Proposed UCC Amendments: A Conservative Approach That Preserves And Restores Prior Law

By: Donald L Swanson

Misunderstandings happen.

That’s especially true of the proposed amendments to the Uniform Commercial Code.  Misunderstandings about the proposed amendments are understandable because:

• the amendments have lots of words;
• the subject matter is complex, dealing with the intersection of commercial law, high-technology and crypto-currency; and
• of necessity, the amendments are the creation of UCC geek lawyers, tech nerds, and crypto aficionados.

Unfortunately, misunderstandings about the proposed Uniform Commercial Code amendments are the exact-opposite of reality.  Instead of projecting toward something new and disruptive, the proposed amendments actually preserve and restore previously-exiting law.

I’ll try to explain.

Two Misunderstandings

The misunderstandings are two-fold — that the proposed amendments:

• pave the way for a national digital currency; and
• inhibit the use of bitcoin and other cryptocurrencies.

These misunderstandings come from the definition of “money” in the existing Uniform Commercial Code [see fn. 1] and in revisions to that definition in the proposed amendments.[See fn. 2]

No change to “money”

The essence of the existing Uniform Commercial Code’s definition of “money,” quoted below in Footnote 1, is this:

• whatever a national government (including the U.S. government) says is its “money” will be “money” under the Uniform Commercial Code. 

That means, the U.S. dollar is “money,” the peso is “money,” the euro is “money,” the yen is “money,” the yuan is “money,” etc., under the Uniform Commercial Code.  And if the U.S. government, or any country recognized by it, adopts a different currency, that different currency will also be “money” under the Uniform Commercial Code.

The proposed amendments to the Uniform Commercial Code keep this same definition of money.  Nothing changes.  Existing law continues on as is.  There is no “paving the way” for anything new.

In all events, whether the proposed amendments are enacted by the states or not, whatever the U.S. government says is its “money” is automatically “money” under the Uniform Commercial Code.

In other words, the proposed amendments are a conservative approach that preserve existing law and keep it intact.  Misunderstandings to the contrary are unfortunate.

Disruptive Nations

A complicating development, under the Uniform Commercial Code’s definition of “money,” is this:

• two nations have adopted bitcoin as their official currency—El Salvador was the first, and Central African Republic followed suit.

This development shifts bitcoin, under the Uniform Commercial Code’s existing definitions, from the category of “general intangible” to the category of “money.”  Such a shift has major consequences for secured loan transactions under Article 9 of the Uniform Commercial Code in its current form.  That’s because:

• a lien on a “general intangible” is perfected by filing;
• a lien on paper money and coins is perfected by possession; but
• there is no way to perfect a lien on electronic money like bitcoin

The practical effect of such a re-categorization is this: bitcoin assets cannot be safely used as collateral for a loan any more—because the lender can’t get a perfected lien on electronic money.  And that’s a problem for any business with bitcoin investments. 

The Remedy

So . . . the proposed amendments attempt to remedy the problem created by El Salvador and Central African Republic with the underlined language in Footnote 2 below.

Here’s the essence of the solution provided in the proposed amendments:

• if a country wants to create its own cryptocurrency as its own “money,” that’s fine—and such cryptocurrency will be recognized as “money” under the Uniform Commercial Code; but
• if a country wants to adopt an existing cryptocurrency like bitcoin, such action won’t turn that cryptocurrency into “money” under the Uniform Commercial Code—the existing cryptocurrency will remain a “general intangible” for secured lending purposes under Article 9; and
• additional provisions on an even better way to perfect a lien on non-money cryptocurrencies (i.e., by “control”) are added by Article 12 in the proposed amendments.

In other words, the proposed amendments are a conservative approach:

• by restoring the “general intangible” categorization of cryptocurrencies that existed before El Salvador and others screwed things up; and
• by adding a new and even-better way (i.e., “control”) to perfect a lien on non-money cryptocurrencies, which makes those currencies even more useful in commercial activities (this is conservative — by enhancing the free-flow of commerce).

Misunderstandings to the contrary are unfortunate.

An Effect of Misunderstandings

Another unfortunate effect of misunderstandings about the proposed amendments is this:

• a “Hip Pocket” amendment is gaining ground that erases all references in the proposed amendments to electronic money.

This “Hip Pocket” amendment is bad policy and should be rejected.  Here’s why:

• it is designed to placate a misunderstanding about the proposed amendments—not to solve a problem with those amendments;
• it will create non-uniform laws among the 50 states on a critical part of the Uniform Commercial Code, which will create uncertainties and inhibit the free-flow of commerce across state lines;
• it destroys the internal integrity of the propose amendments and creates ambiguities and uncertainties on crucial issues that would not otherwise exist;
• its detriments will not be offset by any substantive benefits; and
• it will not achieve any goal of discouraging the U.S. government from adopting a national digital currency.

Further, how can we bring Article 9 of the Uniform Commercial Code into the digital age, while ignoring entirely the existence of electronic currencies?! 

Rules of the Road

Article 9 of the Uniform Commercial Code (and the proposed Article 12) are, literally, the rules of the road for secured loan transactions. 

And removing all references to electronic money from the proposed amendments would be like removing all references to stop lights from state traffic laws—it makes no practical sense!

Alternative Amendment

Perhaps a state legislature believes the proposed Uniform Commercial Code amendments cannot be enacted without an amendment that satisfies the misunderstandings?

In that case, here is an alternative to the “Hip Pocket” amendment that satisfies the misunderstandings—and it does so directly and head-on.  It’s this language:

• “Nothing in this act may be construed to support, endorse, create, or implement a national digital currency.”

Let’s call it the “Direct Amendment.” 

This Direct Amendment has the advantage of expressing policy intentions that animate the misunderstandings, and it does so:

• directly;
• unequivocally; and
• without ambiguity. 

Isn’t that better than pussyfooting around the real concerns and addressing them only by indirection — like we’re scared to face them head-on?

Conclusion

The proposed amendments to the Uniform Commercial Code need to be enacted as-is, to bring that important law into the digital age.

Misunderstandings about the proposed amendments are unfortunate.  Those misunderstandings need to be either:

• clarified by an understanding of the conservative approach that it actually is; or
• satisfied head-on by the “Direct Amendment” proposed above.

————

Footnote 1.  The pre-amendment UCC definition of “money” is this, in § 1-201(24):

(24) “Money”’ means a medium of exchange currently authorized or adopted by a domestic or foreign government.  The term includes a monetary unit of account established by an inter-governmental organization or by agreement between two or more countries.

Footnote 2.  The same definition of “money” in the proposed amendments is this, in § 1-201(24) (added language is underlined, existing language is not):

(24) “Money” means 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.

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