October 18, 2021 - On October 14th, the LSTA hosted Part 2 of Digital Assets and Virtual Currencies – Amendments to the UCC which was presented by Edwin Smith, partner of Morgan Lewis & Bockius LLP, Thomas Buiteweg, partner of Hudson Cook, LLP, Charles Mooney, Charles A. Heimbold, Jr. Professor of Law Emeritus University of Pennsylvania Carey Law School, Juliet Moringiello, Associate Dean for Research and Faculty Development, Widener University Commonwealth Law School, and Steven Weise, partner of Proskauer Rose LLP. This second part followed the September 9th webinar.
Focusing on commercial law in relation to digital assets and the rights of private parties, the UCC amendments, primarily in proposed Article 12, address questions such as (i) to what extent does a buyer of a digital asset take the asset free of third-party property claims, and (ii) how does a secured party perfect a security interest in a digital asset, ensure that the security interest has priority, and enforce the security interest. The proposed amendments, however, do not address other law, such as whether a digital asset is a security or a commodity for regulatory purposes, the taxation of digital assets, money transmission laws, or anti-money laundering laws.
After recapping the first webinar, the panelists discussed the proposed amendments to “money” and “chattel paper”. Money as defined in Article 1 of the UCC is not a controllable electronic recorded (CER). The current definition of “money” in the UCC is sufficiently broad to include a virtual currency authorized or adopted by a government (this is referred to in the proposed amendments as “intangible money”). Intangible money may be token-based or account-based. The amendments include a proposed change to the definition of “money” to exclude a medium of exchange not originally issued or distributed by a government, for example, gold, Bitcoin, and the Bahamian Sand Dollar. (By way of example, the panelists explained that El Salvador has adopted the US dollar as its fiat currency, and although it was not issued by the government of El Salvador it would satisfy the definition of money because the US dollar was originally issued by the US government.)
Under current Article 9 a security interest in money can be perfected only by possession; yet, intangible money is not susceptible to possession. The proposal, therefore, is that if intangible money is credited to a deposit account (even one at a central bank), the normal deposit account rules will apply. If intangible money is money that is not credited to a deposit account, a security interest may be perfected only by “control” similar to control for a CER.
The amendments also propose to modify the definition of “chattel paper” with a basic change that refers to the right to payment rather than the records in which the right to payment is embodied (this is consistent with the definition of “control” of a CER). In addition, the amendments propose a modification to the definition of chattel paper to include a “bundled” lease transaction consisting of lease of goods, licensing of information and provisions of services, where the acquisition of the goods is the predominant purpose of the transaction. The proposals eliminate the distinction between “tangible chattel paper” and “electronic chattel paper”. The single authoritative copy requirements for control is also being eliminated. If there is a tangible copy, the choice-of-law rule for perfection, effect of perfection or non-perfection, and priority will point to the jurisdiction where any tangible authoritative copy of the chattel paper is located. If there is no tangible authoritative copy, the choice-of-law rule for perfection will be the jurisdiction where the debtor is located. The panelists acknowledged that this could create the possibility that there may be more than one tangible authoritative copy in different locations, but the panelists noted that it is hoped that this will not develop as a predominant practice in the market.
The next virtual ALI/ULC drafting meeting will be held on November 5th and 6th. Members who are interested in being Observers (which will allow members to participate in the meetings and receive drafts of the proposed amendments) should email Ed Smith. At this time, the project remains a work in process, and panelists invited comments from our members. Click here for the slides and here for the replay.