By: Donald L Swanson
Proposed amendments to the Uniform Commercial Code are being introduced, during January and February of 2023, as bills in state legislatures across the land.
The Uniform Commercial Code (“UCC”) has been enacted, in some form, by all fifty of the United States and by the District of Columbia. The UCC:
- deals with such boring-but-essential subjects as sales and leases of goods, checks and promissory notes, bank deposits and collections, and secured transactions; and
- has been one of the most-important laws for creating and enabling a free-flow of commerce across state lines and throughout the land.
My purpose in this article is to provide a sampling of what the proposed UCC amendments are about—especially as to an interplay between the UCC’s old Article 9 and new Article 12.[Fn. 1]
Evolutions: Our Economy & The UCC
The proposed UCC amendments are the latest step in assuring that our laws keep pace with needs of our ever-evolving economy.
Evolutionary changes to the UCC are evident from the following:
- UCC began in the 1940s, as a response to the needs of a goods-based economy in these United States;
- then, as our economy became increasingly service-based, the UCC adjusted accordingly; and
- in recent times, we’ve moved toward a digitally-based economy—and so, the proposed UCC amendments are making adjustments to address our new-and-digital reality.
Simple & Complex Provisions
The proposed UCC amendments do everything from the simple and easily understood, to the complex and difficult to understand. For example:
- The simple: everyone knows about signing tax returns electronically—the proposed UCC amendments assure that electronic signatures are clearly authorized for a variety of business documents, like promissory notes and security agreements; and
- The complex: the proposed UCC amendments add an entirely new Article 12 (titled “Controllable Electronic Records”) to deal with electronic currency and other valuable electronic assets.
For more detailed information on the proposed Article 12, see these two video interviews with Edwin Smith, who chaired the Drafting Committee for the proposed UCC amendments: (i) interview on “New Article 12,” and (ii) interview on “New Article 12 & Old Article 9.”
Article 9 Issues
The most important part of the UCC in my practice is Article 9 on secured transactions. The proposed UCC amendments address Article 9 issues.
–A Bitcoin Illustration
Currently under Article 9, digital assets fall within the general intangibles category, for which a security interest is perfected by filing—and the first secured party to file generally wins any priority dispute.
But it’s never that simple. Consider this complicating Bitcoin example under existing law:
- UCC § 1-201(24) defines “money” as “a medium of exchange currently authorized or adopted by a domestic or foreign government”;
- what makes the “money” definition a big deal is this—both El Salvador and Central African Republic have designated Bitcoin as legal tender (see this news report);
- Bitcoin is, therefore, arguably “money” under the UCC, in which a security interest can only be perfected by taking “possession” of the Bitcoin asset (see UCC § 9-312(b)(3)); but
- there is no practical way to take “possession” of Bitcoin—it’s an intangible asset; and
- so . . . there is no practical way under existing law to perfect a security interest in Bitcoin assets.
–An Article 12 Solution
The proposed UCC amendments resolve this Bitcoin problem by:
- clarifying that digital currency and other digital assets qualify as “general intangibles” under the UCC, for which a security interest can be perfected by filing; and
- declaring that (i) security interests in digital assets can also be perfected by “control” over those assets, and (ii) perfection by “control” under Article 12 takes priority over perfection by filing—regardless of which happens first.
The very idea of electronic currency can be scary, these days. But here’s the thing to note about electronic currency, the new Article 12, and the rest of the proposed UCC amendments:
- the proposed amendments are neither in-favor-of nor opposed-to electronic currency; but
- instead, the proposed amendments (i) recognize that electronic currency exits, and (ii) provide a way for people to protect themselves in such a world.
The proposed UCC amendments to the old Article 9 and the proposed addition of a new Article 12 are essential developments of existing law to address the new needs of our ever-evolving economy.
Footnote 1. For a discussion of the exceptionally thorough and intensive process that created the proposed UCC amendments, see this linked article.
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Always very interesting, as usual.! For me, your conclusion was VERY important!
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