S. Law by a Bit: The Consequences for the UCC of Bitcoin Becoming Legal Tender,1 I described the consequences for the UCC of El Salvador declaring Bitcoin to be an authorized currency. I descried the definition of money contained in the UCC2 as containing an Achilles heel that allowed foreign governments to transform crypto currency not previously treated as money into money for purposes of the Uniform Commercial Code.3 Among my conclusions, I argued that Bitcoin (but not other cryptocurrencies) must now be treated as money and therefore it would be impossible to obtain a perfected security interest in Bitcoin since the only method for perfection in money is possession and one cannot possess an electronic intangible medium of exchange.4
During its 2022 annual meeting, the American Law Institute approved proposed Amendments5 to the Uniform Commercial Code that address application of the Code to Emerging Technologies (the “2022 Amendments”).6 During its annual meeting July 8-14, the Uniform Law Commission also approved the same proposed amendments.7 The 2022 Amendments include extensive amendments to existing articles as well as the creation of a new Article 12.8 The original study committee that became the drafting committee for the 2022 Amendments was charged with considering amendments to the UCC to accommodate “emerging technologies, such as artificial intelligence, distributed ledger technology, and virtual currency.”9
Much ink will need to be spilt in analyzing all the implications of the extensive adaption of the UCC to emerging technologies. This article has a more moderate purpose. It describes the effects of some of the amendments relating to electronic money on cryptocurrencies in general and Bitcoin in particular. Among the 2022 Amendments there is a significant revision to the definition of “money” as well as changes to Article 9’s rules for perfection of a security interest in money. These changes appear to have been prompted by the actions of El Salvador and the transformation of Bitcoin into money for purposes of applying the U.C.C. This article will discuss the revisions to the definition of money and the changes to the perfection rules before offering some conclusions.
I. The New Definition of Money
Bitcoin’s tenure as money appears to be short lived. The drafting committee for the 2022 Amendments revised the definition of “money” so that once adopted by the various jurisdictions, Bitcoin will lose its new status as “money.” The amendment is clearly a direct response to the actions of El Salvador to authorize an existing cryptocurrency as legal tender. As approved and recommended to the states, the definition reads: “a medium of exchange that is currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization, or pursuant to an agreement between two or more countries. The term does not include an electronic record that is a medium of exchange recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by the government.”10 The last sentence specifically excludes from the definition of money any medium of exchange that is not created by the authorizing government but which existed prior to its designation as legal tender. The reference to the Bitcoin law in EL Salvador could not be more clear. It is curious that the drafters kept the “or adopted” language in this sentence since it seems implied by the word “adopted” that a medium of exchange would exist prior to its adoption by a government. With the new qualification it seems that only pre-existing tangible media of exchange can be “adopted” as money.
Once the 2022 Amendments are adopted as law, no existing cryptocurrencies can become “money” in the manner in which Bitcoin did since they existed prior to any adoption by a government. Upon enactment, Bitcoin will revert from being money to being a general intangible.11 Unfortunately the transition provisions do not provide any way for a perfected security interest in Bitcoin to arise prior to the amendments becoming effective. They provide for continuation of perfection under prior law, but as I argued previously there is no way to perfect in Bitcoin directly as long as it remains money. Thus, secured parties must wait for the 2022 Amendments to become effective to perfect in Bitcoin.12 Unless and until the 2022 Amendments are adopted in all jurisdictions, Bitcoin’s status will vary across jurisdictional lines. The Article 9 default choice of law rule applies to electronic money—the law of the jurisdiction in which the debtor is located governs perfection, the effect of perfection or non-perfection, and priority.13 In a jurisdiction adopting the 2022 Amendments in which the applicable debtor is located, Bitcoin will be a general intangible once the amendments are effective, and a security interest would be able to be perfected in it by filing. If a different debtor were located in a jurisdiction not adopting the 2022 Amendments, the Bitcoin owned by that debtor would remain money and it will be practically impossible to obtain a perfected security interest in it.
Having adopted a definition that will prevent other exiting cryptocurrencies from becoming money and reassigning Bitcoin to a general intangible, the 2022 Amendments provide for electronic forms of money that are created and maintained by a government. The only cryptocurrency that it seems could become money is one created by a government and thus not in circulation prior to its adoption and which is capable of being controlled, as defined by the 2022 Amendments. Article 9 expressly limits the definition of money for the purposes of that article. The definition excludes “(i) a deposit account or (ii) money in an electronic form that cannot be subjected to control under Section 9-105A.”14 The drafters explain the first exception by the belief that some countries are considering adopting deposits with central banks as money.15 The second exclusion would address a circumstance in which a government created a form of electronic money that was not capable of control, as defined.
Article 9 also creates a sub-definition of “electronic money which it circularly defines to be “money in an electronic form.”16 I do not understand why the drafters did not use this new term in the definition of money and instead said “money in an electronic form” rather than “electronic money which cannot be subjected to control.” Electronic money is created as a term to distinguish it from what the Article defines as “tangible money” which is “money in a tangible form.”17 As a result any government created and authorized electronic currency, capable of control, would be electronic money and the exclusive method of perfection would be control.18 The 2022 Amendments create a new section to explain how a secured party can control electronic money.19 The drafters create a four part test for control. A person has control of electronic money if the secured party has:
- “the power to avail itself of substantially all the benefit from the electronic money;”
- the “exclusive power” to “prevent others” from availing themselves of substantially all the benefits of the electronic money;
- the “exclusive power” to “prevent others” from transferring control of the electronic money to another person; and
- the ability “readily to identify itself in any way . . . as having” the enumerated powers constituting control under the section 9-105A.20
The drafters make clear that control can be established directly over the electronic money or by reference to “a record attached to or logically associated with the electronic money, or a system in which the electronic money is recorded.”21 The required method of identification (in the fourth enumerated requirement) may be established by “name, identifying number, cryptographic key, office, or account number.”22
Although I believe the 2022 Amendments clearly resolve that a cryptocurrency that is electronic money can be controlled by obtaining any cryptographic key associated with it, the changes do not clearly resolve the status of cryptocurrency exchanges.23 Any yet to be developed electronic money that operates in the same manner as Bitcoin would be easily controlled by obtaining the cryptographic key. The 2022 Amendments do not resolve the question of exchanges that receive electronic money. Further, the draft does not resolve the ambiguity around the term “bank” so that an exchange that accepts for deposit cryptocurrencies that qualify as electronic money may be considered a bank and the account holding the electronic money may be a deposit account.24 In addition it is not clear whether an account in an exchange system would be a “record attached to or logically associated with the electronic money.”(emphasis added) If a depositor of electronic money has a direct claim to the exact electronic money (identified by cryptographic key for example) then the exchange account would seem to meet this definition. If, however, the exchange could satisfy any claim for deposited electronic money by use of any electronic money of equal quantity, and not necessarily the originally deposited electronic money it would seem that the property is no longer electronic money but a contractual claim on the exchange which would either be a payment intangible or financial asset or securities entitlement (unless the exchange was considered a bank).25 Although exchanges holding Bitcoin would revert to their former status once the 2022 Amendments are adopted universally, the revisions do not settle the legal ambiguity around such exchanges if they accept cryptocurrency that meets the definition of controllable electronic money.
The 2022 Amendments appear to be a thorough attempt to bring the UCC into the 21st century. It may bring greater negotiability and certainty to a variety of transactions and payments. It has repaired the confusion wrought by El Salvador adopting Bitcoin as legal tender. Although Bitcoin became money on a single date (the effective date of El Salvador’s law), it will gradually transition back to being a general intangible as the effective dates of adoption of the 2022 Amendments occur. The loophole through which Bitcoin became money appears now to be closed for jurisdictions adopting the changes. No other country can do with El Salvador did to Bitcoin to other existing cryptocurrencies. The draft also opens a path for government created electronic money to be accommodated by commercial law.
Unfortunately, however, the 2022 Amendments do not address the lingering ambiguity over the broad definition of a bank. The status of cryptocurrency exchanges also remains unresolved. Finally, there is no method for secured parties to perfect in Bitcoin until the amendments are adopted and effective as the transition provisions do not provide for any method.
- 74 Okla.L.Rev.313 (2022).
- See U.C.C. §1-201(b)(24) (AM. L. INST. & UNIF. L. COMM’N 2018).
- See McCall, supra note 1, at 333.
- Id. at 321-322.
- See https://www.ali.org/projects/show/uniform-commercial-code/
- See Uniform Law Commission, DRAFT UNIFORM COMMERCIAL CODE AND EMERGING TECHNOLOGIES (June 27, 2022) [hereinafter “Code and Emerging Technologies”].
- See https://www.uniformlaws.org/discussion/ulc-2022-annual-meeting-highlights#bm2d8310fc-6e53-40e2-a082-22bdb5c1ab60.
- See “Prefatory Note to 2022 ULC Annual Meeting Draft” to 2022 Amendments, at 3 (describing the proposed revisions as “expansive”).
- Id. at 2.
- See 2022 Amendments §1-201(b)(24).
- See McCall, supra note 1, at 321-22.
- See 2022 Amendments at §A-303 Comment 2, example 1.
- See id. at Comment 5 to §9-301 (“No exception is made for electronic money and the general rule applies (unless preempted by federal law.”).
- 2022 Amendments at §9-102(a)(54A).
- See Code and Emerging Technologies, supra note 5, at 126-27
- 2022 Amendments at §9-102(a)(31A).
- Id. at §9-102(a)(79A).
- See Id. at §9-312(b)(4).
- See Id. §9-105A
- For a discussion of cryptocurrency exchanges see McCall, supra note 1, at 317-19 and 324-30.
- See Id. at 325-26.
- See id. at 324-30.